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Chapter 17 - 3e
Chapter 17 - 3e
Chapter 17 - 3e
MULTIPLE CHOICE
1. Advocates of the active approach believe that discretionary government policy can restore economic
stability and improve economic performance.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Active Policy Versus Passive Policy
2. Advocates of the passive approach to government economic policy believe that the government should
lower tax rates when there is a contractionary gap.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Active Policy Versus Passive Policy
3. In the 1992 presidential campaign, candidate Al Gore advocated a more active role for government in
economic policy than did candidate George W. Bush
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Active Policy Versus Passive Policy
4. In the event of a recession, which of the following is the most likely policy stance of those who
advocate a passive approach to economic policy?
a. cut taxes
b. increase government spending
c. reduce interest rates
d. increase the money supply
e. do nothing
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Active Policy Versus Passive Policy
5. Both those who favor an active approach as well as those who favor a passive approach to policy
believe that the economy can suffer from extreme and long-lasting swings in real GDP.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
6. An economy that self-corrects a contractionary gap will experience falling nominal wages, rising real
wages and falling output.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
7. If self-correction causes prices to fall less than nominal wages, both output and real wages will
decrease.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
8. A policy to increase aggregate demand to cure a contractionary gap may succeed; however, inflation is
a likely result.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
13. If we observe an economy adjusting to potential GDP as prices fall and real output increases,
a. it was experiencing an expansionary gap
b. the correction involves a shift of the AD curve
c. it was experiencing a contractionary gap
d. self-correction is not the process that is occurring
e. there are widespread labor shortages
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
14. An economy in which actual GDP is $10 billion below potential GDP
a. is experiencing an expansionary gap
b. will have the short run aggregate supply shifting outward, if the passive approach is
correct
c. will typically have the short-run aggregate supply curve shifting to the left
d. will likely have falling prices but rising wages
e. will experience stagflation (i.e., rising prices and falling output)
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
16. For those who favor an active approach, public policy changes are necessary to cure a contractionary
gap because
a. the short-run aggregate supply curve will otherwise shift quickly to the right
b. prices and wages are flexible downward but not upward
c. the required decrease in output can be achieved only by shifting the AD curve
d. real wages must fall through price increases rather than waiting for money wages to fall
e. falling money wages will cause the AD curve to shift leftward unless policy counters this
movement
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
17. If the advice of those who favor a passive approach to policy is correct, how would a contractionary
gap eventually close?
a. The aggregate demand curve would shift rightward.
b. The aggregate demand curve would shift leftward.
c. The short-run aggregate supply curve would shift rightward.
d. The short-run aggregate supply curve would shift leftward.
e. There would be a movement upward along the aggregate demand curve.
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
18. According to those who favor a passive approach to policy, a contractionary gap will be eliminated
because
a. prices and wages rise rapidly
b. prices and wages are flexible
c. the aggregate demand curve will shift to the right
d. the economy automatically slows down
e. the aggregate demand curve will shift to the left
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
19. If an economist who favors a passive approach observes a drop in real GDP caused by a decrease in
aggregate demand, she is most likely to think that
a. the economy will recover by itself before discretionary policy can correct the situation
b. discretionary policy will correct the situation before the economy recovers by itself
c. the imposition of policy rules will correct the situation before the economy recovers by
itself
d. aggregate supply will decrease to compensate for the decrease in aggregate demand
e. the economy will not recover by itself
ANS: A PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
20. To favor a passive approach to policy is to believe that the private sector is
a. relatively stable and both wages and prices adjust quickly to eliminate excess supply or
excess demand for labor
b. basically unstable, although both wages and prices adjust quickly to eliminate excess
supply or excess demand for labor
c. relatively stable, although both wages and prices tend to be very sticky downward
d. basically unstable and both wages and prices tend to be very sticky downward
e. so stable that wages and prices rarely change
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
21. If prices and wages are not flexible, an adverse supply shock is most likely to be followed by
a. a rightward shift of the aggregate supply curve
b. a rightward shift of the aggregate demand curve
c. a leftward shift of the aggregate supply curve
d. a leftward shift of the aggregate demand curve
e. persistent unemployment
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
NARREND
22. According to those who favor a passive approach to policy, how will the economy shown in Exhibit
17-1 attain equilibrium at potential output?
a. The SRAS curve will shift to the left.
b. The SRAS curve will shift to the right.
c. Either the money supply or government spending should be increased.
d. Either the money supply or government spending should be decreased.
e. Aggregate demand should be decreased.
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
23. According to those who favor a passive approach to policy, how will the economy shown in Exhibit
17-1 attain equilibrium at potential output?
a. The SRAS curve will shift to the left.
b. Real wages will fall shifting the SRAS curve to the right.
c. Either the money supply or government spending should be increased.
d. Either the money supply or government spending should be decreased.
e. Aggregate demand should be decreased.
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
24. According to those who favor a passive approach to policy, where will the economy in Exhibit 17-1
end up when it achieves its potential output?
a. point A
b. point B
c. point C
d. either point B or C
e. unable to tell from the information given
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
25. According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-
1 attain equilibrium at potential output?
a. The SRAS curve will shift to the left.
b. The SRAS curve will shift to the right.
c. Either the money supply or government spending should be increased.
d. Either the money supply or government spending should be decreased.
e. Aggregate demand should be decreased.
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
26. According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-
1 attain equilibrium at potential output?
a. The SRAS curve will shift to the left.
b. The SRAS curve will shift to the right.
c. The Fed or the government should act to shift the aggregate demand curve to the right.
d. Either the money supply or government spending should be decreased.
e. Aggregate demand should be decreased.
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
27. According to those who favor an active approach to policy, where will the economy in Exhibit 17-1
end up when it achieves its potential output?
a. point A
b. point B
c. point C
d. either point B or C
e. cannot tell from the information provided
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
28. If the economy were in a recession, which of the following policies would a person who favors an
active approach to policy be most likely to support?
a. The economy should be left to cure itself without government intervention.
b. The Fed should sell U.S. government securities in its open-market operations.
c. The Fed should raise the discount rate.
d. Government purchases should increase.
e. The Fed should raise the required reserve ratio.
ANS: D PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
29. In the long run, how would an active approach to a contractionary gap differ from a passive approach
to policy?
a. Both the price level and the level of real GDP would be higher in the long run with the
activist solution.
b. Both the price level and the level of real GDP would be lower in the long run with the
activist solution.
c. The price level would be higher and the level of real GDP would be lower in the long run
with the activist solution.
d. Only the price level would be lower in the long run with the activist solution.
e. Only the price level would be higher in the long run with the activist solution.
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
30. Those who favor a passive approach to policy think that all of the following conditions will allow the
economy to bring itself out of a contractionary gap except one. Which is the exception?
a. lower real wages
b. a shortage of labor
c. lower production costs
d. a lower expected price level
e. a rightward shift in the short-run aggregate supply curve
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing a Contractionary Gap
34. If an economy adjusts to potential GDP accompanied by a rising price level and a falling output level,
a. all of the following are correct
b. an active approach to correcting a contractionary gap is being used
c. an active approach to correcting an expansionary gap is being used
d. a passive approach to correcting a contractionary gap is being used
e. a passive approach to correcting an expansionary gap is being used
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
36. An economy in which actual GDP exceeds potential GDP means that
a. wages and prices must fall
b. self-correcting forces will shift the SRAS curve to the left
c. self-correcting forces will shift the AD curve to the left
d. inflation will occur when AD shifts to the left
e. unemployment is likely to be unusually high
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
NARREND
37. According to those who favor a passive approach to policy, how will the economy shown in Exhibit
17-2 attain equilibrium at potential output?
a. The SRAS curve will shift to the left.
b. The SRAS curve will shift to the right.
c. Either the money supply or government spending should be increased.
d. Either the money supply or government spending should be decreased.
e. Aggregate demand should be decreased.
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
38. According to those who favor a passive approach to policy, how will the economy shown in Exhibit
17-2 attain equilibrium at potential output?
a. Real wages will rise causing the SRAS curve to shift left.
b. The SRAS curve will shift to the right.
c. Either the money supply or government spending should be increased.
d. Either the money supply or government spending should be decreased.
e. Aggregate demand should be decreased.
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
39. According to those who favor a passive approach to policy, where will the economy in Exhibit 17-2
end up once the expansionary gap is eliminated?
a. point A
b. point B
c. point C
d. either point B or C
e. cannot tell from the information provided
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
40. According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-
2 attain equilibrium at potential output?
a. The SRAS curve will shift to the left.
b. The SRAS curve will shift to the right.
c. Either the money supply or government spending should be increased.
d. Either the money supply or government spending should be decreased.
e. Aggregate demand should be increased.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
41. According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-
2 attain equilibrium at potential output?
a. The SRAS curve will shift to the left.
b. The SRAS curve will shift to the right.
c. Either the money supply or government spending should be increased.
d. Either the Fed or the government will act to decrease aggregate demand.
e. Aggregate demand should be increased.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
42. According to those who favor an active approach to policy, where will the economy in Exhibit 17-2
end up once the expansionary gap is eliminated?
a. point A
b. point B
c. point C
d. either point B or C
e. cannot tell from the information given
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
43. If an active approach to policy is followed, how would an expansionary gap eventually close?
a. The aggregate demand curve would shift rightward.
b. The aggregate demand curve would shift leftward.
c. The short-run aggregate supply curve would shift rightward.
d. The short-run aggregate supply curve would shift leftward.
e. There would be a movement up and to the left along the short-run supply curve.
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
44. If a passive approach to policy was followed, how would an expansionary gap eventually close?
a. Restrictive fiscal policy would be used.
b. Restrictive monetary policy would be used.
c. Both restrictive fiscal policy and restrictive monetary policy would be used.
d. Inflation would cure the problem because the price level in an expansionary gap is lower
than firms and workers had expected.
e. Inflation would cure the problem because the price level in an expansionary gap is higher
than firms and workers had expected.
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
45. According to the passive policy maker's position, an expansionary gap will be eliminated because
a. the short-run aggregate supply will shift to the left
b. the short-run aggregate supply will shift to the right
c. rising prices will shift the aggregate demand to the left
d. wages will fall relatively quickly
e. aggregate demand will shift to the right as wages increase
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
46. If self-correction works, a policy that continually increases aggregate demand will
a. have a strong impact on GDP
b. cause permanent inflation
c. eventually cause the SRAS curve to shift to the right
d. have relatively large impact on GDP
e. will cause inflation to continually diminish
ANS: B PTS: 1 DIF: Hard NAT: Analytic
LOC: Monetary and fiscal policy TOP: Problems with Active Policy
47. If the natural unemployment rate cannot easily be estimated, __________ policy making becomes
more difficult.
a. active
b. passive
c. monetarist
d. classical
e. rational expectations
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Problems with Active Policy
50. Which of the following pieces of information is not necessary for active policy to work successfully?
a. All of the following are necessary for good policy.
b. the size of potential output or the natural rate of unemployment
c. the speed of self-correction
d. the slope of the short-run aggregate supply curve
e. the size of the multiplier
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Problems with Active Policy
52. Which of the following lags reduces the effectiveness of active policy?
a. both d and e
b. all of the following
c. self-correction lag
d. recognition lag
e. decision-making lag
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
53. In total, the lags associated with discretionary policy can extend from the time a
a. problem occurs in the economy through the time it is recognized by the government
b. problem is recognized by the government through the time an agreed-on policy is
approved
c. policy is approved through the time the policy is implemented
d. policy is implemented through the time its impact is felt in the economy
e. problem occurs in the economy through the time a corrective policy has an impact on the
economy
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
55. One reason that long time lags hamper the effectiveness of economic policy is that
a. people don't want to wait for economic recovery
b. the longer unemployment lasts the more intense inflation becomes
c. by the time the impact of a policy is felt, a new problem may have come along that
requires a different policy, which may make the economic situation even worse
d. if inflation is allowed to continue for too long, it becomes immune to policy interference
e. if unemployment is allowed to continue for too long, it becomes immune to policy
interference
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
56. The time it takes for a new policy to register its full impact on the economy after it has been put in
force is known as the
a. activity lag
b. decision-making lag
c. effectiveness lag
d. implementation lag
e. recognition lag
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
57. The time it takes for the Fed's purchase of government securities to ultimately change aggregate
demand is called the
a. recognition lag
b. implementation lag
c. effectiveness lag
d. decision-making lag
e. self-correction lag
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
58. The time it takes to identify and examine the nature and seriousness of an economic problem is the
a. activity lag
b. decision-making lag
c. effectiveness lag
d. implementation lag
e. recognition lag
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
59. The selection of a new policy takes place during a period of time known as the
a. activity lag
b. decision-making lag
c. effectiveness lag
d. implementation lag
e. recognition lag
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
61. Policy makers may not know that the economy is in a recession until six months after the recession
starts; this is a phenomenon known as the
a. implementation lag
b. policy coordination problem
c. decision-making lag
d. recognition lag
e. effectiveness lag
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
62. Suppose that policy makers are concerned about a shortage of long-term capital investment. To remedy
the problem, various plans to cut capital gains taxes have been suggested. The delay in picking a plan
is called the
a. implementation lag
b. policy coordination problem
c. decision-making lag
d. recognition lag
e. effectiveness lag
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Problem of Lags
63. Time required __________ is not a time lag associated with using discretionary policy to correct an
economic problem.
a. to recognize the problem
b. to decide how to handle the problem
c. to set a policy change in action
d. for a policy to affect economic variables
e. to coordinate monetary and fiscal policy
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
65. Suppose a recession surprises economic forecasters, who did not see it coming. Which type of lag is
that?
a. cyclical lag
b. recognition lag
c. decision-making lag
d. implementation lag
e. effectiveness lag
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
67. Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy?
a. the recognition lag and the implementation lag
b. the effectiveness lag and the decision-making lag
c. the decision-making lag and the implementation lag
d. the implementation lag and the effectiveness lag
e. the recognition lag and the effectiveness lag
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
68. The average U.S. recession (after World War II) has lasted
a. a few months
b. about half a year
c. just under a year
d. about three weeks
e. about two years
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
69. The __________ lag is typically longer for fiscal policy than monetary policy.
a. both b and d
b. decision-making
c. effectiveness
d. implementation
e. recognition
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
70. Those who favor a passive approach to policy often argue that changes in prices and wages will shift
the short-run aggregate supply curve
a. before active policy shifts the aggregate demand curve
b. only after active policy shifts the aggregate demand curve
c. more than active policy shifts the aggregate demand curve
d. less than active policy shifts the aggregate demand curve
e. in a direction opposite to the shift in the aggregate demand curve caused by active policy
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
71. If the time for an economy to self-correct is shorter than the active policy lags,
a. active policy should be strengthened
b. active policy will likely be destabilizing
c. the passive policy case is weakened
d. the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve
e. active policy will work better than passive policy
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
72. Which of the following statements supports the passive approach to a contractionary gap?
a. It is likely that policies will be subject to time lags.
b. Prolonged unemployment may cause the economy's potential real GDP to fall.
c. Workers' skills may grow rusty during a prolonged recession.
d. Unemployed workers may drop out of the labor force during a prolonged recession.
e. Firms may neglect their capital stock during a prolonged recession.
ANS: A PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Problem of Lags
73. If high unemployment lasts a long time, it could cause potential real GDP to fall.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: A Review of Policy Perspectives
74. Those who favor an active approach to policy and those who favor a passive approach disagree not
only on how quickly the government can act but also on how stable the economy basically is.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: A Review of Policy Perspectives
77. An effective policy of governmental intervention in the economy requires all of the following except
one. Which is the exception?
a. the will to reject sound policy if it gets in the way of political considerations
b. the ability to estimate the economy's potential level of output
c. the ability to predict what would happen without intervention
d. an assortment of effective tools of discretionary policy
e. the ability to achieve effective cooperation between fiscal and monetary policy makers
ANS: A PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: A Review of Policy Perspectives
78. A passive approach to economic policy calls for the government to do nothing to offset unemployment
because of
a. a lack of any real concern for those who have no jobs
b. a conviction that unemployment is relatively harmless
c. a belief that active economic policy is likely to be either ineffective or harmful
d. a desire to await further economic data before intervening
e. belief in the law of diminishing returns
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: A Review of Policy Perspectives
79. Which of the following is not a valid criticism of discretionary fiscal policy?
a. Implementation of fiscal policy is sometimes difficult.
b. Time lags in fiscal policy are long.
c. Fiscal policy works only during periods of stagflation.
d. Fiscal policy often affects only current income, but many economic decisions are made on
the basis of permanent income.
e. Fiscal policy might have undesirable long-term effects on aggregate supply.
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: A Review of Policy Perspectives
80. According to the rational expectations school, people base their expectations about inflation on
a. the announcement of a change in policy
b. weighted averages of previous inflation rates, with the most distant getting the heaviest
weight
c. all information available to them
d. changes in monetary policy only
e. changes in both monetary and fiscal policy
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Role of Expectations
81. According to the rational expectations school,
a. on average people have very little idea of what to expect from government policy makers
b. people form expectations by focusing only on the private sector
c. changes in the expected price level shift the aggregate demand curve
d. people do not consider likely government policies when forming expectations, choosing to
remain rationally ignorant
e. people form expectations, in part, by considering the probable future actions of
government policy makers
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Role of Expectations
82. One of the reasons fiscal and monetary policy can stimulate output and employment in the short run is
that nominal wages increase faster than the price level.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Monetary Policy and Inflation Expectations
83. If the price level increases by more than expected, output can be expected to decrease as a result.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Monetary Policy and Inflation Expectations
85. If an economy is at potential GDP and an expansionary policy is correctly anticipated, the result will
be
a. both c and e
b. little or no increase in GDP
c. an increase in wages along with a dramatically falling price level
d. a rapidly expanding economy
e. a severe recession
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Monetary Policy and Inflation Expectations
87. Which of the following would eliminate the time inconsistency problem?
a. Each of the following would eliminate the time inconsistency problem.
b. When lags associated with monetary and fiscal policy are extremely short.
c. When discretionary macro policy is replaced with fixed policy rules which are well
publicized.
d. When expectations about the economy adjust very slowly.
e. None of the above.
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Monetary Policy and Inflation Expectations
88. Given the expected price level, policies for reaching potential GDP will work best if the money supply
is
a. large, so that prices at potential GDP are below expectations and people can afford to buy
enough goods to support the natural level of employment
b. large enough that prices at potential GDP are above expectations and firms can afford to
hire workers
c. small, so that prices at potential GDP are below expectations and people can afford to buy
enough goods to support the natural level of employment
d. small, so that prices at potential GDP are above expectations and firms can afford to hire
the workers
e. exactly the size that makes prices equal to the prices people expected to prevail
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Monetary Policy and Inflation Expectations
89. Economists of the rational expectations school believe that expansionary monetary policy is fully
effective only if
a. the policy is anticipated by workers and firms
b. aggregate supply shifts to the left
c. the economy is operating at or above its potential output level
d. policy makers follow through on their previously announced plans
e. the policy is totally unexpected
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Monetary Policy and Inflation Expectations
90. If rational expectations cause people's price expectations to be generally correct, active policy will
influence the price level but not output.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Anticipating Monetary Policy
91. The wage rate considered acceptable to workers engaged in collective bargaining will be determined in
part by what monetary policy workers expect in the near future.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Anticipating Monetary Policy
92. According to the rational expectations school, when monetary policy makers do exactly what is
expected of them, their efforts to stimulate the economy will have no effect either on output or
employment.
a. True
b. False
ANS: A PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Anticipating Monetary Policy
93. According to the rational expectations school, when the economy is operating at the potential output
level, a temporary decrease in unemployment is possible through appropriate monetary policy--but
only if workers and employers are aware in advance of the Fed's intentions.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Anticipating Monetary Policy
94. According to the rational expectations school, which of the following can affect the levels of output
and employment?
a. an expansionary monetary policy, if it is fully anticipated
b. a contractionary monetary policy, if it is fully anticipated
c. monetary policy that is unanticipated
d. fiscal policy that is anticipated
e. the Fed's announcement of no change in monetary policy
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Anticipating Monetary Policy
95. If resource owners anticipated a monetary growth rate of 6 percent, but the money supply actually
grew at only 2 percent,
a. real wages would fall
b. output would fall
c. output would increase
d. output would increase, but only if nominal wages were increased more rapidly than prices
e. the expected inflation rate was less than the actual rate
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Anticipating Monetary Policy
96. According to the rational expectations school, if the Fed announces a policy of rapid growth in the
money supply, but then puts the brakes on money expansion without any announcement, the short-run
result is likely to be
a. an unexpected surge in aggregate demand
b. an unexpected drop in aggregate demand
c. an anticipated surge in aggregate demand
d. an anticipated drop in aggregate demand
e. no change in aggregate demand
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Anticipating Monetary Policy
97. Suppose that in 2004 the Fed announced a policy of rapid growth in the money supply, but then put the
brakes on money expansion without any announcement. If in 2005, Fed officials announce again that
an expansion is planned, the most likely result is that
a. people will believe the announcement since the conditions that created a need for the
expansion are probably still in effect
b. people will believe the announcement since they will believe that having failed to
implement the expansion previously, the Fed still plans to do so
c. people will not believe the announcement since they will believe that the conditions that
created a need for the expansion must have changed in the meantime
d. people will not believe the announcement since they will believe that having failed to
implement the expansion previously, the Fed will probably fail again
e. there will be more uncertainty about the Fed following through on the policies it
announces
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Anticipating Monetary Policy
98. Some economists believe that when workers and firms come to expect an expansionary monetary
policy and the resulting inflation,
a. they act so as to prevent the inflation from occurring
b. their actions lead to a further increase in output
c. the expansionary monetary policy will have no effect on either output or employment
d. the monetary authority will be forced to cancel its planned expansionary policy
e. both output and employment will increase even more than was originally planned
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Anticipating Monetary Policy
99. A credible policy designed to lower inflation must throw the economy into recession.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Policy Credibility
100. For an economy to eliminate inflation once people have begun to anticipate inflation,
a. all of the following could occur
b. credibility of policy is crucial to the cost of lowering inflation
c. actual inflation must be less than anticipated inflation
d. cold-turkey solutions will reduce inflation relatively rapidly
e. a recession will have to be endured until expectations have been reduced
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Policy Credibility
103. Those who prefer a pasive approach to the conduct of macroeconomic policy tend to believe that
markets are self-correcting.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Active Policy Versus Passive Policy
104. In the conduct of macroeconomic policy there are 4 lags that complicate the timing of the policy’s
implementation. They are
a. recognition lag, decision-making lag, correction lag and feedback lag
b. statistical lag, decision-making lag, implementation lag and effectiveness lag
c. recognition lag, decision-making lag, implementation lag and effectiveness lag
d. statistical lag, decision-making lag, correction lag and effectiveness lag
e. recognition lag, statistical lag, correction lag and feedback lag
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
105. A major problem in the conduct of macroeconomic policy is the time it takes to recognize that the
economy is experiencing a problem.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
106. A major problem in the conduct of macroeconomic policy is the time it takes to decide how to deal
with the problem the economy is experiencing.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
107. Rational excectations is a school of thought that argues people form expectations based on
all available information, including the likely future actions of government policy makers.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Role of Expectations
108. According to the rational expectations theory, monetary policy is fully anticipated and therefore only
affects
a. the level of real GDP
b. the level of real investment
c. the price level
d. the level of real consumption
e. the level of exports
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Rules and Rational Expectations
110. Some of those who favor a passive approach to policy disapprove of government intervention in the
economy because they think government policy makers do not know which policy is correct.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Limitations on Discretion
111. Advocates of policy rules rather than discretion believe that self-correction forces work too slowly
when discretionary policy is used.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Limitations on Discretion
112. The active approach to monetary policy involves predetermined rules that are followed virtually
without exception.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Limitations on Discretion
114. According to rational expectations theory, people's predictions about the future course of
governmental economic policy influence the position of the short-run aggregate supply curve.
a. True
b. False
ANS: A PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Rules and Rational Expectations
115. According to the rational expectations model, the only time active policy has an impact on aggregate
output is when
a. it is expansionary
b. it is contractionary
c. it is unannounced
d. the economy has a contractionary gap
e. the economy has an expansionary gap
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Rules and Rational Expectations
116. If an economist of the rational expectations school were advising a policy maker, the advice most
likely to be given would be:
a. Don't use discretionary policy if recognition lags are long.
b. Don't use discretionary policy if activity lags are long.
c. Don't use fiscal policy if effectiveness lags are long.
d. Don't use monetary policy if implementation lags are long.
e. Don't use discretionary policy.
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: Rules and Rational Expectations
119. According to the rational expectations school, a correctly anticipated expansionary monetary policy
will
a. increase prices and real output
b. increase real output in the short run only
c. have no effect on prices or real output
d. decrease prices and real output
e. lead only to a higher price level
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Rules and Rational Expectations
122. The rational expectations school advocates the passive rule of a fixed-growth-rate monetary policy
because
a. we don't have enough information to pursue an active policy
b. the economy is not in bad enough shape to require active intervention
c. then the Federal Reserve Board would be superfluous and we could eliminate a large
bureaucracy
d. people render active policy ineffective by figuring out what it's going to be and taking
actions to offset it
e. they prefer to put their major emphasis on an active fiscal policy
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Rules and Rational Expectations
123. In general, the Fed has not embraced a fixed-growth-rate monetary policy because
a. its adoption would cost them their jobs
b. no influential economists have yet come out in favor of it
c. the Fed has to answer to Congress, and Congress is not in favor of it
d. the Fed prefers active fiscal policy
e. they believe the economy is too complex and too changeable to make such a policy work
consistently
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Rules and Rational Expectations
124. The early Phillips curve showed a tradeoff between unemployment and inflation because it was drawn
for a period in which the main source of instability was aggregate demand.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Phillips Framework
125. In the early 1960s, the discovery of the Phillips curve relationship caused economists and policy
makers to think that they understood the tradeoffs between
a. aggregate supply and aggregate demand
b. excess aggregate supply and excess aggregate demand
c. inflation and unemployment
d. monetary and fiscal policy
e. rule-making and discretionary policy
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Phillips Framework
126. On the Phillips curve graph, the immediate effects of a discretionary increase in government spending
are represented by a
a. rightward shift of the aggregate demand curve
b. leftward shift of the aggregate demand curve
c. rightward shift of the Phillips curve
d. leftward shift of the Phillips curve
e. movement along the Phillips curve
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Phillips Framework
128. The inflation associated with the oil embargoes of the 1970s illustrated the __________ of the
downward-sloping Phillips curve in the long run, as unemployment __________.
a. validity; fell
b. validity; rose
c. fallacy; rose
d. fallacy; fell
e. fallacy; did not change
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Phillips Framework
129. The inflation associated with the oil embargoes of the 1970s resulted in
a. reduced unemployment because aggregate demand increased
b. reduced unemployment because aggregate demand fell
c. increased unemployment because aggregate demand increased
d. increased unemployment because aggregate demand fell
e. increased unemployment because aggregate supply fell
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Phillips Framework
130. Suppose the economy had been operating along a given short-run Phillips curve for several years and
then experienced a year of stagflation. The year of stagflation would
a. be represented as a move upward along the short-run Phillips curve
b. be represented as a move downward along the short-run Phillips curve
c. be represented as a point above the short-run Phillips curve
d. be represented as a point below the short-run Phillips curve
e. correspond to the origin
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Phillips Framework
132. In its original form, the Phillips curve depicted a situation in which an economy could reduce its
unemployment rate by holding the inflation rate steady.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Short-Run Phillips Curve
133. The short-run Phillips curve is drawn for a given expected inflation rate and so it shifts as inflation
expectations change.
a. True
b. False
ANS: A PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Short-Run Phillips Curve
137. Which of the following would correspond to movement downward along a short-run Phillips curve?
a. The aggregate demand curve shifts rightward, moving up along a short-run aggregate
supply curve.
b. The aggregate demand curve shifts leftward, moving down along a short-run aggregate
supply curve.
c. The short-run aggregate supply curve shifts leftward, moving up along the aggregate
demand curve.
d. The short-run aggregate supply curve shifts rightward, moving down along the aggregate
demand curve.
e. Both the aggregate demand and the short-run aggregate supply curves shift leftward.
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Short-Run Phillips Curve
138. Suppose we observe several years of falling inflation rates for an economy. Which of the following
would best explain this phenomenon?
a. Unemployment is probably at the natural rate.
b. The unemployment rate must be rising.
c. The unemployment rate must be below the natural rate.
d. The unemployment rate is probably above the natural rate.
e. Aggregate output must be increasing.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Short-Run Phillips Curve
139. Along the short-run Phillips curve, when the unemployment rate goes down,
a. unemployment benefit payments go up
b. prices go down
c. the Phillips curve shifts outward
d. the inflation rate goes up
e. there is no change in the rate of inflation
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Short-Run Phillips Curve
140. One way of expressing the meaning of the short-run Phillips curve is to say that
a. the cost of reducing unemployment is higher inflation
b. nothing but good comes from reducing unemployment
c. the cost of reducing inflation is lower unemployment
d. aggregate supply and aggregate demand will always be equal at the potential output level
e. the best economic policy is one that attempts to make the rate of inflation equal to the rate
of unemployment
ANS: A PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Short-Run Phillips Curve
141. The short-run Phillips curve is based upon labor contracts that reflect a given expected
a. price level
b. unemployment level
c. money supply
d. aggregate demand
e. unemployment rate
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Short-Run Phillips Curve
142. The long-run Phillips curve is located at the natural rate of unemployment.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
143. The long-run Phillips curve suggests that changing the rate of unemployment in the economy has no
impact on the inflation rate.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
144. Some economists believe that in the long run the unemployment rate is independent of the inflation
rate and so the Phillips curve becomes a vertical line.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
146. In Exhibit 17-3, if the economy started near point b, and government purchases increased, we would
expect the economy in the short run to move to
a. point a
b. point e
c. point c
d. point d
e. none of the above; the economy would remain at point b
ANS: C PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
148. Consider Exhibit 17-4. If the economy is initially at point c and aggregate demand increases, the
economy will (in the long run)
a. move toward point a
b. move toward point b
c. stay at point c
d. move toward point d
e. move toward point f
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
149. If the economy in Exhibit 17-4 is initially at point c and aggregate demand decreases, the economy
will (in the long run)
a. move toward point a
b. move toward point b
c. stay at point c
d. move toward point d
e. move toward point f
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
150. If the economy in Exhibit 17-4 is initially at point c and aggregate demand is stable, the economy will
a. move toward point a
b. move toward point b
c. stay at point c
d. move toward point d
e. move toward point f
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
154. All of the following are true along a long-run Phillips curve except one. Which is the exception?
a. unemployment is at the natural rate
b. employers and workers have the time and ability to adjust fully to unexpected changes in
aggregate demand
c. the only choices for policy makers are different levels of inflation
d. inflation and unemployment are inversely related
e. changes in aggregate demand will have no effect in the long run on unemployment
ANS: D PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
155. Which of the following is true about the long-run Phillips curve?
a. No event can shift the curve rightward; it can only be shifted leftward.
b. No event can shift the curve leftward; it can only be shifted rightward.
c. No event can shift the curve either rightward or leftward.
d. Only fiscal and monetary policy can shift the curve.
e. Demand-side policy cannot shift the curve.
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
157. If the actual inflation rate exceeds the expected inflation rate,
a. the economy is on the long-run Phillips curve
b. unemployment exceeds the natural rate
c. maintaining the existing unemployment rate will require increasing inflation in the long
run
d. the actual rate will tend to fall toward the expected rate
e. unemployment will tend to decrease in the long run
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
158. Probably the most significant implication of the natural rate of unemployment hypothesis is that
a. the natural rate of inflation tends toward zero
b. long-run policy should be directed toward controlling inflation rather than unemployment
c. the natural rate of unemployment can be reduced by accepting worsening inflation
d. the natural rate of unemployment is consistent only with a zero inflation rate in the long
run
e. tax cuts stimulate the economy and lower inflation
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
160. The unemployment rate can remain below the natural rate, but only
a. in the long run
b. with continuous deflation
c. with a continuously increasing inflation rate
d. with a series of adverse supply shocks
e. if the money supply is constant
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
163. Current thinking on the Phillips curve suggests that it would be best for policy makers to
a. focus on controlling unemployment
b. stimulate permanent shifts in aggregate supply
c. focus on controlling inflation
d. stimulate permanent shifts in aggregate demand
e. develop a two-pronged policy to control both unemployment and inflation
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
164. Unemployment cannot be maintained below the natural rate, no matter what inflation rate is tolerated.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Natural Rate Hypothesis
165. The natural rate hypothesis claims that policy makers can have considerable success in reducing
unemployment through monetary and fiscal policy.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Natural Rate Hypothesis
166. According to the natural rate hypothesis, the economy tends toward
a. the natural rate of unemployment in the long run
b. the natural rate of unemployment in the short run
c. potential output in the short run
d. zero inflation in the long run
e. a stable tradeoff between inflation and unemployment in the long run
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Natural Rate Hypothesis
167. The hypothesis that the economy tends toward the natural rate of unemployment in the long run is
known as the
a. cyclical unemployment hypothesis
b. full employment hypothesis
c. natural rate hypothesis
d. economic stability hypothesis
e. policy ineffectiveness hypothesis
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Natural Rate Hypothesis
168. According to the natural rate hypothesis, the natural rate of unemployment is
a. largely independent of the level of aggregate supply stimulus provided by fiscal or
monetary policy
b. largely independent of the level of aggregate demand stimulus provided by fiscal or
monetary policy
c. dependent on the level of aggregate supply stimulus provided by fiscal or monetary policy
d. dependent on the level of aggregate demand stimulus provided by fiscal or monetary
policy
e. dependent on the size of the federal budget deficit or surplus
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Natural Rate Hypothesis
172. An important implication of the natural rate hypothesis is that the government policy that results in
low inflation is generally the optimal long-run policy
a. only if there is no cyclical unemployment in the short run
b. only if there is no structural unemployment in the short run
c. regardless of concerns about unemployment
d. regardless of concerns about currency exchange rates
e. only if the dollar's exchange rate is stable
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Natural Rate Hypothesis
173. In general, we would expect those who favor a passive approach to policy to believe in
a. slow rather than rapid self-correction
b. potentially incorrect rather than rational price expectations
c. short, certain rather than long, variable policy lags
d. a negatively sloped rather than vertical Phillips curve
e. the natural rate hypothesis
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Natural Rate Hypothesis
174. The natural rate hypothesis states that in the long run,
a. economic policy can reduce both inflation and unemployment
b. the economy's natural rate of annual growth is approximately 3%
c. monetary and fiscal policy have their greatest effect on the rate of unemployment
d. the Phillips curve is horizontal
e. the economy tends toward the natural rate of unemployment
ANS: E PTS: 1 DIF: Hard NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Natural Rate Hypothesis
175. As people come to expect higher inflation, the long-run Phillips curve shifts leftward.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Evidence of the Phillips Curve
176. Contrary to what the Phillips curve would have predicted, the U.S. economy in the 1970s experienced
simultaneous increases in inflation and unemployment.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Evidence of the Phillips Curve
177. Before discovering that the short-run Phillips curve does not show the true long-run situation, policy
makers were successful in trying to bring the economy to the zero-inflation, zero-unemployment point
on the short-run curve.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Evidence of the Phillips Curve
178. An increase in price expectations shifts the long-run Phillips curve, but not the short-run Phillips
curve.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Evidence of the Phillips Curve
179. After the 1960s, the short-run Phillips curve based on U.S. economic data
a. began shifting inward
b. began shifting outward
c. shifted little or none at all
d. became virtually horizontal
e. became virtually vertical
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Evidence of the Phillips Curve
180. During the period __________, the short-run Phillips curve for the United States was farthest from the
origin.
a. 1960 to 1964
b. 1964 to 1969
c. 1970 to 1973
d. 1974 to 1983
e. 1984 to 1989
ANS: D PTS: 1 DIF: Hard NAT: Analytic
LOC: Monetary and fiscal policy TOP: Evidence of the Phillips Curve
181. According to the __________ approach, __________ policy may __________ the instability of the
economy.
a. passive, automatic, increase
b. passive, discretionary, increase
c. passive, discretionary, decrease
d. active, discretionary, increase
e. active, automatic, decrease
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Active Policy Versus Passive Policy
182. Which of the following is not a potential problem with active policy for policy makers?
a. predicting what would happen with a passive approach
b. lacking the tools needed to achieve the desired result quickly
c. not predicting the effects of an active policy on the economy’s key performance measures
d. fiscal and monetary policy makers not working together
e. failing to implement the appropriate policy because of political obstacles
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: Problems with Active Policy
183. The economy may turn around on its own before a new policy registers its full impact primarily
because of the
a. recognition lag
b. decision-making lag
c. effectiveness lag
d. implementation lag
e. time lag
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Problem of Lags
184. The long run Phillip’s curve is a horizontal line at the country’s natural rate of inflation.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Long-Run Phillips Curve
185. Active macroeconomic policy would move to close an expansionary gap by decreasing aggregate
demand.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
186. Passive macroeconomic policy would rely on natural market forces and automatic stabilizers to close
an expansionary gap.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Closing an Expansionary Gap
187. When policy makers have an incentive to announce one policy to shape expectations but then pursue a
different policy once those expectations have been formed and acted on, there is
a. no problem; this is normal behavior
b. policy credibility
c. a time-inconsistency problem
d. rational expectation
e. None of the answers is correct
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Monetary Policy and Inflation Expectations
188. An anti-inflation policy that involves announcing and executing tough measures to stop inflation is
called
a. cold turkey
b. cold chicken
c. hot water
d. chokehold
e. time-inconsistency
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monetary and fiscal policy TOP: Policy Credibility
190. The initial Phillips curve relationship implied that the opportunity cost of __________ __________
was higher __________.
a. reducing, unemployment, inflation
b. increasing, unemployment, inflation
c. reducing, unemployment, deflation
d. increasing, employment, deflation
e. reducing, employment, inflation
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Monetary and fiscal policy TOP: The Phillips Curve