Question 1

According to the rational expectations school, people base their expectations about inflation on

Accepted Answer

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 policyF) All of the above
G) B) and E)

Question 2

The short-run Phillips curve is based upon labor contracts that reflect a given expected

Accepted Answer

A)  price level
B)  unemployment level
C)  money supply
D)  aggregate demand
E)  unemployment rateF) A) and D)
G) C) and E)

Question 3

Which of the following is consistent with an active approach to policy?

Accepted Answer

A)  The natural rate of unemployment is uncertain.
B)  Wages and prices adjust relatively quickly.
C)  The short-run aggregate supply curve is slow to shift in the presence of a recessionary gap.
D)  The size of the multiplier is irrelevant.
E)  Self-correction lags are not a problem.F) None of the above
G) B) and E)

Question 4

Along the short-run Phillips curve, when the unemployment rate goes down,

Accepted Answer

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 inflationF) A) and B)
G) A) and C)

Question 5

The average U.S. recession (after World War II)  has lasted

Accepted Answer

A)  a few months
B)  about half a year
C)  just under a year
D)  about three weeks
E)  about two yearsF) A) and D)
G) A) and C)

Question 6

If rational expectations cause people's price expectations to be generally correct, active policy will influence the price level but not output.

Accepted Answer

A) True 
 B)False

Question 7

A policy to increase aggregate demand to cure a recessionarly gap may succeed; however, inflation is a likely result.

Accepted Answer

A) True 
 B)False

Question 8

Those who prefer a passive approach to the conduct of macroeconomic policy tend to believe that markets are self-correcting.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 17-1
 
-According to those who favor a passive approach to policy, how will the economy shown in Exhibit 17-1 attain equilibrium at potential output?

Accepted Answer

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.F) C) and D)
G) B) and D)

Question 10

If a passive approach to policy was followed, how would an expansionary gap eventually close?

Accepted Answer

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.F) B) and C)
G) A) and E)

Question 11

According to the rational expectations school, a correctly anticipated expansionary monetary policy will

Accepted Answer

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 levelF) A) and B)
G) C) and D)

Question 12

If a recessionary gap is cured by increasing aggregate demand,

Accepted Answer

A)  both c and e are correct
B)  both d and e are correct
C)  real wages fall because prices rise
D)  prices rise causing real wages to increase
E)  money wages decrease as prices decreaseF) A) and E)
G) D) and E)

Question 13

On the Phillips curve graph, the immediate effects of a discretionary increase in government spending are represented by a

Accepted Answer

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 curveF) C) and D)
G) B) and E)

Question 14

The active approach to monetary policy involves predetermined rules that are followed virtually without exception.

Accepted Answer

A) True 
 B)False

Question 15

All of the following are true along a long-run Phillips curve except one. Which is the exception?

Accepted Answer

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 unemploymentF) A) and B)
G) A) and C)

Question 16

The initial Phillips curve relationship implied that the opportunity cost of __________ __________ was higher __________.

Accepted Answer

A)  reducing, unemployment, inflation
B)  increasing, unemployment, inflation
C)  reducing, unemployment, deflation
D)  increasing, employment, deflation
E)  reducing, employment, inflationF) A) and E)
G) B) and C)

Question 17

An increase in the expected inflation rate will

Accepted Answer

A)  shift the short-run Phillips curve upward and to the right
B)  shift the short-run Phillips curve downward and to the left
C)  not shift the short-run Phillips curve unless the unemployment rate changes
D)  cause the unemployment rate associated with each inflation rate to decrease
E)  tend to increase production unless the actual inflation rate also increasesF) D) and E)
G) A) and C)

Question 18

Long lags make discretionary policy less effective because

Accepted Answer

A)  in the long run, we shall all be dead
B)  by the time the impact of a policy is felt, the problem it was meant to cure may have been corrected
C)  lags are longer in contractions than in expansions
D)  lags are longer in expansions than in contractions
E)  automatic stabilizers are subject to longer lags than are discretionary policiesF) A) and C)
G) B) and C)

Question 19

For an economy to eliminate inflation once people have begun to anticipate inflation,

Accepted Answer

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 reducedF) All of the above
G) A) and E)

Question 20

According to the active policy position, eliminating a recessionary gap

Accepted Answer

A)  can only be achieved by decreasing wages
B)  requires a public policy of wage and price controls
C)  should be accomplished by stimulating aggregate demand
D)  will increase unemployment
E)  will cause a recessionF) C) and E)
G) A) and B)

Exam 18: Macro Policy Debate: Active or Passive

The active approach to monetary policy involves predetermined rules that are followed virtually without exception.

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The average U.S. recession (after World War II) has lasted

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According to the active policy position, eliminating a recessionary gap

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According to the rational expectations school, a correctly anticipated expansionary monetary policy will

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Long lags make discretionary policy less effective because

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If a recessionary gap is cured by increasing aggregate demand,

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The short-run Phillips curve is based upon labor contracts that reflect a given expected

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An increase in the expected inflation rate will

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Which of the following is consistent with an active approach to policy?

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All of the following are true along a long-run Phillips curve except one. Which is the exception?

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Exhibit 17-1 -According to those who favor a passive approach to policy, how will the economy shown in Exhibit 17-1 attain equilibrium at potential output?

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For an economy to eliminate inflation once people have begun to anticipate inflation,

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A policy to increase aggregate demand to cure a recessionarly gap may succeed; however, inflation is a likely result.

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If rational expectations cause people's price expectations to be generally correct, active policy will influence the price level but not output.

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According to the rational expectations school, people base their expectations about inflation on

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Along the short-run Phillips curve, when the unemployment rate goes down,

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On the Phillips curve graph, the immediate effects of a discretionary increase in government spending are represented by a

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The initial Phillips curve relationship implied that the opportunity cost of __________ __________ was higher __________.

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Those who prefer a passive approach to the conduct of macroeconomic policy tend to believe that markets are self-correcting.

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If a passive approach to policy was followed, how would an expansionary gap eventually close?

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The initial Phillips curve relationship implied that the opportunity cost of was higher __.

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