Economics Chapter 15—Stabilization Policy, Output, and Employment
MULTIPLE CHOICE
1. In the twentieth century, fluctuations in real GDP were
a.
less severe during the last 50 years than was true during the first half of the century.
b.
virtually eliminated as the result of the countercyclical application of fiscal policy.
c.
more severe during the last 50 years than was true during the first half of the century.
d.
primarily the result of a fiscal policy that has persistently balanced the federal budget.
2. If the monetary authorities follow policies that keep the annual rate of inflation steady and low (for
example, 2 percent), which of the following is most likely to occur?
a.
a high rate of unemployment because people will anticipate a higher rate of inflation
b.
considerable fluctuations in real GDP because the monetary authorities are not constantly
adjusting monetary policy in light of current business conditions
c.
higher real interest rates because decision makers will fail to anticipate the 2 percent rate
of inflation
d.
an unemployment rate that is at or near the natural rate of unemployment because the
actual rate of inflation will not be much different than what people expect
3. Economic analysis suggests that countercyclical macro-policy will
a.
be difficult to time properly because of uncertainty about the future direction of the
economy.
b.
be difficult to implement because we do not know whether monetary policy is transmitted
through the interest rate, or whether it affects aggregate demand directly.
c.
reduce the natural rate of unemployment when macro-policy is persistently expansionary.
d.
help reduce economic instability if, and only if, we are willing to tolerate double-digit
inflation.
4. Under the adaptive expectations hypothesis, how will a shift to a more expansionary monetary policy
affect the economy?
a.
In the short run, the real rate of output will be unaffected, but in the long run, it will
increase.
b.
In the short run, the real rate of output will increase, but in the long run, it will be
unchanged.
c.
There will be a permanent increase in the real rate of output, but the inflation rate will also
be a little higher.
d.
In the short run, the impact on the real rate of output is uncertain, but in the long run,
output will increase.
5. The adaptive expectations hypothesis implies that people
a.
adjust their expectations quickly to policy changes.
b.
expect the next period to be pretty much like the recent past.
c.
will always be correct in their forecast for the next period.
d.
change their expectations about the future if policy changes.
6. The index of leading indicators is
a.
an alphabetical listing of the most popular indicators in the economy for a given month.
b.
a composite index of indicators that provides information on the future direction of the
economy.
c.
a measure of the level of aggregate output.
d.
a composite index designed to measure inflation.
7. Under the rational expectations hypothesis, which of the following is the most likely short-run effect
of a move to expansionary monetary policy?
a.
a higher general level of prices but little or no change in real output
b.
a higher general level of prices and an expansion in real output
c.
no change in the general level of prices and a reduction in real output
d.
no change in either the general level of prices or real output
8. Why did many economists during the 1960s and 1970s believe that expansionary macroeconomic
policy that resulted in inflation would reduce the rate of unemployment?
a.
They failed to realize that the expansionary policy would stimulate aggregate demand.
b.
They failed to realize that the expansionary policy would reduce real interest rates.
c.
They failed to incorporate expectations into their analysis.
d.
They thought that money growth would simply lead to a proportional increase in the price
level.
9. Which of the following is an implication of the modern view of the Phillips curve?
a.
Higher rates of inflation always lead to lower rates of unemployment.
b.
Higher rates of inflation always lead to higher rates of unemployment.
c.
If actual inflation exceeds the inflation rate anticipated by decision makers, unemployment
will temporarily fall below the natural rate.
d.
If actual inflation exceeds the inflation rate anticipated by decision makers, unemployment
will temporarily rise above the natural rate.
10. Most economists believe that
a.
a monetary policy that achieves price stability will reduce uncertainty and provide the
framework for strong economic growth.
b.
demand stimulus policies will reduce the long-term average rate of unemployment.
c.
expansionary monetary policy, if persistently followed, will reduce nominal interest rates.
d.
inflation is primarily the result of large budget deficits and other elements of expansionary
fiscal policy.
11. Which of the following is true regarding economic fluctuations in the United States?
a.
Prior to World War II, economic ups and downs were more moderate than after the war.
b.
Prior to World War II, annual increases in real GDP of more than 5 percent were unheard
of.
c.
Real GDP grew rapidly during the 1930s.
d.
The 1930s was a period of prolonged economic stagnation and high unemployment.
12. During the 1900-1950 period,
a.
the growth of real GDP was more stable than has been the case since 1950.
b.
unemployment seldom exceeded 4 percent of the labor force.
c.
double-digit swings in real GDP during a single year were not uncommon.
d.
the money supply was increased at a constant annual rate of between 4 percent and 6
percent throughout the period.
13. Prior to World War II,
a.
the growth of real GDP was more stable than has been the case since the war.
b.
the growth of real GDP was less stable than has been the case since the war.
c.
unemployment seldom exceeded 4 percent of the labor force.
d.
double-digit swings in real GDP during a single year were unheard of.
14. If monetary and fiscal policy are going to promote economic stability, they must _________ during a
recession, and _________ during an economic boom. (Fill in the blank)
a.
add stimulus; apply restraint
b.
apply restraint; add stimulus
c.
add stimulus; add stimulus
d.
apply restraint; apply restraint
15. Activists and nonactivists both believe that
a.
the self-corrective mechanism of a market economy works quite well.
b.
macro-policy should seek to minimize economic fluctuations, keep the inflation rate low,
and establish an environment consistent with strong economic growth.
c.
discretionary monetary and fiscal policy can be used successfully to speed the adjustment
process and reduce the swings of the business cycle.
d.
policies that stimulate aggregate demand can reduce the long-term rate of unemployment.
16. Activists believe that
a.
the M1 money supply should be increased at a steady rate annually.
b.
taxes should be increased during a recession in order to balance the federal budget.
c.
the economy’s self-correcting mechanism, if not stifled by perverse policies, will prevent
prolonged periods of high unemployment.
d.
discretionary changes in macroeconomic policy can help smooth the business cycle of a
market economy.
17. Which one of the following accurately states the view of activists who favor discretionary stabilization
policy?
a.
Neither monetary nor fiscal policy will exert an impact on the real level of economic
activity.
b.
Since we have only limited ability to forecast the future direction of the economy, the best
policy is to do nothing.
c.
Our ability to forecast the future direction of economic activity is quite good, and
therefore, discretionary macroeconomic policy is now capable of eliminating fluctuations
in the business cycle if policy makers would follow the advice of leading economists.
d.
The index of leading indicators and other forecasting tools provide policy makers with
valuable information that permits them to institute stabilizing changes in macroeconomic
policy.
18. Which of the following best reflects the nonactivist view of stabilization policy?
a.
Monetary and fiscal policies exert little impact on the economy.
b.
Discretionary policy changes often make matters worse.
c.
Fiscal policy should be used to help stabilize the economy; monetary policy should not.
d.
Expansionary monetary policy is the primary source of rapid economic growth.
19. Regarding the issue of economic stability, nonactivists believe that
a.
consumption is highly unstable over the business cycle.
b.
the highest possible level of investment must be maintained over all phases of the business
cycle.
c.
minor economic disturbances often feed on themselves, leading to severe swings in the
business cycle.
d.
the self-correcting properties of a market economy work reasonably well.
20. Which of the following is a major area of disagreement between activists and nonactivists?
a.
Activists believe discretionary macroeconomic policy can be applied in a manner that will
enhance economic stability. Nonactivists disagree.
b.
Activists believe monetary policy is more potent than fiscal policy. Nonactivists disagree.
c.
Activists believe changes in monetary and fiscal policy exert their effects instantaneously.
Nonactivists think they work only with a substantial lag.
d.
Nonactivists think macroeconomic policy is sometimes motivated by the pursuit of
political gain. Activists disagree.
21. The time period between when economic conditions change and when policy makers are aware of the
change is called the
a.
index of leading indicators.
b.
administrative lag.
c.
recognition lag.
d.
impact lag.
22. The time between implementation of a macro-policy change and when the change exerts its primary
influence is called the
a.
impact lag.
b.
recognition lag.
c.
administrative lag.
d.
tax reform lag.
23. The index of leading indicators was developed to provide more reliable information on
a.
the expected future direction of the economy.
b.
the future profitability of the leading companies in various industries.
c.
where the economy has been in the recent past.
d.
the extent to which the economy’s existing plant and equipment capacity is being used.
24. The variables in the index of leading indicators are included in the index because
a.
they are good indicators of the current rate of inflation.
b.
they generally lag behind turns in the business cycle.
c.
of their tendency to lead (or predict) turns in the business cycle.
d.
they are good indicators of the current state of the economy.
25. If the index of leading indicators and other forecasting devices suggested that the economy is moving
into an inflationary boom, activists’ economic policy would call for
a.
a decrease in money supply growth and a tax increase.
b.
an increase in money supply growth and a shift toward a budget deficit.
c.
an increase in money supply growth and a tax decrease.
d.
a continuation of the policies already in place.
26. Computer forecasting models are most accurate at predicting the economy when
a.
inflation is accelerating.
b.
there is a turn in the business cycle.
c.
economic conditions are relatively stable.
d.
supply shocks impact the economy.
27. Computer forecasting models have
a.
been able to forecast changes in the growth rate of real GDP with considerable accuracy.
b.
had only limited success predicting turns in key economic variables such as real GDP.
c.
been able to accurately forecast the future direction of inflation but not real GDP.
d.
been able to accurately forecast the future direction of real GDP but not inflation.
28. Which of the following would suggest that monetary policy is restrictive?
a.
falling commodity prices
b.
depreciation of the foreign exchange value of the dollar
c.
a rising M1 money supply
d.
an increase in the rate of inflation
29. A decrease in a broad index of commodity prices suggests to the Fed that
a.
money is plentiful, and the Fed should conduct restrictive policy.
b.
money is plentiful, and the Fed should conduct expansionary policy.
c.
deflation is a potential future danger, and the Fed should conduct expansionary policy.
d.
future prices will likely increase, and the Fed should conduct expansionary policy.
30. If indicators like weak demand and falling commodity prices caused concern about deflation (falling
prices), what could the Fed do to head off the deflationary threat?
a.
increase the reserve requirements imposed on banks
b.
buy bonds in order to expand the money supply
c.
increase the discount rate
d.
increase the national debt
31. Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more
expansionary policy is in order?
a.
Commodity prices are falling, and the dollar is appreciating.
b.
Commodity prices are rising, and the dollar is appreciating.
c.
Commodity prices are rising, and the dollar is depreciating.
d.
Commodity prices are falling, and the dollar is depreciating.
32. Which of the following factors substantially reduces the effectiveness of discretionary changes in tax
rates or government expenditures as a stabilization tool?
a.
Even though computer models have enhanced our forecasting ability, policy makers at the
Federal Reserve have been reluctant to utilize information supplied by the models.
b.
When fiscal policy is altered, the Fed generally shifts monetary policy in a manner that
offsets the impact of the fiscal action.
c.
Changes in government expenditures and taxes are always offset by equal changes in
private spending.
d.
Since it takes time for fiscal policy to work and since the future is difficult to forecast, it is
difficult to time fiscal policy changes correctly.
33. Which one of the following reduces the likelihood that real-world fiscal policy will promote economic
stability?
a.
Policy planners do not know whether a tax cut is expansionary or restrictive.
b.
Policy makers need to know what economic conditions will be like 6 to 18 months into the
future, and this is extremely difficult to forecast accurately.
c.
Policy planners are reluctant to implement expansionary fiscal policy even during a
serious recession.
d.
Public choice theory suggests that elected political officials will generally favor restrictive
fiscal policy.
34. Which of the following is a widely-used and closely-watched forecasting tool concerning the future
direction of the macro-economy?
a.
the excess reserves of commercial banks
b.
the Phillips curve
c.
the index of leading indicators
d.
the current budget deficit or surplus
e.
the velocity of the M1 money supply
35. The variables in the index of leading indicators are included in the index because
a.
they turn down prior to a deflation and turn up prior to an inflation.
b.
they generally lag behind turns in the business cycle.
c.
they turn down prior to a recession and turn up before the beginning of a business
expansion.
d.
they provide a comprehensive measure of the current state of the economy.
36. According to the rational expectations theory,
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.
people do not consider likely government policies when forming expectations.
d.
people form expectations, in part, by considering the probable future effects of changes in
government policy.
37. Under the adaptive expectations theory, people persistently
a.
underestimate inflation when it is slowing down.
b.
overestimate inflation when it is accelerating.
c.
underestimate inflation when it is accelerating.
d.
adapt to the prevailing inflation rate quickly.
38. The view that decision-maker expectations are based on actual outcomes observed during the recent
past is called the
a.
rational expectations hypothesis.
b.
adaptive expectations hypothesis.
c.
permanent income theory.
d.
recognition lag.
39. According to the adaptive expectations hypothesis,
a.
inflation will cause the long-run unemployment rate to decline.
b.
the economic record during the current period strongly influences decision-maker
expectations about the future.
c.
decision makers will consider the expected impact of policy changes when forming their
expectations about the future rate of inflation.
d.
future inflation will adapt to conform with the expectations of decision makers.
40. Use the table below to choose the correct answer.
Time period
Actual inflation
1
2 percent
2
2 percent
3
5 percent
4
8 percent
According to the adaptive expectations hypothesis, at the beginning of period 3, decision makers
would expect inflation during period 3 to be
a.
2 percent.
b.
5 percent.
c.
7 percent.
d.
8 percent.
41. Suppose the inflation rate of a country falls from 8 percent during 2002-2004 to 6 percent in
2005-2007, under the adaptive expectations hypothesis what will the expected rate of inflation at the
beginning of 2008?
a.
2 percent
b.
4 percent
c.
6 percent
d.
8 percent
42. The view that individuals weigh all available evidence when they formulate their expectations about
economic events (including information concerning the probable effects of current and future
economic policy) is called
a.
the adaptive expectations hypothesis.
b.
the permanent income hypothesis.
c.
the rational expectations hypothesis.
d.
the Phillips curve.
43. The rational expectations hypothesis indicates that people
a.
pay little attention to policy when forming their expectations about the future.
b.
expect the next period to be pretty much like the recent past, regardless of policy changes.
c.
will always be able to forecast the future accurately.
d.
change their expectations about the future if policy changes.
44. The rational expectations hypothesis assumes that individuals will
a.
never make forecasting errors.
b.
be as likely to overestimate as to underestimate the future rate of inflation.
c.
continually make systematic forecasting errors.
d.
ignore past forecasting errors when formulating predictions.
45. Suppose that during the last five years the rate of inflation was 3 percent each year and the money
supply had grown 6 percent annually during the period. However, during the last nine months, the Fed
has expanded bank reserves more rapidly and the money supply has been growing at a 12 percent
annual rate. As a result, the expected inflation rate for the next period will be
a.
higher than 3 percent under the rational expectations hypothesis.
b.
3 percent under the adaptive expectations hypothesis.
c.
higher than 3 percent under both the adaptive and rational expectations hypotheses.
d.
both a and b.
46. Assume that during the last several years, the annual rate of inflation was 4 percent and the annual
growth rate of the money supply was 5 percent. During the last 12 months, however, the monetary
authorities have increased the money supply at a 12 percent annual rate. The expected inflation rate for
the next period will be
a.
higher than 4 percent under the rational expectations hypothesis.
b.
4 percent under the adaptive expectations hypothesis.
c.
higher than 4 percent under both the adaptive and rational expectations hypotheses.
d.
both a and b.
47. Systematic overestimation or underestimation of inflation will
a.
occur under rational expectations but not under adaptive expectations.
b.
occur under adaptive expectations but not under rational expectations.
c.
occur under both rational and adaptive expectations.
d.
not occur under either rational or adaptive expectations.
48. (I) Rational expectations adherents believe that decision makers base their future expectations on
actual outcomes observed during recent periods.
(II) The adaptive expectations hypothesis states that decision makers weigh all available evidence
when forming expectations about future economic events.
a.
I is true; II is false.
b.
I is false; II is true.
c.
Both I and II are true.
d.
Both I and II are false.
49. According to the theory of rational expectations, the government can influence output
a.
with appropriate fiscal and monetary policy.
b.
in the short run, but not in the long run.
c.
without affecting the price level.
d.
only by making unexpected changes that impact aggregate demand.
50. According to the theory of rational expectations, errors in predicting inflation will
a.
be biased upward more often than not.
b.
be purely random.
c.
tend to be biased downward when inflation is rising, and tend to be biased upward when
inflation is falling.
d.
tend to be biased upward when inflation is rising, and tend to be biased downward when
inflation is falling.
51. According to the rational expectations theory, 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 effects of the policy are unexpected.
52. According to the rational expectations theory, which of the following will affect the levels of output
and employment?
a.
expansionary monetary policy that is fully anticipated
b.
contractionary monetary policy that is fully anticipated
c.
changes in monetary policy that are unanticipated
d.
changes in fiscal policy that are anticipated
53. The main policy conclusion of the rational expectations theory is
a.
fiscal policy lags are so long and variable that such policy is worthless, but monetary
policy can stimulate output.
b.
monetary policy lags are so long and variable that such policy is worthless, but fiscal
policy can stimulate output.
c.
both monetary and fiscal policy will affect real output if firms and households correctly
anticipate the effects of changes in government policy.
d.
neither monetary nor fiscal policy will affect real output if firms and households correctly
anticipate the effects of changes in government policy.
54. The proponents of adaptive expectations believe that
a.
there will be a substantial time lag before people anticipate the effects of a shift to a more
expansionary macro-policy.
b.
macro-policies that stimulate demand and place upward pressure on the general level of
prices will temporarily increase output and employment.
c.
discretionary changes in macro-policy can be made in a manner that will reduce the
economic ups and downs of a market economy.
d.
all of the above are true.
55. Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more
expansionary monetary policy?
a.
In the short run, the real rate of output will be unaffected, but in the long run, it will
increase.
b.
In the short run, the real rate of output will increase, but in the long run, it will be
unchanged.
c.
There will be a permanent increase in the real rate of output, but the inflation rate will also
be a little higher.
d.
In the short run, the impact on the real rate of output is uncertain, but in the long run,
output will increase.
56. Under adaptive expectations, the short-term effect of an unanticipated shift to a more expansionary
macroeconomic policy will be a
a.
temporary reduction in the unemployment rate.
b.
permanent reduction in the unemployment rate.
c.
temporary reduction in the inflation rate.
d.
permanent reduction in the inflation rate.
57. Starting from an initial long-run equilibrium, under the adaptive expectations hypothesis, a shift to a
more expansionary policy will increase
a.
prices and unemployment in the long run.
b.
real output in the short run but not in the long run.
c.
real output in the long run but not in the short run.
d.
real output in both the long run and the short run.
58. The proponents of rational expectations believe that
a.
there will be a substantial time lag before people anticipate the eventual effects of a shift
to a more expansionary macro-policy.
b.
macro-policies that stimulate demand and place upward pressure on the general level of
prices will temporarily increase output and employment.
c.
the inflationary side effects of expansionary policies will be anticipated quickly, and
therefore, even their short-run effects on real output and employment will be minimal.
d.
discretionary changes in macro-policy can be made in a manner that will reduce the
economic ups and downs of a market economy.
59. Under the rational expectations hypothesis, which of the following is the most likely effect of a shift to
a more expansionary monetary policy?
a.
In the short run, the real rate of output will be unaffected, but in the long run, it will
increase.
b.
In the short run, the real rate of output will increase, but in the long run, it will be
unchanged.
c.
There will be a permanent increase in the real rate of output, but the inflation rate will also
be a little higher.
d.
In the short run, the impact on the real rate of output is uncertain; in the long run, it will
remain unchanged.
60. Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated
shift to a more expansionary policy will increase
a.
prices but not real output in the short run.
b.
real output but not prices in the short run.
c.
real output in the long run but not in the short run.
d.
real output in both the long run and the short run.
61. The rational expectations hypothesis implies that use of discretionary macro-policy as a stabilization
tool will
a.
be ineffective, even in the short run.
b.
be effective in the short run but ineffective in the long run.
c.
be effective both in the short run and long run.
d.
make it possible to trade-off a higher rate of inflation for a lower rate of unemployment.
62. If the government accelerates money supply growth and enlarges the budget deficit to stimulate
aggregate demand, the rational expectations hypothesis indicates that decision makers will
a.
ignore the policy until it exerts an observable impact on prices, output, and employment.
b.
quickly take steps to adjust their decision making in light of the more expansionary
policies.
c.
be fooled at the outset but eventually adjust their decision making in accordance with the
change in policy.
d.
be unaware that this policy change has been implemented until a higher rate of inflation is
observed.
63. The rational expectations theory indicates that expansionary policy will
a.
stimulate real output in the long run but not in the short run.
b.
expand real output and employment if the public quickly anticipates the effects of the
expansionary policy.
c.
equalize real and nominal interest rates during lengthy periods of inflation.
d.
fail to increase employment because individuals will anticipate it and take actions that will
offset its impact.
64. Suppose Congress raises taxes and the monetary authorities slow the annual money supply growth
from 10 percent to 5 percent. If decision makers accurately anticipate the impact of these policy
changes on prices,
a.
unemployment will rise.
b.
unemployment will fall.
c.
there will be no effect on unemployment.
d.
unemployment will fall if the change in monetary policy dominates, but unemployment
will rise if the change in fiscal policy dominates.
65. When the effects of a more expansionary macroeconomic policy are quickly and accurately
anticipated, the policy will
a.
increase inflation without reducing unemployment.
b.
increase unemployment while exerting little impact on inflation.
c.
decrease unemployment while exerting little impact on inflation.
d.
fail to exert a significant impact on either unemployment or inflation.
66. Under the adaptive expectations hypothesis, which of the following is the most likely short-run effect
of a move to a more expansionary monetary policy?
a.
higher prices and no change in real output
b.
higher prices and expansion in real output
c.
no change in prices but an expansion in real output
d.
no change in either prices or real output
67. Under the rational expectations hypothesis, which of the following is the most likely short-run effect
of a move to a more expansionary monetary policy?
a.
higher prices and no change in real output
b.
higher prices and expansion in real output
c.
no change in prices but an expansion in real output
d.
no change in either prices or real output
68. Under the adaptive expectations hypothesis, which of the following is the most likely long-run effect
of a move to a more expansionary monetary policy?
a.
higher prices and no change in real output
b.
higher prices and expansion in real output
c.
no change in prices but an expansion in real output
d.
no change in either prices or real output
69. Under the rational expectations hypothesis, which of the following is the most likely long-run effect of
a move to a more expansionary monetary policy?
a.
higher prices and no change in real output
b.
higher prices and expansion in real output
c.
no change in prices but an expansion in real output
d.
no change in either prices or real output
70. Under the adaptive expectations theory, expansionary monetary and fiscal policies designed to reduce
the unemployment rate will be
a.
ineffective in the long run.
b.
ineffective in the short run.
c.
noninflationary.
d.
all of the above.
71. The Phillips curve illustrates the relationship between
a.
change in the money supply and change in unemployment.
b.
tax rates and tax revenues.
c.
the equilibrium level of income and the employment rate.
d.
inflation and unemployment.
72. During the 1960s, most economists believed that expansionary macro-policy
a.
that caused inflation would permanently reduce unemployment.
b.
that caused inflation would permanently increase unemployment.
c.
could not be utilized to reduce unemployment.
d.
did not affect inflation.
73. Incorporation of expectations into economic decision making and the economic experience of recent
decades indicate that in the long run
a.
inflation relates directly to unemployment.
b.
inflation is inversely related to unemployment.
c.
there is no trade-off between inflation and unemployment.
d.
high unemployment is a primary cause of inflation.
74. An unanticipated shift to a more expansionary macro-policy that leads to a higher-than-expected rate
of inflation will
a.
place downward pressure on prices.
b.
temporarily reduce unemployment.
c.
temporarily reduce output.
d.
temporarily reduce the natural rate of unemployment.
75. According to the modern view of the Phillips curve, expansionary macroeconomic policy that leads to
inflation will reduce unemployment
a.
only if people underestimate the inflationary side effects of the policy.
b.
only if people overestimate the inflationary side effects of the policy.
c.
if people accurately anticipate the inflationary side effects of the policy.
d.
only if monetary policy provides the macroeconomic stimulus.
76. If decision makers adjust fully to demand stimulus policies, persistent expansionary macro-policy will
lead to
a.
inflation with no lasting reductions in unemployment.
b.
a permanent reduction in unemployment.
c.
lower interest rates.
d.
more rapid economic growth.
77. An unanticipated shift to a more expansionary monetary policy that permanently increases the rate of
inflation from 2 to 6 percent will
a.
reduce unemployment in the short run, but unemployment will return to the natural rate in
the long run.
b.
reduce unemployment in the short run, but unemployment will exceed the natural rate in
the long run.
c.
increase unemployment in the short run, but unemployment will return to the natural rate
in the long run.
d.
exert an unpredictable impact on unemployment in the short run, but unemployment will
return to the natural rate in the long run.
78. The modern view of the Phillips curve suggests that
a.
when inflation is less than anticipated, unemployment will rise above the natural rate.
b.
monetary policy will be unable to affect inflation.
c.
when people accurately anticipate inflation, expansionary monetary policy will reduce
unemployment.
d.
when inflation exceeds what was anticipated, the natural rate of unemployment will rise.
79. Modern Phillips curve analysis indicates that if people
a.
underestimate inflation, actual unemployment will be below the natural rate.
b.
overestimate inflation, actual unemployment will be below the natural rate.
c.
accurately estimate inflation, actual unemployment will be less than the natural rate.
d.
accurately estimate inflation, actual unemployment will be below the natural rate.
80. According to the modern expectational Phillips curve, unemployment will temporarily rise above the
natural rate of unemployment when
a.
any inflation is present.
b.
inflation turns out to be lower than what people expected.
c.
inflation turns out to be higher than what people expected.
d.
inflation turns out to be equal to what people expected.
81. According to the modern expectational Phillips curve, unemployment will temporarily fall below the
natural rate of unemployment when
a.
any inflation is present.
b.
inflation turns out to be lower than what people expected.
c.
inflation turns out to be higher than what people expected.
d.
inflation turns out to be equal to what people expected.
82. According to the modern expectational Phillips curve, unemployment will equal the natural rate of
unemployment when
a.
any inflation is present.
b.
inflation turns out to be lower than what people expected.