c.
inflation turns out to be higher than what people expected.
d.
inflation turns out to be equal to what people expected.
83. When persons underestimate inflation (when actual inflation exceeds the expected rate), actual
unemployment will
a.
exceed the natural rate of unemployment.
b.
equal the natural rate of unemployment.
c.
fall below the natural rate of unemployment.
d.
increase if the government is running a budget deficit and decrease if a budget surplus is
present.
84. Under which of the following conditions will the actual rate of unemployment tend to rise above the
natural rate of unemployment?
a.
Prices are stable and have been for the last four years.
b.
Inflation is 3 percent and was widely anticipated more than a year ago.
c.
Expansionary monetary policies lead to an unexpected increase in inflation from 3 percent
to 7 percent.
d.
Restrictive monetary policies lead to an unexpected reduction in inflation from 6 percent
to 2 percent.
85. The modern view of the Phillips curve suggests that
a.
when inflation is less than anticipated, unemployment will fall below the natural rate.
b.
when inflation is steady, actual unemployment will equal the natural rate of
unemployment.
c.
systematic demand stimulus policies will be unable to affect prices in the long run.
d.
there will be a trade-off between inflation and unemployment in the long run.
86. In terms of the Phillips curve, the experience of the 1970s indicates that macro-policy
a.
can permanently reduce unemployment if we are willing to tolerate higher inflation.
b.
can reduce unemployment in the long run if we are willing to tolerate higher inflation.
c.
may be able to reduce unemployment but cannot retard inflation.
d.
may be able to reduce unemployment in the short run, but there is little evidence that
expansionary policies can reduce unemployment permanently.
87. (I) In the 1960s and 1970s, most economists believed that there was a permanent trade-off between
inflation and unemployment.
(II) Today, most economists believe there is no permanent trade-off between inflation and
unemployment.
a.
Both I and II are true.
b.
Both I and II are false.
c.
I is true; II is false.
d.
I is false; II is true.
88. After an extended period of steady inflation at a constant rate,
a.
people will anticipate inflation.
b.
actual unemployment will approximate the natural rate of unemployment.
c.
actual unemployment will be less than the natural rate of unemployment.
d.
both a and b are true.
89. When there is an abrupt increase in the rate of inflation,
a.
the actual rate of inflation will tend to fall below the natural rate.
b.
the actual rate of inflation will tend to rise above the natural rate.
c.
the actual and natural rate of inflation will generally be equal.
d.
the natural rate of unemployment will tend to rise.
90. Which of the following is most important for the achievement of long-term prosperity and strong
economic growth?
a.
expansionary monetary policy
b.
expansionary fiscal policy
c.
price stability
d.
a balanced federal budget
91. Most economists agree that
a.
fiscal policy is a more effective stabilization tool than monetary policy.
b.
it is difficult to time discretionary changes in macro-policy in a manner that will promote
stability.
c.
monetary policy should focus on reducing unemployment, while fiscal policy should focus
on the control of inflation.
d.
discretionary macro-policy can easily be instituted in a manner that will promote
economic stability.
92. Since the 1960s, macroeconomists have become more aware
a.
that increases in government expenditures are more effective than tax reductions as a
source of economic stimulus.
b.
that persistent inflation will reduce the unemployment rate.
c.
of both the potential and the limitations of fiscal and monetary policy as stabilization tools.
d.
of the fact that fiscal policy is more potent than monetary policy.
93. When it comes to macro-policy, most economists now agree that
a.
policy should be constantly changing in response to business cycle conditions.
b.
policy changes should exert stimulus during inflationary booms and restraint during
downturns.
c.
given our ability to forecast economic conditions, policy changes easily can be
implemented in a timely manner.
d.
policy changes are difficult to time correctly, and therefore constant shifts in policy are
likely to be a source of economic instability.
94. Which of the following is an area of substantial agreement among macroeconomists?
a.
Expansionary policies that lead to inflation can keep the actual rate of unemployment
below the natural rate.
b.
It is relatively easy to time shifts in monetary policy in a manner that will promote
economic stability.
c.
Price stability is a proper goal of monetary policy.
d.
It is relatively easy to time shifts in fiscal policy in a manner that will promote economic
stability.
95. Which group is most likely to argue that an increase in government spending will be more effective
than a reduction in taxes as a tool to promote recovery?
a.
monetarists
b.
Keynesian economists
c.
supply-side economists
d.
new classical economists
e.
All of the above; there is a consensus on this issue.
96. Economists who believe that market economies are inherently unstable argue that the crisis of 2008
was primarily the result of
a.
the expansionary policies of the Fed that caused the housing boom.
b.
housing regulations that undermined sound lending practices.
c.
the leveraged lending practices of banks and the fear that retarded both consumption and
investment in the latter half of 2008.
d.
persistently high interest rates during the decade leading up to the crisis.
97. Economists who believe that policy errors are the source of economic instability argue that the crisis of
2008 was primarily the result of
a.
housing regulations that undermined sound lending practices and Fed policies that
generated the housing boom and bust.
b.
the stock market crash.
c.
the actions of speculators who drove up the world price of oil, the domestic price of
gasoline, and other energy sources.
d.
persistently high interest rates during the decade leading up to the crisis.
98. The U.S. experience during the 1980s and 1990s illustrates that
a.
fiscal policy is substantially more potent than monetary policy.
b.
a balanced budget is essential for the achievement of price stability.
c.
a monetary policy that keeps the inflation rate low and steady will help promote economic
stability.
d.
there is a trade-off between inflation and unemployment-the unemployment rate can be
reduced if we are willing to tolerate higher rates of inflation.
99. Which of the following contributed the most to the economic stability and strong growth of real GDP
during the 1980s and 1990s?
a.
the rapid growth of government expenditures throughout most of the period
b.
congressional policies that persistently balance the budget
c.
modifications in fiscal policy that stimulated aggregate demand during economic
slowdowns and restrained it during periods of economic boom
d.
Federal Reserve policies that kept the inflation rate low and relatively stable
100. Which of the following was an important source of economic stability during the two decades
following the recovery from the 1982 recession?
a.
countercyclical fiscal policy instituted by Congress
b.
a substantial increase in government spending as a share of the economy
c.
monetary policy that kept the inflation rate low and relatively steady
d.
balanced federal budgets throughout the period
101. Compared to the 1910-1960 period, during the past 50 years the severity of macroeconomic
fluctuations has
a.
increased.
b.
decreased.
c.
changed little.
d.
increased, but the general level of prices has been more stable.
102. Compared to the 1910-1960 period, economic fluctuations during the past 50 years have been less
severe. Most economists believe that this increased stability is primarily the result of
a.
more stable monetary policy.
b.
the smaller budget deficits of recent decades.
c.
regulations that promoted more affordable housing.
d.
greater stability of stock prices as measured by the Dow Jones Industrial Average.
103. The 25 years prior to the crisis of 2008-2009 were
a.
characterized by more instability than the first 50 years of the twentieth century.
b.
the most stable economic quarter of a century in American history.
c.
characterized by more monetary and price instability than any era other than the 1970s.
d.
a period of historically slow growth and high unemployment.
104. Which of the following occurred during and following the 2008-2009 recession?
a.
Unemployment benefits were extended from their normal 26 weeks to up to 99 weeks.
b.
The Federal Reserve more than doubled the size of the monetary base.
c.
The federal budget deficit expanded to approximately 10 percent of GDP.
d.
All of the above are true.
105. In response to the recession of 2008-2009, the fiscal policy of the federal government was
a.
highly expansionary, and this Keynesian stimulus promoted a rapid recovery.
b.
highly expansionary, but this was largely offset by the Fed’s restrictive monetary policy
c.
highly restrictive, but this was largely offset by the Fed’s highly expansionary monetary
policy
d.
highly expansionary, but the unemployment rate nonetheless remained high during 2010
and 2011
106. The two most severe recessions of the post-World War II era occurred in 1981-1982 and 2008-2009.
The policy responses to the two recessions were
a.
very similar; expansionary fiscal policy promoted a strong recovery in both cases
b.
very similar, but the recovery was nonetheless weak in both cases
c.
dramatically different; tax rates were cut and monetary policy was restrictive during the
earlier recession, while government spending was increased sharply and monetary policy
highly expansionary during the more recent recession
d.
dramatically different; tax rates were increased and monetary policy was highly
expansionary during the earlier recession, while tax rates were cut and monetary policy
was restrictive during the more recent recession
107. The policy response to the recession of 2008-2009 provided an experiment on the potency of
Keynesian fiscal policy. In what respect was this true?
a.
The money supply increased rapidly and the short-term interest rates were pushed to near
zero just as the Keynesian model of fiscal policy recommends.
b.
Government spending increased sharply and the budget deficits were large just as the
Keynesian model of fiscal policy recommends.
c.
The money supply increased rapidly and the budget was shifted toward a surplus just as
the Keynesian model recommends.
d.
The federal budget was balanced just as the Keynesian model indicates would be prudent
policy during a recession.
108. During and following the recession of 2008-2009, private investment was
a.
strong, and this should increase the future productivity of workers.
b.
strong, and this will tend to weaken the future productivity of workers.
c.
weak, and this will tend to reduce the future productivity of workers.
d.
weak, and this will tend to increase the future productivity of workers.
109. Compared to the severe recession of 1981-1982, the growth of real GDP during the first two years of
recovery from the 2008-2009 recession was
a.
much more rapid and the unemployment rate fell by a smaller amount after the more
recent recession.
b.
slower and the unemployment rate fell by a smaller amount after the more recent
recession.
c.
more rapid but the unemployment rate fell by a smaller amount after the more recent
recession.
d.
similar and the decline in the rate of unemployment was almost identical during the
recovery from each of these recessions.
110. During the recession of 2008-2009, the length of time qualified workers were permitted to draw
unemployment benefits was increased from 26 to up to 99 weeks. Economic theory indicates that this
extension would
a.
reduce the opportunity cost of job search and lead to longer spells of unemployment.
b.
increase the opportunity cost of job search and lead to shorter spells of unemployment.
c.
reduce the long-term rate of unemployment.
d.
increase the current supply of labor and make it easier for employers to hire workers.
111. Compared with the recovery from the recession of 1981-82, the recovery from the recession of
2008-09 was characterized by
a.
more rapid growth of real GDP.
b.
a more rapid decline in the rate of unemployment.
c.
larger increases in both government spending and budget deficits as a share of GDP.
d.
higher interest rates and a more restrictive monetary policy.
112. Which of the following contributed to the weak recovery from the 2008-2009 recession?
a.
The restrictive monetary policy followed by the Fed.
b.
Government spending was increased by only a small amount.
c.
The temporary nature of the tax rebates and spending increases created uncertainty and
exerted only a weak impact on aggregate demand.
d.
The budget deficits were too small to exert much impact on aggregate demand, output, and
employment.
113. Which of the following reduced the effectiveness of the Fed’s low interest rate policy during the
aftermath of the 2008-2009 recession?
a.
The heavy indebtedness of households.
b.
The reduction in the earnings derived from savings accounts, certificates of deposits, and
other forms of savings used by many Americans.
c.
The increased fear of inflation fueled by the Fed’s expansionary monetary policy.
d.
All of the above.
114. Which of the following contributed to the weak recovery from the 2008-2009 recession?
a.
the restrictive monetary policy followed by the Fed
b.
constant policy changes that created uncertainty and thereby retarded private business
investment
c.
sharp reductions in federal spending that were designed to achieve a balanced federal
budget
d.
failure to run budget deficits that were large enough to exert an impact on aggregate
demand
115. Which of the following reduced the demand stimulus effects of monetary policy during the years
following the 2008-2009 recession?
a.
Failure of the Fed to provide sufficient reserves to the banking system for the extension of
new loans.
b.
A substantial reduction in the velocity of money resulting from the historically low interest
rates.
c.
The Fed’s high interest rate policy that reduced private investment.
d.
Inability of the Fed to gain approval from Congress to purchase assets other than bonds
issued by the federal government.
116. Which of the following contributed to the weak recovery from the 2008-2009 recession?
a.
constant policy changes that generated uncertainty and undermined private investment
b.
the restrictive monetary policy followed by the Fed
c.
the tax increases instituted by a Congress intent on balancing the budget
d.
the inability of the federal government to borrow because of the sharply higher interest
rates
Use the figure below to answer the following question(s).
Figure 15-1
117. In Figure 15-1, AD1 and SRAS1 indicate initial conditions in the goods and services market. In the short
run, which of the following will most likely result from a shift to a more expansionary monetary policy
under the adaptive expectations hypothesis?
a.
price level P1 and output Y1
b.
price level P2 and output Y2
c.
price level P3 and output Y1
d.
price level P1 and output Y2
118. In Figure 15-1, AD1 and SRAS1 indicate initial conditions in the goods and services market. In the short
run, which of the following will most likely result from a shift to a more expansionary monetary policy
under the rational expectations hypothesis?
a.
price level P1 and output Y1
b.
price level P2 and output Y2
c.
price level P3 and output Y1
d.
price level P1 and output Y2
Use the figure below to answer the following question(s).
Figure 15-2
119. According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will
temporarily rise above the natural rate of unemployment when
a.
inflation turns out to be lower than what people expected.
b.
inflation turns out to be higher than what people expected.
c.
inflation turns out to be equal to what people expected.
d.
all of the above are true.
120. According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will
temporarily fall below the natural rate of unemployment when
a.
inflation turns out to be lower than what people expected.
b.
inflation turns out to be higher than what people expected.
c.
inflation turns out to be equal to what people expected.
d.
all of the above are true.
121. According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will
equal the natural rate of unemployment when
a.
inflation turns out to be lower than what people expected.
b.
inflation turns out to be higher than what people expected.
c.
inflation turns out to be equal to what people expected.
d.
all of the above are true.
Figure 15-3
122. As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in
the aggregate demand curve from AD1 to AD2 will cause the economy to move
a.
directly from E1 to E3 and then remain at E3.
b.
directly from E1 to E2 and then remain at E2.
c.
from E1 to E2 initially and then eventually move back to E1.
d.
from E1 to E2 initially and then eventually move to E3.
123. As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in
the aggregate demand curve from AD1 to AD2 will cause the price level to move
a.
directly from 100 to 110 and then remain at 110.
b.
directly from 100 to 105 and then remain at 105.
c.
from 100 to 105 initially and then eventually move back to 100.
d.
from 100 to 105 initially and then eventually move to 110.
124. As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in
the aggregate demand curve from AD1 to AD2 will cause
a.
labor to adjust nominal wages sluggishly.
b.
the aggregate supply curve to shift from SRAS1 to SRAS2
c.
the price level to eventually rise from 100 to 110.
d.
All of the above.
125. As shown in Figure 15-3, if people behave according to rational expectations theory, an increase in the
aggregate demand curve from AD1 to AD2 will cause the price level to move
a.
directly from 100 to 105 and then remain at 105.
b.
directly from 100 to 110 and then remain at 110.
c.
from 100 to 105 initially and then eventually move back to 100.
d.
from 100 to 105 initially and then eventually move to 110.
126. As shown in Figure 15-3, if people behave according to rational expectations theory, an increase in the
aggregate demand curve from AD1 to AD2 will cause the economy to move
a.
directly from E1 to E3 and then remain at E3.
b.
directly from E1 to E2 and then remain at E2.
c.
from E1 to E2 initially and then eventually move back to E1.
d.
from E1 to E2 initially and then eventually move to E3.
127. Which of the following is true regarding economic fluctuations in the United States?
a.
Since World War II, economic ups and downs have been more moderate than before the
war.
b.
Prior to World War II, real GDP annual increases of more than 5 percent were unheard of.
c.
Real GDP grew rapidly during the 1930s.
d.
The 1920s was a period of prolonged economic stagnation and high unemployment.
128. The effectiveness of monetary policy as a stabilization tool is limited by
a.
activist economists, who exert pressure on politicians.
b.
the inability to forecast the future and time policy changes in a stabilizing manner.
c.
Congressional attempts to offset changes in monetary policy with modifications in fiscal
policy.
d.
the inability of the Federal Reserve to alter the money supply.
129. Activists believe that
a.
discretionary changes in macroeconomic policy can help smooth the ups and downs of the
business cycle.
b.
balancing the federal budget is of primary importance to economic stability.
c.
the economy’s self-correcting mechanism, if not stifled by perverse policies, will prevent
prolonged periods of high unemployment.
d.
the M1 money supply should be increased at a steady annual rate.
130. Which combination of signals would be a strong indication that Fed policy is too expansionary and
that a shift to a more restrictive policy is in order?
a.
commodity prices are falling and the dollar is appreciating.
b.
commodity prices are rising and the dollar is depreciating.
c.
commodity prices are rising and the dollar is appreciating.
d.
commodity prices are falling and the dollar is depreciating.
131. The interval between the recognition of a need for a policy change and when the policy change is
instituted is called the:
a.
recognition lag.
b.
impact lag.
c.
policy lag.
d.
administrative lag.
132. According to the adaptive expectations hypothesis, people will
a.
anticipate that what has happened in the immediate past will continue.
b.
systematically overestimate inflation when inflation is increasing.
c.
use all available information, including information on the expected impact of economic
policy, when they formulate expectations about economic events.
d.
systematically underestimate inflation when inflation is declining.
133. The rational expectations hypothesis implies that discretionary macropolicy may be
a.
relatively effective in both the short run and long run.
b.
relatively effective in the short run but ineffective in the long run.
c.
relatively ineffective both in the short run and long run.
d.
effective in the long run since decision makers will continually make predictable,
systematic errors.
134. According to the rational expectations theory, expansionary monetary policy will
a.
reduce inflation.
b.
lead to inflation and the higher rate of inflation will be quickly anticipated.
c.
reduce unemployment because people will generally underestimate the inflationary side
effects of the monetary expansion.
d.
accelerate inflation in the short run, but in the long run the primary effect will be an
increase in employment.
135. Which of the following is part of the modern view of the Phillips curve?
a.
When inflation exceeds what was anticipated, unemployment falls below the natural rate.
b.
When inflation is less than anticipated, unemployment will rise above the natural rate.
c.
Demand stimulus policies can temporarily reduce unemployment, but in the long run, their
primary impact will be on prices (inflation).
d.
All of the above are correct.
136. Suppose the annual rate of inflation has been 3 percent and the annual growth rate of the money supply
has been 5 percent during the last few years. In the last twelve 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.
lower than 3 percent under both the adaptive and rational expectations hypotheses.
b.
3 percent under the adaptive expectations hypothesis.
c.
3 percent under the rational expectations hypothesis.
d.
higher than 3 percent under both the adaptive and rational expectations hypotheses.
137. The modern view of the Phillips curve indicates that in the long run there
a.
is no trade-off between inflation and unemployment.
b.
is a definite trade-off between unemployment and inflation.
c.
will be a trade-off if the rational expectations hypothesis is correct.
d.
may be a long-run trade-off between unemployment and inflation, but there is no such
trade-off in the short run.
138. In order to make effective policy changes, policy makers need to know
a.
where the economy is going to be six to twelve months from now.
b.
the magnitude of past recessions.
c.
Keynesian economics.
d.
the exact size of the current M1 money supply.
139. Which of the following variables are included in the index of leading indicators?
a.
new orders placed with manufacturers, length of average workweek, permits for new
housing starts
b.
changes in the M1 money supply, number of new credit cards, political stance of current
politicians
c.
average worker salary, average number of children per family, current standard of living
d.
labor-force participation rate, household debt as a share of disposable income, the real
interest rate
140. The integration of expectations into macroeconomic analysis indicates that
a.
fiscal policy is more potent than monetary policy.
b.
monetary policy is more potent than fiscal policy.
c.
once people come to expect a given rate of inflation, the inflation will neither stimulate
real output nor reduce unemployment.
d.
higher rates of inflation will lead to lower rates of unemployment in the long run but not in
the short run.
141. Which of the following contributed to the weak recovery from the 2008-2009 recession?
a.
Government stimulus spending that was largely temporary and often directed toward
unproductive activities.
b.
The restrictive monetary policy followed by the Fed.
c.
The tax increases instituted by a Congress intent on balancing the budget.
d.
The failure of the Fed to provide the banking system with sufficient reserves for the
extension of new loans.
142. What is the index of leading indicators, and what is it used for?
143. Explain two reasons why economic forecasting can only be of limited use.
144. Explain the three lags that make it difficult to time changes in discretionary policy properly.
145. What are the two theories about how expectations are formed? Discuss each.
146. What are the macroeconomic policy implications of the rational expectations hypothesis? What should
policy makers do and not do?
147. What is the Phillips curve? What is the difference between the original Phillips curve and the
“modern” view of the Phillips curve? What problems caused the abandonment of the ideas behind the
original Phillips curve?
148. What will actual unemployment be (in relation to the natural rate) in each of the following cases? Use
a graph of the modern Phillips curve in your answer.
a.
Decision makers underestimate inflation.
b.
Decision makers overestimate inflation.
c.
Decision makers correctly forecast inflation.
Actual unemployment will fall below the natural rate.
b.
Actual unemployment will rise above the natural rate.
c.
Actual unemployment will equal the natural rate.
149. How has macro-policy changed since the 1970s? How have the views of economists on the trade-off
between inflation and unemployment changed?
150. What are the proper monetary and fiscal responses to a recession under the activist view and the
nonactivist view?
