Question 1

Which of the following is true regarding economic fluctuations in the United States?

Accepted Answer

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.E) B) and D)
F) None of the above

Question 2

Why did many economists during the 1960s and 1970s believe that expansionary macroeconomic policy that resulted in inflation would reduce the rate of unemployment?

Accepted Answer

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

Question 3

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?

Accepted Answer

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 outputE) All of the above
F) A) and C)

Question 4

According to the rational expectations theory,

Accepted Answer

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.E) C) and D)
F) None of the above

Question 5

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?

Accepted Answer

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 outputE) None of the above
F) A) and D)

Question 6

Under the adaptive expectations theory, people persistently

Accepted Answer

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

Question 7

Activists believe that

Accepted Answer

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.E) A) and B)
F) A) and D)

Question 8

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?

Accepted Answer

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 outputE) All of the above
F) B) and C)

Question 9

Use the table below to choose the correct answer. 
According to the adaptive expectations hypothesis, at the beginning of period 3, decision makers would expect inflation during period 3 to be

Accepted Answer

A)   2.5 percent.
B)   5 percent.
C)   7.5 percent.
D)   8 percent.E) C) and D)
F) A) and B)

Question 10

The effectiveness of monetary policy as a stabilization tool is limited by

Accepted Answer

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

Question 11

According to the modern expectational Phillips curve, unemployment will temporarily fall below the natural rate of unemployment when

Accepted Answer

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.E) A) and B)
F) B) and D)

Question 12

The rational expectations hypothesis implies that use of discretionary macro-policy as a stabilization tool will

Accepted Answer

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.E) C) and D)
F) All of the above

Question 13

What are the two theories about how expectations are formed? Discuss each.

Accepted Answer

The two theories are adaptive and ration...

Question 14

Figure 15-3
 
-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

Accepted Answer

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.E) None of the above
F) C) and D)

Question 15

Which of the following best reflects the nonactivist view of stabilization policy?

Accepted Answer

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.E) A) and C)
F) A) and D)

Question 16

The adaptive expectations hypothesis implies that people

Accepted Answer

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

Question 17

According to the rational expectations theory, expansionary monetary policy will

Accepted Answer

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.E) None of the above
F) A) and C)

Question 18

According to the modern expectational Phillips curve, unemployment will equal the natural rate of unemployment when

Accepted Answer

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.E) B) and D)
F) B) and C)

Question 19

Which of the following is a major area of disagreement between activists and nonactivists?

Accepted Answer

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.E) A) and C)
F) C) and D)

Question 20

Activists believe that

Accepted Answer

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.E) A) and D)
F) C) and D)

Exam 15: Stabilization Policy, Output, and Employment

Which of the following best reflects the nonactivist view of stabilization policy?

Correct AnswerverifiedShow Answer

According to the rational expectations theory, expansionary monetary policy will

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According to the modern expectational Phillips curve, unemployment will equal the natural rate of unemployment when

Correct AnswerverifiedShow Answer

The adaptive expectations hypothesis implies that people

Correct AnswerverifiedShow Answer

Figure 15-3 -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

Correct AnswerverifiedShow Answer

Activists believe that

Correct AnswerverifiedShow Answer

Which of the following is a major area of disagreement between activists and nonactivists?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

The effectiveness of monetary policy as a stabilization tool is limited by

Correct AnswerverifiedShow Answer

The rational expectations hypothesis implies that use of discretionary macro-policy as a stabilization tool will

Correct AnswerverifiedShow Answer

Use the table below to choose the correct answer. According to the adaptive expectations hypothesis, at the beginning of period 3, decision makers would expect inflation during period 3 to be

Correct AnswerverifiedShow Answer

Under the adaptive expectations theory, people persistently

Correct AnswerverifiedShow Answer

Why did many economists during the 1960s and 1970s believe that expansionary macroeconomic policy that resulted in inflation would reduce the rate of unemployment?

Correct AnswerverifiedShow Answer

According to the modern expectational Phillips curve, unemployment will temporarily fall below the natural rate of unemployment when

Correct AnswerverifiedShow Answer

What are the two theories about how expectations are formed? Discuss each.

Correct AnswerverifiedThe two theories are adaptive and ration...View AnswerShow Answer

Which of the following is true regarding economic fluctuations in the United States?

Correct AnswerverifiedShow Answer

According to the rational expectations theory,

Correct AnswerverifiedShow Answer

Activists believe that

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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The two theories are adaptive and ration...
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