Deck 18: Theory Versus Reality

Question 1

Which of the following is an example of an automatic stabilizer?

A)Fed discount rate.
B)Discretionary fiscal policy that must be determined by Congress and the president.
C)Changes that are triggered by the economy and not by government decision makers.

Answer 1

Changes that are triggered by the economy and not by government decision makers.

Question 2

Which of the following is a responsibility of Congress?

A)Monetary policy.
B)Fiscal policy and supply-side policy.
C)Monetary and fiscal policy.

Answer 2

Fiscal policy and supply-side policy.

Question 3

The belief that monetary policy can be effective in changing aggregate demand and that interest rates are the critical monetary variable is associated with

A)Modern Keynesians.
B)New classical economists.
C)Monetarists.

Answer 3

Modern Keynesians.

Question 4

Which of the following believes that the money supply is the critical policy lever?

A)Marxists.
B)Monetarists.
C)Supply-siders.

Question 5

Which of the following policy options would tend to offset each other?

A)A decrease in the discount rate and a decrease in the reserve requirement.
B)An increase in the discount rate and a decrease in the tax rate.
C)An increase in the reserve requirement and an open market sale by the Fed.

Question 6

A tax cut can best be characterized as

A)Both fiscal and supply-side policy.
B)Both monetary and supply-side policy.
C)Fiscal policy only.

Question 7

Fiscal policy includes all of the following except

A)Tax cuts.
B)Tax increases.
C)Interest rate increases.

Question 8

Which of the following is an example of supply-side policy?

A)Selling bonds in the open market.
B)The purchase of military goods by the government.
C)Tax incentives for business investment.

Question 9

Monetarists believe that

A)Monetary policy is effective only in a recession.
B)Interest rates are the critical policy lever.
C)The money supply should be expanded at a steady,predictable rate.

Question 10

Income taxes are an automatic stabilizer because when income rises,ceteris paribus,tax receipts

A)Fall because automatic stabilizers work against the cyclical movements of the GDP.
B)Rise because taxes are computed on the basis of income.
C)Fall because income taxes are regressive.

Question 11

Monetary policy tools include:

A)Income taxes and the discount rate.
B)Open market operations and government spending.
C)The reserve ratio and the discount rate.

Question 12

Which of the following is not true about a structural deficit?

A)It exists even if the economy is at full employment.
B)It is influenced by discretionary fiscal spending.
C)It definitely gets larger as unemployment increases.

Question 13

The structural deficit is

A)The deficit that would exist if the economy were at full employment.
B)Computed on the basis of the current value of automatic stabilizers.
C)Determined by the president of the United States.

Question 14

Which of the following is most consistent with supply-side policy?

A)The Workforce Investment Act,which increased funds for skill training.
B)The increase in the interest rate six times during 1999-2000 by the Fed.
C)The decrease in the growth of the money supply in 1994.

Question 15

When the chairman of the Federal Reserve announced a goal of "zero inflation," which of the following economic policies was most likely being changed?

A)Fiscal policy.
B)Monetary policy.
C)Supply-side policy.

Question 16

Assume the economy is in a recession and has a budget deficit.Ceteris paribus,if the economy starts expanding,automatic stabilizers will cause

A)A decrease in tax revenues.
B)An increase in government spending.
C)A decrease in the budget deficit.

Question 17

Policy tools include

A)Population growth,spending behavior,and invention.
B)Wars,natural disasters,and trade disruptions.
C)Tax policy,government spending,and the availability of money.

Question 18

The natural rate of unemployment is the

A)Rate that would occur if the structural deficit were zero.
B)Rate that corresponds to 3 percent inflation on the Phillips curve.
C)Long-term rate determined by structural forces in labor and product markets.

Question 19

Which of the following is a monetary policy action?

A)Open market operations.
B)Changes in transfer payments.
C)Changes in government spending.

Question 20

Automatic stabilizers include

A)Open market operations.
B)Unemployment benefits.
C)Deregulation.

Question 21

Which of the following groups believes that the velocity of money is constant in the long run?

A)Keynesians.
B)Monetarists.
C)Supply-side economists.

Question 22

Who believes the government should react to inflation by tightening the money supply?

A)Modern Keynesians and supply-siders.
B)Monetarists and modern Keynesians.
C)New classical economists and monetarists.

Question 23

A supply-side policy to cure a recession might include

A)A decrease in government spending.
B)Elimination of the minimum wage.
C)A tax increase.

Question 24

During a severe recession,appropriate economic policy might include

A)An open market purchase by the Fed,a decrease in the discount rate,or a decrease in government regulation.
B)An open market sale by the Fed,a decrease in the discount rate,or an increase in the budget deficit.
C)A decrease in government spending,a decrease in the discount rate,or a decrease in government regulation.

Question 25

In a recession Keynesians emphasize the need to ________ government spending or ________ taxes,which will cause a multiplier reaction.

A)increase;decrease
B)decrease;decrease
C)increase;increase

Question 26

The modern Keynesian approach to cure a recession might include

A)Expanding the money supply or increasing government spending.
B)Expanding the money supply or reducing government spending.
C)Contracting the money supply or increasing government spending.

Question 27

The recessionary GDP gap is

A)Equal to the spending multiplier.
B)The amount by which equilibrium GDP falls short of full-employment GDP.
C)Small unless the unemployment rate is very low.

Question 28

Which of the following is both a supply-side and a fiscal policy tool during a recession?

A)Deregulation.
B)Tax cuts.
C)Welfare programs.

Question 29

An inflationary GDP gap is equal to the

A)Recessionary GDP gap.
B)Difference between equilibrium GDP and full-employment GDP.
C)Difference between potential GDP and full-employment GDP.

Question 30

Which of the following supply-side efforts did the Clinton administration embrace?

A)Expansion of the money supply.
B)Additional investment in education and skills training.
C)Reduction in immigration of highly skilled workers.

Question 31

Which of the following is a Keynesian approach for dealing with a recession?

A)Raise interest rates.
B)Increase government expenditure.
C)Raise taxes.

Question 32

Fiscal and monetary policies are most effective in reducing inflation when the aggregate

A)Supply curve is horizontal.
B)Supply curve is vertical.
C)Supply curve is upward-sloping but not vertical.

Question 33

Which of the following would a Keynesian macro model include to describe the effect of a tax cut?

A)Labor supply and production responses.
B)Interest rate rises.
C)Multiplier spending responses.

Question 34

In a recession,monetarists believe

A)Velocity varies in response to fiscal policy.
B)Interest rates rise to eliminate the recession.
C)Fiscal policy is ineffective.

Question 35

Which of the following supply-side efforts was embraced by the second Bush administration?

A)Reduction of the deficit.
B)Increase in government environmental regulations.
C)Reduction in marginal tax rates.

Question 36

Which of the following is an accurate statement about supply-side policy?

A)The aggregate supply curve should be shifted to the right during periods of inflation and to the left during a recession.
B)The aggregate supply curve should be shifted to the left during periods of inflation and to the right during a recession.
C)The aggregate supply curve should be shifted to the right during periods of both inflation and recession.

Question 37

If the economy is experiencing a recessionary GDP gap from a demand shock,then aggregate

A)Supply must be increased so that producers can sell more goods.
B)Supply must be decreased so that producers will have fewer goods to sell.
C)Demand must be increased so that producers can sell more goods.

Question 38

A fiscal policy cure for inflation might include

A)A reduction in government spending.
B)An increase in the reserve requirement.
C)Reductions in marginal tax rates for corporations and households.

Question 39

Which of the following is a supply-side policy action to eliminate a recession?

A)Increased investment in infrastructure.
B)The purchase of securities in the open market by the Fed.
C)An increase in the marginal tax rate.

Question 40

The number of times per year,on average,that a dollar is used to purchase final goods and services is the

A)Business cycle.
B)Multiplier.
C)Velocity of money.

Question 41

The simultaneous occurrence of high inflation and high unemployment is called

A)Reflation.
B)Stagflation.
C)Deflation.

Question 42

Supply-side policy to reduce inflation would focus on

A)Decreasing the money supply.
B)Decreasing the interest rates to encourage investment.
C)Increasing the incentives to produce goods and services.

Question 43

Alternating periods of economic growth and contraction are referred to as

A)Fiscal policy.
B)A policy lever.
C)The business cycle.

Question 44

Fine-tuning is most consistent with

A)Keynesian or Modern Keynesian economics.
B)Monetarism or new classical economics.
C)Supply-side economics or new classical economics.

Question 45

Which of the following groups designs policies that are best at eliminating stagflation?

A)Keynesians.
B)Monetarists.
C)Supply-side economists.

Question 46

Which of the following is not a supply-side policy to cure inflation?

A)Reduced marginal tax rates.
B)Incentives to encourage saving.
C)Lower interest rates.

Question 47

Efforts to fine-tune the economy have been used for several decades,and as a result

A)We have successfully achieved our major economic goals at all times.
B)We still experience periods of recession,high unemployment,and inflation.
C)Employment goals have been met,but price stability has not been attained.

Question 48

Which of the following is true about the U.S.economy?

A)It has been able to do away with the business cycle.
B)It still experiences periods of inflation and unemployment.
C)It had greater economic problems than other Western countries in the 1990s.

Question 49

Which of the following is true about stagflation?

A)It can be corrected by policies that increase aggregate supply.
B)It results in a lower value of the misery index.
C)It can be corrected by demand-side policies.

Question 50

The correction of any and all macroeconomic problems that arise

A)Is compatible with our design capabilities.
B)Has been easy to accomplish over the last decade.
C)Is the concept of fine-tuning.

Question 51

A growth recession is characterized by

A)An increasing unemployment rate with moderate inflation.
B)An increasing unemployment rate with substantial inflation.
C)A positive growth rate below 3 percent annually.

Question 52

Business cycles in the United States

A)Are remarkably similar in length but vary greatly in intensity.
B)Vary greatly in length,frequency,and intensity.
C)Are similar in frequency and intensity.

Question 53

Which of the following is not a policy to reduce stagflation?

A)Restricting immigration.
B)Developing infrastructure.
C)Investing in human capital.

Question 54

Which of the following concepts does not represent basic trade-offs faced by a government?

A)The production possibilities curve.
B)Fine-tuning.
C)Opportunity costs.

Question 55

Which of the following is true about the U.S.economy from 1992 to 1999?

A)It performed above average based on most measures.
B)It had the lowest unemployment levels of the century.
C)It experienced zero inflation most years.

Question 56

Since World War II,the business cycle has been characterized by

A)Increasingly longer recessions.
B)Shorter periods of growth.
C)Alternating periods of expansion and contraction.

Question 57

Fiscal and monetary policy can be used to change the price level but not output when the aggregate

A)Supply curve is horizontal.
B)Supply curve is vertical.
C)Supply curve is upward-sloping but not vertical.

Question 58

Which of the following is an accurate statement concerning the macroeconomy of the United States?

A)The goals of full employment,price stability and vigorous economic growth are frequently met.
B)The economy continues to experience the ups and downs of the business cycle.
C)The ups and downs of the business cycle have been more severe since World War II.

Question 59

A supply-side policy to cure inflation would include

A)A minimum wage increase.
B)Tax increases.
C)Deregulation.

Question 60

A supply-side policy to cure stagflation would include

A)Reduced government spending.
B)Reduced government regulation.
C)The purchase of securities in the open market by the Fed.

Question 61

The decision concerning how the dollars left over from a defense cutback will be distributed is an example of

A)A goal conflict.
B)A design problem.
C)A velocity problem.

Question 62

If the data collected by policy makers overstate inflation,this is an example of

A)A goal conflict.
B)A measurement problem.
C)A design problem.

Question 63

The idea that no one knows for certain the shape of the aggregate supply curve contributes to

A)Design problems.
B)Goal conflicts.
C)Inventory problems.

Question 64

Which of the following actions results in the shortest lag between recognition of a problem and an appropriate stabilization response?

A)Congress takes authority over stabilization and is not required to wait for the executive branch to respond.
B)The appropriation and authorization responsibilities of Congress are transferred to the executive branch in order to eliminate congressional lags.
C)Congress writes legislation providing more automatic stabilizers in the economy.

Question 65

Which of the following explains why Congress or the president might hesitate to use restrictive fiscal policy in an election year?

A)Monetary policy is always more effective.
B)Voters might become unemployed.
C)Fiscal policy is too complex.

Question 66

The potential conflict of economic policy with political objectives can be used to explain

A)The ups and downs in overall business activity.
B)The election of the Federal Reserve's Board of Governors.
C)Why politicians stimulate the economy before an election and restrict it afterward.

Question 67

Information about the leading economic indicators is collected to address which of the following issues?

A)Goal conflicts.
B)Measurement problems.
C)Multiplier problems.

Question 68

The opportunity costs of different policies must be weighed to solve which of the following obstacles?

A)Rational expectations problems.
B)Measurement problems.
C)Goal conflicts.

Question 69

The index of leading indicators is a factor that

A)We can observe today that is logically linked to future economic performance.
B)Generally moves in a positive direction before recessions.
C)Is published weekly and provides forecasts of the economy three to six months in advance.

Question 70

The fact that the president must ask Congress for the authority to cut taxes is an example of

A)An implementation problem.
B)A goal conflict.
C)A rational expectations problem.

Question 71

Many economists argue that government price indexes overstate inflation by 1 to 2 percent.From the point of view of those designing economic policy,this is an example of

A)A measurement problem.
B)A goal conflict.
C)A design problem.

Question 72

Which of the following is the appropriate order of policy responses?

A)Response design,recognition,impact,and implementation.
B)Recognition,response design,implementation,and impact.
C)Response design,implementation,recognition,and impact.

Question 73

Advocates of "fixed policy rules" believe

A)That fine-tuning can improve macro outcomes.
B)In constant increases in the money supply and balanced federal budgets.
C)That the economy is better off using discretionary policy.

Question 74

Which of the following policy obstacles could occur because it is difficult to know how market participants will respond to specific prices?

A)Implementation problems.
B)Design problems.
C)Velocity problems.

Question 75

Politicians might hesitate to increase income and in-kind transfers to the poor because this could cause

A)A decrease in the budget deficit.
B)Private sector spending to overpower public sector spending.
C)Excessive demand for goods and services.

Question 76

Which of the following does not help to explain why politicians might hesitate to balance the budget in an election year?

A)The inflation rate might rise.
B)Voters might become unemployed.
C)The economy could be pushed into recession.

Question 77

Economic forecasts

A)Drive economic policy for both the Fed and Congress.
B)Drive economic policy for the Fed but not for Congress.
C)Drive economic policy for Congress but not for the Fed.

Question 78

External shocks can

A)Be predicted using standard statistical techniques.
B)Cause economic forecasts based on leading economic indicators to become invalid.
C)Improve the validity of economic forecasts based on leading economic indicators.

Question 79

Which of the following policy obstacles could occur because it is difficult to know how market participants will respond to specific policies?

A)Goal conflicts.
B)Measurement problems.
C)Design problems.

Question 80

Which of the following is not a leading indicator for economic activity?

A)Orders for new equipment.
B)The level of inventories.
C)Natural disasters.