Deck 15: Macro Policy Debate: Active or Passive

Question 1

Suppose an economist who favours a passive approach observes a drop in real GDP caused by a decrease in aggregate demand.What is the economist most likely to think?  

A) that the economy will recover by itself, before discretionary policy can correct the situation 
B) that discretionary policy will correct the situation before the economy can recover by itself 
C) that the imposition of policy rules will correct the situation before the economy can recover by itself 
D) that aggregate supply will decrease

Answer 1

 that the economy will recover by itself, before discretionary policy can correct the situation 

Question 2

According to the active policy position, how should policymakers eliminate a recessionary gap?  

A) by decreasing wages 
B) through the use of wage and price controls 
C) by stimulating aggregate demand 
D) by doing nothing

Answer 2

 by stimulating aggregate demand 

Question 3

For policymakers who favour an active approach, why are public policy changes considered necessary for curing a recessionary gap?  

A) because the short-run aggregate supply curve will otherwise shift quickly to the right 
B) because prices and wages are flexible downward but NOT upward 
C) because the required decrease in output can be achieved only by shifting the AD curve 
D) because real wages must fall during price increases rather than wait for money wages to fall

Answer 3

 because real wages must fall during price increases rather than wait for money wages to fall

Question 4

Which of the following statements is NOT consistent with a self-correcting economy?  

A) Prices and wages are flexible. 
B) A recessionary gap is corrected through falling wages and prices. 
C) The short-run aggregate supply tends to shift until it intersects aggregate demand at potential GDP. 
D) The best policy is to take an active approach to a recession or depression.

Question 5

According to policymakers who favour a passive approach to policy, why will a recessionary gap be eliminated by a passive approach?  

A) because prices and wages will rise rapidly 
B) because prices and wages are flexible 
C) because the aggregate demand curve will shift to the right 
D) because the aggregate demand curve will shift to the left

Question 6

Suppose prices and wages are NOT flexible.What is most likely to occur after an adverse supply shock?  

A) deflation 
B) unemployment 
C) inflation 
D) full employment

Question 7

When self-correcting forces cure a recessionary gap, how are money and real wages affected?  

A) Money wages increase, and real wages increase. 
B) Money wages remain constant, and real wages fall. 
C) Money wages fall, and real wages fall. 
D) Money wages fall, and real wages increase.

Question 8

Why does self-correction work to close a recessionary gap?  

A) because a labour shortage causes money wages to increase 
B) because a labour surplus causes money wages to increase 
C) because a labour shortage causes money wages to fall 
D) because a labour surplus causes money wages to fall

Question 9

Suppose the advice of policymakers who favour a passive approach to policy is correct.How would a recessionary gap eventually close?  

A) The aggregate demand curve would shift rightward. 
B) The aggregate demand curve would shift leftward. 
C) The short-run aggregate supply curve would shift rightward. 
D) The short-run aggregate supply curve would shift leftward.

Question 10

Exhibit 15-1

Refer to the graph in the exhibit.According to policymakers who favour an active approach to policy, how can the economy attain equilibrium at potential output?  

A) by shifting the SRAS curve to the left 
B) by shifting the SRAS curve to the right 
C) by shifting the aggregate demand curve to the right 
D) by decreasing the money supply or by decreasing government spending

Question 11

Exhibit 15-1

Refer to the graph in the exhibit.According to policymakers who favour an active approach to policy, where will the economy end up when potential output is achieved?  

A) at point A 
B) at point B 
C) at point C 
D) CANNOT tell from the information provided

Question 12

Suppose actual GDP is $10 billion below potential GDP.How can the economy achieve long-run equilibrium using a passive approach?  

A) Policymakers can stimulate aggregate demand. 
B) The short-run aggregate supply could shift outward. 
C) The short-run aggregate supply curve could shift to the left. 
D) Policymakers can reduce aggregate demand.

Question 13

Exhibit 15-1

Refer to the graph in the exhibit.According to policymakers who favour a passive approach to policy, how will the economy attain equilibrium at potential output?  

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 will be increased. 
D) Either the money supply or government spending will be decreased.

Question 14

Suppose the economy is in a recession.Which of the following policies would is most likely to be supported by a person who favours an active approach to policy?  

A) The economy should be left to cure itself without government intervention. 
B) The Bank of Canada should sell Canadian government securities in its open-market operations. 
C) The Bank of Canada should raise the overnight loans rate. 
D) Government purchases should increase.

Question 15

Exhibit 15-1

Refer to the graph in the exhibit.According to policymakers who favour an active approach to policy, how can the economy attain equilibrium at potential output?  

A) by shifting the SRAS curve to the left 
B) by shifting the SRAS curve to the right 
C) by increasing the money supply or by increasing government spending 
D) by decreasing the money supply or by decreasing government spending

Question 16

Exhibit 15-1

Refer to the graph in the exhibit.According to policymakers who favour a passive approach to policy, how will the economy attain equilibrium at potential output?  

A) The SRAS curve will shift to the left. 
B) Real wages will fall, shifting the SRAS curve to the right. 
C) Either the money supply or government spending will be increased. 
D) Either the money supply or government spending will be decreased.

Question 17

Exhibit 15-1

Refer to the graph in the exhibit.According to policymakers who favour a passive approach to policy, where will the economy end up when potential output is achieved?  

A) at point A 
B) at point B 
C) at point C 
D) unable to tell from the information given

Question 18

In the event of a recession, which of the following is the most likely policy stance of people who advocate a passive approach to economic policy?  

A) cut taxes 
B) increase government spending 
C) reduce interest rates 
D) do nothing

Question 19

Suppose we observe an economy adjusting to potential GDP as prices fall and real output increases.Which of the following describes what the economy is experiencing?  

A) It is experiencing an expansionary gap. 
B) It is experiencing a shift of the AD curve. 
C) It is experiencing a recessionary gap. 
D) It is NOT experiencing a self-correction.

Question 20

In the long run, how would an active approach to a recessionary gap differ from a passive approach to policy?  

A) In an activist approach, both the price level and the level of real GDP would be higher in the long run. 
B) In an activist approach, both the price level and the level of real GDP would be lower in the long run. 
C) In an activist approach, only the price level would be lower in the long run. 
D) In an activist approach, only the price level would be higher in the long run.

Question 21

Suppose that an economy is experiencing an expansionary gap.And suppose the economy is adjusting to potential GDP through a rising price level and a falling output level.Which of the following best illustrates how the adjustment of GDP is being achieved?  

A) An active approach to correcting a recessionary gap is being used. 
B) An active approach to correcting an expansionary gap is being used. 
C) A passive approach to correcting a recessionary gap is being used. 
D) A passive approach to correcting an expansionary gap is being used.

Question 22

Which of the following is a belief generally held by individuals who are opposed to using policy to stabilize the economy?  

A) that neither fiscal policy nor monetary policy has much impact on aggregate demand 
B) that attempts to stabilize the economy can increase the magnitude of economic fluctuations 
C) that unemployment and inflation are NOT cause for much concern 
D) that unemployment is a cause for concern, but inflation is NOT

Question 23

Exhibit 15-2

Refer to the graph in the exhibit.According to policymakers who favour a passive approach to policy, how will the economy attain equilibrium at potential output?  

A) by shifting the SRAS curve to the left 
B) by shifting the SRAS curve to the right 
C) by increasing the money supply or by increasing government spending 
D) by decreasing the money supply or by decreasing government spending

Question 24

In the conduct of macroeconomic policy, what are the four lags that complicate the timing of the policy's implementation?  

A) the recognition lag, the decision-making lag, the correction lag, and the feedback lag 
B) the statistical lag, the decision-making lag, the implementation lag, and the effectiveness lag 
C) the recognition lag, the decision-making lag, the implementation lag, and the effectiveness lag 
D) the statistical lag, the decision-making lag, the correction lag, and the effectiveness lag

Question 25

Suppose the natural unemployment rate CANNOT easily be calculated.What type of policy is more difficult to implement under these circumstances?  

A) recognition policy 
B) neutral policy 
C) passive policy 
D) active policy

Question 26

Exhibit 15-2

Refer to the graph in the exhibit.Suppose the expansionary gap is eliminated.According to policymakers who favour an active approach to policy, where will the economy end up?  

A) at point A 
B) at point B 
C) at point C 
D) unknown

Question 27

Suppose the natural unemployment rate CANNOT easily be estimated.What type of policymaking becomes more difficult under these circumstances?  

A) active policymaking 
B) passive policymaking 
C) monetarist policymaking 
D) classical policymaking

Question 28

Suppose an economy is experiencing an expansionary gap.Which of the following best characterizes what happens in such an environment?  

A) Labour shortages drive up money wages, real wages, and prices. 
B) An excess supply of labour results due to rising money wages and prices. 
C) The economy will self-correct as rising money wages decrease faster than rising prices. 
D) The economy will have excessive involuntary unemployment,
E)g., cyclical unemployment.

Question 29

According to the passive policymaker's position, why would an expansionary gap be eliminated?  

A) because the short-run aggregate supply shifts to the left 
B) because the short-run aggregate supply shifts to the right 
C) because rising prices shift the aggregate demand to the left 
D) because wages fall relatively quickly

Question 30

Suppose a passive approach to policy is followed.How would an expansionary gap eventually close?  

A) Restrictive fiscal policy would be used. 
B) Restrictive monetary policy would be used. 
C) Inflation would cure the problem because the price level in an expansionary gap is lower than firms and workers had expected. 
D) Inflation would cure the problem because the price level in an expansionary gap is higher than firms and workers had expected.

Question 31

Exhibit 15-2

Refer to the graph in the exhibit.According to policymakers who favour a passive approach to policy, where will the economy end up once the expansionary gap is eliminated?  

A) at point A 
B) at point B 
C) at point C 
D) CANNOT tell from the information provided

Question 32

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

A) Wages and prices adjust relatively quickly. 
B) The short-run aggregate supply curve is slow to shift in the presence of a recessionary gap. 
C) The size of the multiplier is irrelevant. 
D) Self-correction lags are NOT a problem.

Question 33

What will happen in an economy in which actual GDP exceeds potential GDP?  

A) Wages and prices must fall. 
B) Self-correcting forces will shift the SRAS curve to the left. 
C) Self-correcting forces will shift the AD curve to the left. 
D) Inflation will occur when AD shifts to the left.

Question 34

Suppose self-correction works.Then, all things equal, a policy that continually increases aggregate demand is implemented.What kind of economic outcome will this policy lead to?  

A) The policy will have a strong effect on GDP. 
B) The policy will cause permanent inflation. 
C) The policy will eventually cause the SRAS curve to shift to the right. 
D) The policy will cause deflation.

Question 35

Exhibit 15-2

Refer to the graph in the exhibit.According to policymakers who favour an active approach to policy, how can the economy attain equilibrium at potential output?  

A) by shifting the SRAS curve shift to the left 
B) by shifting the SRAS curve shift to the right 
C) by increasing the money supply or by increasing government spending 
D) by decreasing aggregate demand

Question 36

Exhibit 15-2

Refer to the graph in the exhibit.According to policymakers who favour a passive approach to policy, how will the economy attain equilibrium at potential output?  

A) by increasing real wages, thus causing the SRAS curve to shift left 
B) by shifting the SRAS curve to the right 
C) by increasing the money supply or by increasing government spending 
D) by decreasing the money supply or by decreasing government spending

Question 37

When self-correction works to eliminate an expansionary gap, how are money wages and real wages affected?  

A) Money wages increase, and real wages increase. 
B) Money wages increase, and real wages decrease. 
C) Money wages decrease, and real wages decrease. 
D) Money wages decrease, and real wages increase.

Question 38

Exhibit 15-2

Refer to the graph in the exhibit.According to policymakers who favour an active approach to policy, how can the economy attain equilibrium at potential output?  

A) by shifting the SRAS curve to the left 
B) by shifting the SRAS curve to the right 
C) by increasing the money supply or by increasing government spending 
D) by decreasing the money supply or by decreasing government spending

Question 39

Suppose an active approach to policy is followed.How would an expansionary gap eventually close?  

A) The aggregate demand curve would shift rightward. 
B) The aggregate demand curve would shift leftward. 
C) The short-run aggregate supply curve would shift rightward. 
D) The short-run aggregate supply curve would shift leftward.

Question 40

According to policymakers who favour a passive approach to policy, which of the following conditions will NOT allow the economy to bring itself out of a recessionary gap?  

A) lower real wages 
B) a shortage of labour 
C) lower production costs 
D) a lower expected price level

Question 41

In total, how long can the lags associated with discretionary policy extend?  

A) from the time a problem occurs in the economy through to the time the problem is recognized by the government 
B) from the time a problem is recognized by the government through to the time an agreed-on policy is approved 
C) from the time a policy is implemented through to the time the policy's impact is felt in the economy 
D) from the time a problem occurs in the economy through to the time a corrective policy has an impact on the economy

Question 42

What term refers to the time it takes for the Bank of Canada's purchase of government securities to ultimately change aggregate demand?  

A) recognition lag 
B) implementation lag 
C) effectiveness lag 
D) decision-making lag

Question 43

Suppose that policymakers are concerned about a shortage of long-term capital investment.To remedy the problem, the policymakers have suggested various plans to cut capital gains taxes.What term refers to the delay that is incurred while a plan is being selected?  

A) implementation lag 
B) decision-making lag 
C) recognition lag 
D) effectiveness lag

Question 44

Policymakers who favour a passive approach to policy often argue that the passive approach is more effective than an active approach because changes in prices and wages will shift the short-run aggregate supply curve (SRAS).Why is the passive approach able to shift the SRAS?  

A) because a passive policy will act faster than an active policy aimed at shifting the aggregate demand curve 
B) because a passive policy will be effective only after an active policy shifts the aggregate demand curve 
C) because a passive policy will shift the SRAS curve more than an active policy aimed at shifting the aggregate demand curve 
D) because a passive policy will shift the SRAS curve less than an active policy aimed at shifting the aggregate demand curve

Question 45

What term refers to the time it takes for a new policy to register its full impact on the economy after it has been put in force?  

A) decision-making lag 
B) effectiveness lag 
C) implementation lag 
D) recognition lag

Question 46

Which term refers to the time it takes to identify a problem and determine its seriousness?  

A) decision-making lag 
B) implementation lag 
C) effectiveness lag 
D) recognition lag

Question 47

What term refers to the time it takes to identify and examine the nature and seriousness of an economic problem?  

A) decision-making lag 
B) effectiveness lag 
C) implementation lag 
D) recognition lag

Question 48

What is an implementation lag?  

A) the time it takes policymakers to decide what to do 
B) the time it takes for the chosen policy to have its full impact on the economy 
C) the time it takes to identify trouble in the economy and to assess its severity 
D) the time it takes to introduce a change in monetary or fiscal policy

Question 49

Once a policy has been implemented, a period of time passes before the full impact of the policy registers on the economy.What is this time lag known as?  

A) as a decision-making lag 
B) as an implementation lag 
C) as an effectiveness lag 
D) as a recognition lag

Question 50

Policymakers may NOT know that the economy is in a recession until six months after the recession starts.What is this phenomenon known as?  

A) as the implementation lag 
B) as the decision-making lag 
C) as the recognition lag 
D) as the effectiveness lag

Question 51

Suppose the time required for an economy to self-correct is shorter than the active policy lags.Which of the following best describes the results of implementing an active policy?  

A) Active policy should be strengthened. 
B) Active policy will likely be destabilizing. 
C) The aggregate demand curve will shift more rapidly than the short-run aggregate supply curve. 
D) Active policy will work better than passive policy.

Question 52

Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy?  

A) the recognition lag and the implementation lag 
B) the effectiveness lag and the decision-making lag 
C) the decision-making lag and the implementation lag 
D) the implementation lag and the effectiveness lag

Question 53

Which of the following is NOT a time lag associated with using discretionary policy to correct an economic problem?  

A) the time required to recognize the problem 
B) the time required to decide how to handle the problem 
C) the time required to set a policy change in action 
D) the time required to coordinate monetary and fiscal policy

Question 54

Which of the following is one reason that long time lags hamper the effectiveness of economic policy?  

A) because the longer unemployment lasts, the more intense inflation becomes 
B) because by the time the impact of a policy is felt, a new problem may have come along that requires a different policy, which may make the situation even worse 
C) because if inflation is allowed to continue for too long, it becomes immune to policy interference 
D) because if unemployment is allowed to continue for too long, it becomes immune to policy interference

Question 55

What term refers to the period of time when a new policy is being selected?  

A) decision-making lag 
B) effectiveness lag 
C) implementation lag 
D) recognition lag

Question 56

Suppose a recession surprises economic forecasters.Which term refers to the time it takes forecasters to recognize the recession?  

A) recognition lag 
B) decision-making lag 
C) implementation lag 
D) effectiveness lag

Question 57

Why do long lags make discretionary policy less effective?  

A) because by the time the impact of a discretionary policy is felt, the problem it was meant to cure may have been corrected 
B) because lags are longer in contractions than in expansion. 
C) because lags are longer in expansions than in contractions 
D) because automatic stabilizers are subject to longer lags than are discretionary policies

Question 58

Fiscal policy usually takes months, or longer, to develop and approve.What is this time lag known as?  

A) as a decision-making lag 
B) as an implementation lag 
C) as an effectiveness lag 
D) as a recognition lag

Question 59

When is new policy actually put in force?  

A) during the decision-making lag 
B) during the effectiveness lag 
C) during the implementation lag 
D) during the recognition lag

Question 60

Consider policymakers who favour a passive approach to policy.Which of the following do these policymakers believe?  

A) Discretionary monetary policy can be used to help the economy because monetary policy lags are short. 
B) Discretionary fiscal policy can be used to help the economy because fiscal policy lags are short. 
C) Lags associated with implementing policies are too long and unstable for discretionary policy to be effective. 
D) Despite the lags involved, implementing discretionary policy is preferable to inaction.

Question 61

According to the rational expectations theory, monetary policy is fully anticipated.Therefore, what is the only factor affected by the policy?  

A) the level of real GDP 
B) the level of real investment 
C) the price level 
D) the level of real consumption

Question 62

Which of the following is NOT required in order for a policy of governmental intervention in the economy to be effective?  

A) the will to reject sound policy if the policy gets in the way of political considerations 
B) the ability to estimate the economy's potential level of output 
C) the ability to predict what would happen without intervention 
D) an assortment of effective tools of discretionary policy

Question 63

Economists in the rational expectations school believe a certain circumstance needs to exist in order for expansionary monetary policy to be fully effective.What is that circumstance?  

A) The policy must be anticipated by workers and firms. 
B) Aggregate supply must shift to the left. 
C) The economy must be operating at or above its potential output level. 
D) The policy must be totally unexpected.

Question 64

Suppose an economy is at potential GDP and an expansionary policy is correctly anticipated.Which of the following will result?  

A) little or no increase in GDP 
B) an increase in wages along with a dramatically falling price level 
C) a rapidly expanding GDP 
D) a severe decline in GDP

Question 65

Suppose the Bank of Canada announces a policy of rapid growth in the money supply, but then puts the brakes on money expansion without any announcement.According to the rational expectations school, what will the short-run result likely be?  

A) an unexpected surge in aggregate demand 
B) an unexpected drop in aggregate demand 
C) an anticipated surge in aggregate demand 
D) an anticipated drop in aggregate demand

Question 66

What is the term for an anti-inflation policy that involves announcing and executing tough measures to stop inflation?  

A) cold turkey 
B) cold chicken 
C) chokehold 
D) time-inconsistency

Question 67

Suppose workers and firms come to expect an expansionary monetary policy and the resulting inflation.What do some economists believe will occur when workers and firms believe this?  

A) Workers and firms will act so as to prevent price increases from occurring. 
B) The actions of workers and firms will lead to a further increase in output. 
C) Neither output nor employment will be affected by the expansionary policy. 
D) The monetary authority will be forced to cancel the expansionary policy.

Question 68

When does the time inconsistency problem arise?  

A) when attempts are made to coordinate monetary policy throughout different time zones 
B) when there is a lag between the announcement of a monetary policy and the implementation of it 
C) when policymakers have an incentive to mislead people about their monetary policy intentions 
D) when policymakers do NOT allow enough time for a new policy to take effect

Question 69

Given the expected price level, what size of money supply will best facilitate policies for the achievement of potential GDP?  

A) a large money supply, so that prices at potential GDP are below expectations and people can afford to buy enough goods to support the natural level of employment 
B) a large enough money supply that prices at potential GDP are above expectations and firms can afford to hire workers 
C) a small money supply, so that prices at potential GDP are above expectations and firms can afford to hire the workers 
D) a money supply that is exactly the size needed to make prices equal to the prices people expect to prevail

Question 70

Which of the following is a statement that would be made by an opponent of inflation targets?  

A) Inflation targets encourage workers to plan on a low and stable inflation rate and to hold down demands for wage increases. 
B) Inflation targets will lead the Bank of Canada to pay less attention to jobs and economic growth. 
C) Inflation targets encourage firms to plan on a low and stable inflation rate and to hold down price increases. 
D) Inflation targets encourage investors to plan on a low and stable inflation rate and to hold down demands for interest rate increases.

Question 71

Which of the following statements supports the passive approach to a recessionary gap?  

A) It is likely that policies will be subject to time lags. 
B) Prolonged unemployment may cause the economy's potential real GDP to fall. 
C) Workers' skills may grow rusty during a prolonged recession. 
D) Unemployed workers may drop out of the labour force during a prolonged recession.

Question 72

According to the rational expectations model, when does active policy have an impact on aggregate output?  

A) only when active policy is expansionary 
B) only when active policy is contractionary 
C) only when active policy is unannounced 
D) only when the economy has a contractionary gap

Question 73

According to the rational expectations school, which of the following can affect the levels of output and employment?  

A) an expansionary monetary policy, if it is fully anticipated 
B) a contractionary monetary policy, if it is fully anticipated 
C) monetary policy that is unanticipated 
D) fiscal policy that is anticipated

Question 74

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

A) on the announcement of a change in inflation policy 
B) on weighted averages of previous inflation rates, with the most distant getting the heaviest weight 
C) on all information available to them 
D) on changes in monetary and fiscal policy

Question 75

Suppose resource owners anticipated a monetary growth rate of 6 percent, but the money supply actually grew at only 2 percent.How would output be affected?  

A) Output would remain the same. 
B) Output would fall. 
C) Output would increase. 
D) Output would increase, but only if nominal wages increased more rapidly than prices.

Question 76

Why does a passive approach to economic policy call for the government to do nothing to offset unemployment?  

A) because there is a lack of any real concern for people who have no jobs 
B) because there is a conviction that unemployment is relatively harmless 
C) because there is a belief that active economic policy is likely to be either ineffective or harmful 
D) because there is a desire to await further economic data before intervening

Question 77

Suppose that in 2014 the Bank of Canada announced a policy of rapid growth in the money supply, but then put the brakes on money expansion without any announcement.And suppose in 2015 officials at the Bank of Canada announce again that an expansion is planned.What is the most likely result?  

A) People will believe the second announcement because the conditions that created a need for the expansion are probably still in effect. 
B) Even though the Bank of Canada failed to implement the expansion after the first announcement, people will believe the second announcement because they will believe the Bank of Canada still plans to implement the policy. 
C) People will NOT believe the second announcement because they will believe that the conditions that created a need for the expansion must have changed since the first announcement. 
D) People will have more uncertainty about the Bank of Canada following through on the policies it announces.

Question 78

According to the rational expectations school, how do people form expectations?  

A) On average, people who form expectations have very little idea of what to expect from government policymakers. 
B) People form expectations by focusing only on the private sector. 
C) People do NOT consider the likely government policies when forming expectations, thus they choose to remain rationally ignorant. 
D) People form expectations, in part, by considering the probable future actions of government policymakers.

Question 79

Consider policymakers who favour an active approach to policy.Which of the following is one of their beliefs?  

A) Discretionary monetary policy CANNOT be used to help the economy because monetary policy lags are long. 
B) Discretionary fiscal policy CANNOT be used to help the economy because fiscal policy lags are long. 
C) Lags associated with implementing policies are too long and unstable for discretionary policy to be effective. 
D) Despite the lags involved, implementing discretionary policy is preferable to inaction.

Question 80

Which of the following is NOT a valid criticism of discretionary fiscal policy?  

A) Implementation of fiscal policy is sometimes difficult. 
B) Time lags in fiscal policy are long. 
C) Fiscal policy works only during periods of stagflation. 
D) Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income.