Deck 14: Macroeconomic Policy: Challenges in a Global Economy

Question 1

The American Recovery and Reinvestment Act,signed into law in February 2009,was designed to shift aggregate:

A) demand rightward.
B) demand leftward.
C) supply rightward.
D) supply leftward.

Answer 1

demand rightward.

Question 2

Both ________ on credit by households and ________ interest rates set in motion the events that led to the 2007-2008 financial crisis.

A) overspending;high
B) underspending;high
C) underspending;low
D) overspending;low

Answer 2

overspending;low

Question 3

Some argue that the financial crisis of 2007-2008 was caused by a poor understanding of risks in the economy.One reason for this is that:

A) credit card companies did not disclose who defaulted on their loans.
B) banks' secrecy laws prevented them from reporting which homeowners were behind in their mortgage payments.
C) mortgage brokers did not use the Internet to check on default rates.
D) some bond rating agencies' ratings did not disclose the true extent of the riskiness of mortgage-backed assets.

Answer 3

some bond rating agencies' ratings did not disclose the true extent of the riskiness of mortgage-backed assets.

Question 4

One of the trigger points for the financial crisis of 2008 was when:

A) interest rates on adjustable-rate mortgages were reset at a higher level.
B) foreigners started to sell off their holdings of U.S.financial instruments.
C) the Federal Reserve started to raise short-term interest rates.
D) the federal government started to engage in deficit spending.

Question 5

A credit default swap:

A) is essentially the same as an adjustable-rate mortgage.
B) is essentially the same as insurance against a default.
C) prevents investors from defaulting on a swap.
D) allows investors to trade one bad stock for another.

Question 6

Which of the following actions was NOT taken in response to the financial crisis?

A) a bailout of Lehman Brothers
B) purchases of over $1 trillion in mortgage-backed securities by the Fed
C) an increase in the FDIC's guarantee on deposits from $100,000 to $250,000 per account
D) over $100 billion in loans by the Fed to AIG

Question 7

One of the key factors leading to the great recession was:

A) a worldwide savings glut.
B) a shortage of housing in the United States.
C) a surplus in the federal budget.
D) the war in Iraq.

Question 8

If the interest rate on a mortgage changes with the market interest rate,then the mortgage is:

A) a 30-year fixed mortgage.
B) a collateralized debt obligation.
C) an adjustable-rate mortgage.
D) a credit default swap.

Question 9

The difference between Bear Stearns and Lehman Brothers was that:

A) the Fed bailed out Bear Stearns and did not bail out Lehman Brothers.
B) the Fed bailed out Lehman Brothers and did not bail out Bear Stearns.
C) Lehman Brothers was an investment bank and Bear Stearns was a commercial bank.
D) Bear Stearns was a commercial bank and Lehman Brothers was an investment bank.

Question 10

Some analysts blame the financial crisis of 2008 on Fed policy.They argue that:

A) a restrictive policy lowered aggregate demand and GDP.
B) low interest rates encouraged excessive mortgage borrowing,leading to the housing bubble.
C) the Fed securitized the mortgages into collateralized debt obligations and encouraged excessive risk taking.
D) did not adequately regulate the mortgage market's credit standards for issuing loans as required by the Federal Reserve Act.

Question 11

Adjustable-rate mortgages are attractive to many homebuyers because these mortgages start out with a ________ interest rate and then ________ in later years.

A) low;adjust upward
B) low;stay the same
C) high;stay the same
D) high;adjust upward

Question 12

Which of the following was NOT a factor leading to the financial crisis of 2008?

A) Low interest rates encouraged a housing boom.
B) Policymakers underestimated the level of risk inherent in the mortgage market.
C) The public lacked faith in the ability of the U.S.Treasury to pay on government bonds.
D) Investors borrowed heavily to purchase securitized mortgages.

Question 13

What types of loans are NOT typically included in collateralized debt obligations?

A) subprime mortgages
B) home equity loans
C) adjustable-rate mortgages
D) student loans

Question 14

Adjustable-rate mortgages:

A) are mortgages whose interest rates can change.
B) are mortgages whose interest rates can't change.
C) usually have interest rates higher than market rates during the first year.
D) are more attractive when interest rates on fixed mortgages fall.

Question 15

Deflation is a problem because:

A) the rate of inflation,though still positive,is getting lower.
B) the dollar loses purchasing power.
C) debt becomes easier to pay off.
D) it takes more purchasing power to make interest payments or pay off debt.

Question 16

New oversight on financial firms will probably include:

A) lower capital requirements.
B) fewer restrictions on leverage.
C) higher returns on equity.
D) much tighter regulations.

Question 17

Using real GDP and employment growth relative to the peak of the business cycle,the 2007-2009 recession,as compared to the previous two recessions in 1990 and 2001:

A) was deeper.
B) was less severe.
C) was shorter.
D) was shorter but more severe.

Question 18

A financial instrument backed by a collection of mortgages is called a(n):

A) adjustable-rate mortgage.
B) collateralized debt obligation.
C) credit default swap.
D) collateralized mortgage obligation.

Question 19

The 2007-2009 recession can be shown as a combination of a(n)_____ in aggregate demand and _______ in the short-run aggregate supply.

A) decline;an increase
B) increase;an increase
C) decrease;a decrease
D) decline;no change

Question 20

The 2007-2009 recession was caused by:

A) an increase in demand following a rapid increase in the money supply.
B) a drop in aggregate supply caused by a slowdown in productivity growth.
C) a decrease in supply caused by an increase in oil prices.
D) a decrease in aggregate demand triggered by a financial crisis.

Question 21

Assume that nominal wages increase 10% and productivity increases 20%.Using the equation for the Phillips curve,inflation is:

A) 10%.
B) 20%.
C) 30%.
D) -10%.

Question 22

One of the problems with deflation is that it:

A) increases the real value of existing debt.
B) decreases the real value of existing debt.
C) shifts the aggregate demand curve to the right.
D) shifts the aggregate supply curve to the right.

Question 23

Which of these companies did the Fed and the Treasury allow to fail to send a message to the financial markets about the costs of risky behavior?

A) AIG
B) Chrysler
C) Ford
D) Lehman Brothers

Question 24

The graph that shows the tradeoff between inflation and money wages is called the:

A) misery index.
B) employment line.
C) Phillips curve.
D) minimization curve.

Question 25

During the period 2008-2009,_______ million people lost their jobs.

A) 3
B) 4
C) 7
D) 12

Question 26

A leveraged account:

A) magnifies both gains and losses.
B) magnifies gains and reduces losses.
C) reduces gains and magnifies losses.
D) reduces both gains and losses.

Question 27

Credit default swaps:

A) are a type of collateralized debt obligation.
B) are a type of insurance against defaults.
C) were accurately priced before the housing market collapsed.
D) made AIG the most profitable company in the United States.

Question 28

Which of the following statements about adjustable-rate mortgages is TRUE?

A) Interest rates can't change over the life of the mortgage.
B) Adjustable-rate mortgages are especially attractive to high-income buyers.
C) Adjustable-rate mortgages usually have interest rates lower than market rates during the first year.
D) Adjustable-rate mortgages are more attractive when interest rates on fixed mortgages fall.

Question 29

Which of the following was a change in banks' lending practices that contributed to a housing bubble?

A) Lenders began to require borrowers to provide proof of income.
B) Banks began to originate subprime loans they did not intend to keep.
C) Banks developed fixed-rate mortgage loans.
D) Banks began to rigorously check borrowers' credit quality.

Question 30

(Figure: Determining Curves) The curve on the graph is a:

A) demand curve.
B) Phillips curve.
C) labor demand curve.
D) production possibilities curve.

Question 31

The decrease in short-run aggregate supply during the Great Recession was caused by:

A) excessive consumer debt.
B) miscalculation of the risk of subprime mortgages.
C) the worldwide glut of savings.
D) businesses reducing their production capacity by closing plants and laying off workers.

Question 32

The Phillips curve:

A) was developed by economists at Phillips 66.
B) shows the effectiveness of government policy.
C) is used by economists to determine optimal oil prices.
D) shows the relationship between unemployment and inflation.

Question 33

When labor demand rises,unemployment ________ and wages ________.

A) falls;rise
B) falls;decline
C) rises;decline
D) rises;rise

Question 34

Deflation can be a problem because it:

A) leads to higher wages.
B) makes it more difficult to pay off debt.
C) can easily become hyperinflation.
D) increases interest rates.

Question 35

The recession of 2007-2009 was:

A) deeper than the recessions of 1990 and 2001.
B) longer and more severe than the Great Depression.
C) one of the shortest on record.
D) dissimilar to the Great Depression in that the financial sector was not involved.

Question 36

One implication of the Phillips curve when it is unable to shift in the short run,is that:

A) fiscal and monetary policies have no impact on the economy.
B) the economy is in a liquidity trap.
C) policymakers face a tradeoff between low unemployment and low inflation.
D) fiscal policy is more effective than monetary policy.

Question 37

The United States underwent _______ throughout most of 2009.

A) deflation
B) disinflation
C) moderate inflation
D) stable prices

Question 38

The natural rate of unemployment is:

A) the rate that produces worker revolutions.
B) zero unemployment.
C) the rate at which there are no inflationary pressures on the economy.
D) the equilibrium to which the economy naturally tends.

Question 39

Collateralized debt obligations:

A) are mortgages whose interest rates can change.
B) are financial instruments backed by a collection of mortgages.
C) are financial instruments that provide insurance against a default.
D) are home loans made to borrowers with poor credit.

Question 40

The original Phillips curve showed a ________ relationship between ________ and unemployment rates.

A) negative;price inflation
B) negative;money wage rates
C) positive;price inflation
D) positive;money wage rates

Question 41

________ occurs when both inflation and unemployment increase over time.

A) Disinflation
B) Stagflation
C) Inflation
D) Deflation

Question 42

If policymakers use contractionary policy to reduce inflation,the unemployment rate will be _________.

A) higher
B) below its natural rate
C) above its natural rate
D) at its natural rate

Question 43

Use the following to answer questions
Figure: Policy Changes in the Short Run
(Figure: Policy Changes in the Short Run)To move the economy in the short run from point a to point b,policymakers implement _______ monetary policy,thereby accepting _______ to reduce _______.

A) expansionary;more unemployment;the rate of inflation
B) contractionary;a higher rate of inflation;unemployment
C) expansionary;a higher rate of inflation;unemployment
D) contractionary;more unemployment;the rate of inflation

Question 44

Use the following to answer questions
Figure: Policy Changes in the Short Run
(Figure: Policy Changes in the Short Run)To move the economy in the short run from point b to point a,Fed policymakers implement _______ monetary policy,thereby accepting _______ to reduce ________.

A) expansionary;more unemployment;the rate of inflation
B) contractionary ;a higher rate of inflation;unemployment
C) expansionary;a higher rate of inflation;unemployment
D) contractionary;more unemployment;the rate of inflation

Question 45

According to the equation for the Phillips curve,if nominal wages rise by 8% and labor productivity rises by 5%,then we can expect:

A) prices to drop by 3%.
B) no change in prices.
C) prices to rise by 3%.
D) prices to drop by 5%.

Question 46

Using the equation for the Phillips curve,suppose that nominal wages increased by 5% and the inflation rate was 3%.What was the rate of increase in labor productivity?

A) 2%
B) 5%
C) 8%
D) 15%

Question 47

The Phillips curve of the 1960s for the United States:

A) showed stagflation in the U.S.economy.
B) suggested to policymakers that they could keep unemployment low by accepting moderate inflation.
C) indicated that to keep unemployment low,policymakers had to accept double-digit rates of inflation.
D) was nearly a vertical line.

Question 48

When the growth in productivity is ________ the rate of change in wages,inflation is ________,and the level of unemployment at that point is ________ the natural rate of unemployment.

A) greater than;positive;less than
B) less than;zero;greater than
C) equal to;zero;equal to
D) equal to;negative;less than

Question 49

According to the equation for the Phillips curve,if wages increase by 5% and productivity decreases by 2%,then inflation will be:

A) -3%.
B) 3%.
C) 7%.
D) 2.5%.

Question 50

________ measure the rate of inflation expected by workers for any given period.

A) Rational expectations
B) Natural expectations
C) Wage expectations
D) Inflationary expectations

Question 51

According to the Phillips curve analysis,the way to solve inflation is to _______ unemployment or _______

A) increase;increase productivity
B) increase;decrease productivity
C) decrease;increase the money supply
D) increase;increase the money supply

Question 52

(Figure: Natural Rate of Unemployment) The natural rate of unemployment:

A) is zero.
B) is 3%.
C) is 6%.
D) cannot be determined.

Question 53

According to the equation for the Phillips curve,if nominal wages increase by 3% and productivity increases 2%,then inflation will change by:

A) -5%.
B) -1%.
C) 1%.
D) 5%.

Question 54

According to the equation for the Phillips curve,if nominal wages and labor productivity both rise by 3%:

A) unemployment rises by 3%.
B) unemployment falls by 3%.
C) unemployment is at its natural rate.
D) inflation is accelerating.

Question 55

In effect,the Phillips curve framework implies that to fight inflationary expectations,policymakers must:

A) rapidly increase aggregate demand.
B) cause unemployment.
C) decrease aggregate supply.
D) increase exports.

Question 56

According to the equation for the Phillips curve,if wages rise by 2%,inflation:

A) must also rise by 2%.
B) will be zero if productivity increases by 2%.
C) will be zero if productivity increases by more than 2%.
D) will be zero if productivity falls by 2%.

Question 57

If policymakers attempt to reduce the rate of unemployment below its natural rate:

A) the federal deficit will rise.
B) interest rates will rise.
C) they run the risk of inflation.
D) worker productivity will drop.

Question 58

According to the equation for the Phillips curve,if nominal wages and labor productivity both increase by 3%,then the inflation rate _____ and unemployment _____.

A) increases by 3%;falls
B) increases by 3%;rises
C) is zero;is at its natural rate
D) increases by 3%;is at its natural rate

Question 59

According to the equation for the Phillips curve,if wages increase by 3% and productivity increases by 5%,then inflation will be:

A) -8%.
B) -2%.
C) 2%.
D) 8%.

Question 60

According to the equation for the Phillips curve,inflation is zero when the increase in nominal wages is ________ the rate of increase in labor productivity.

A) greater than
B) less than
C) equal to
D) Inflation is always zero in the Phillips curve model.

Question 61

If inflationary expectations fall:

A) there is a movement down along the Phillips curve.
B) the Phillips curve shifts outward.
C) the Phillips curve shifts inward.
D) there is a movement up along the Phillips curve.

Question 62

One implication of the long-run Phillips curve is that:

A) economic policies to keep the unemployment rate below its natural rate will lead to accelerating inflation.
B) in the long run,the government can accurately estimate the natural rate of unemployment.
C) in the long run,the curve becomes upward sloping.
D) the natural rate of unemployment must be lowered to zero.

Question 63

Use the following to answer questions
Figure: Understanding Phillips Curves
(Figure: Understanding Phillips Curves)What is the natural rate of unemployment associated with Phillips curve PC_b?

A) zero
B) 3%
C) 4%
D) 5%

Question 64

When inflationary expectations are added to the Phillips curve,the nonaccelerating inflation rate of unemployment is defined as the unemployment rate at which the:

A) inflation rate is always zero.
B) actual inflation rate exceeds the expected inflation rate.
C) actual inflation rate is less than the expected inflation rate.
D) actual inflation rate equals the expected inflation rate.

Question 65

The shift outward in the Phillips curve in the 1970s was caused by:

A) the oil supply shocks of the mid-1970s and the rise in inflationary expectations.
B) the fall in the unemployment rate.
C) the fall in the inflation rate.
D) the rise in the trade deficit.

Question 66

Use the following to answer questions
Figure: Understanding Phillips Curves
(Figure: Understanding Phillips Curves)What is the expected inflation rate associated with Phillips curve PC_b?

A) zero
B) 3%
C) 4%
D) 5%

Question 67

The long-run Phillips curve shows:

A) a tradeoff between inflation and unemployment.
B) the relationship between unemployment and inflation when the inflation rate is zero.
C) the relationship between inflation and unemployment when the expected inflation rate exceeds the actual inflation rate.
D) the relationship between inflation and unemployment when the actual inflation rate and the expected inflation rate are equal.

Question 68

The Phillips curve tradeoff worsened in the 1970s because of:

A) oil shocks.
B) aggressive unions.
C) environmental concerns.
D) the Watergate scandal.

Question 69

In the augmented model of the Phillips curve,which of the following factors does NOT affect inflation?

A) productivity growth
B) inflationary expectations
C) trade balance
D) initial location of the short-run Phillips curve

Question 70

Use the following to answer questions
Figure: Understanding Phillips Curves
(Figure: Understanding Phillips Curves)What is the natural rate of unemployment associated with Phillips curve PC_a?

A) zero
B) 3%
C) 4%
D) 5%

Question 71

The long-run Phillips curve is the counterpart to the:

A) short-run aggregate supply curve.
B) aggregate demand curve.
C) long-run aggregate supply curve.
D) budget deficit.

Question 72

An increase in worker productivity would cause the Phillips curve to:

A) shift to the left.
B) collapse about the origin.
C) shift to the right.
D) become linear.

Question 73

During the early 1970s,the Phillips curve:

A) shifted inward as inflation rates fell.
B) shifted outward as inflation rates rose.
C) showed a long-run tradeoff between inflation and unemployment.
D) showed that moderate inflation rates (2% to 3% per year)were needed to keep the unemployment rate low.

Question 74

The short-run Phillips curve holds _____ constant.

A) wages
B) taxes
C) income
D) inflationary expectations

Question 75

In the long run,any demand-side policy that attempts to reduce unemployment below its natural rate will:

A) cause inflation.
B) be successful.
C) increase the natural rate.
D) lower GDP.

Question 76

Suppose the economy is at the natural rate of unemployment,but it's an election year and expansionary policies are used to reduce the unemployment rate.If inflation now exceeds expected inflation,real wages have _____ and workers will demand _____ in their nominal wages.

A) risen;increases
B) risen;decreases
C) fallen;no changes
D) fallen;increases

Question 77

(Figure: Understanding Phillips Curve Shifts) The graph shows two Phillips curves.Suppose the economy originally faced curve PC₁.Which of the following would cause the curve to shift to PC₂?

A) Workers in the economy are expecting lower inflation.
B) The natural rate of unemployment rose.
C) The nonaccelerating inflation rate of unemployment increased.
D) The actual unemployment rate fell.

Question 78

Workers,when asking for wage increases:

A) are influenced by inflationary expectations.
B) are not influenced by future possible price increases.
C) are influenced only by their productivity increases.
D) always get what they ask for.

Question 79

Suppose the Federal Reserve announces that its policy will increase the supply of money next year.This announcement can be expected to:

A) increase unemployment.
B) shift the Phillips curve to the right.
C) reduce tax revenue.
D) shift the Phillips curve to the left.

Question 80

Use the following to answer questions
Figure: Understanding Phillips Curves
(Figure: Understanding Phillips Curves)What is the expected inflation rate associated with Phillips curve PC_a?

A) zero
B) 3%
C) 4%
D) 5%