Question 1

During the 1970s, real shocks to the U.S. economy caused:

Accepted Answer

Real shocks, such as the oil crisis in the 1970s, decreased aggregate supply which led to an increase in the price level and a decrease in real output. This resulted in higher unemployment rates as businesses cut back on hiring. The Phillips curve, which shows the inverse relationship between inflation and unemployment, shifted leftward as the economy experienced both higher inflation and higher unemployment. Therefore, B is the best choice as it accurately describes the consequences of the real shocks.

Question 2

The figure given below represents the short run and long run Phillips curve.
Figure 14.4
 
-Refer to Figure 14.4. If the observed unemployment rate equals the natural rate, and the expected rate of inflation equals zero, the economy will be located at:

Accepted Answer

At point A, the short run Phillips curve and the long run Phillips curve intersect at the natural rate of unemployment (NAIRU) and zero expected inflation. Therefore, if the observed unemployment rate equals the natural rate, and the expected rate of inflation equals zero, the economy will be located at point A.

Question 3

Suppose workers do not believe the Fed will implement its announced monetary policy plans and the Fed wants to achieve low unemployment. In this situation the Fed would be best off:

Accepted Answer

The answer of Suppose workers do not believe the Fed...

Question 4

The figure given below represents the short run and long run Phillips curve.
Figure 14.4
 
-Refer to Figure 14.4. If the adaptive expectations hypothesis holds, and the economy moves from point C to point D because of expansionary fiscal policy, what rate of inflation are people expecting at point D?

Accepted Answer

According to the adaptive expectations hypothesis, people's expectations about inflation are based on past experience. The movement from point C to point D represents an expansionary fiscal policy, which will lead to higher aggregate demand and ultimately higher inflation. Based on the short run Phillips curve, we can see that at point D, the unemployment rate is lower than at point C, indicating an increase in aggregate demand. This increase in aggregate demand will lead to inflation, which is reflected in the higher expected rate of inflation at point D. Looking at the short run Phillips curve, we can see that the expected rate of inflation at point D is around 4 percent.

Question 5

Suppose that the Fed announces a low-money-growth policy to control inflation and workers sign low-wage contracts as a result. If instead, the Fed had implemented a high-money-growth policy, which of the following would not occur?

Accepted Answer

If the Fed had implemented a high-money-growth policy, the unemployment rate would not increase. In fact, it may even decrease as a result of the increase in aggregate demand. However, this policy would lead to higher inflation, which may be higher than expected, and would prevent the Fed from achieving credibility through its actions. The Fed's stated policy would also be time inconsistent as they would have to adjust policy to control the increase in inflation.

Question 6

According to the rational expectations view:

Accepted Answer

According to the rational expectations view, individuals form their expectations based on all available information, including their understanding of the policy being implemented. As a result, if a policy is anticipated, it will not lead to any surprises and will not deviate the economy from its natural rate of unemployment. Therefore, A is the correct choice. B is incorrect because the long-run inflation rate is determined by structural factors, not zero. C is incorrect because rational expectations suggest that people use all available information to form expectations, including current and anticipated inflation rates. D is incorrect because rational expectations suggest that people use all available information to form expectations, including past and current data. E is incorrect because even if announced money-growth policies are effective in reducing unemployment in the short-run, they will eventually cause inflation, leading to a return to the natural rate of unemployment in the long run.

Question 7

Which of the following gives the Fed a credibility problem because the Fed may change its planned policies in light of new economic developments?

Accepted Answer

Time inconsistency refers to the Fed's problem of making a policy commitment but then changing its planned policies in light of new economic developments, leading to a loss of credibility. This creates uncertainty for investors and can negatively affect the economy.

Question 8

The figure given below represents the short run and long run Phillips curve.
Figure 14.4
 
-Refer to Figure 14.4. Suppose the rational expectations hypothesis holds, and the Fed implements a fully expected increase in money supply growth. Starting from point C in the short run, the economy will tend to move to:

Accepted Answer

The answer of The figure given below represents the short...

Question 9

The figure given below represents the short run and long run Phillips curve.
Figure 14.4
 
-Refer to Figure 14.4. A movement from point A to point C would be associated with an:

Accepted Answer

Moving from point A to point C would result in a higher level of inflation (indicated by a higher vertical position on the Phillips curve) and a higher level of output (indicated by a further to the right position on the Phillips curve). To achieve this, there would need to be an increase in aggregate demand, which would shift the Phillips curve outward, and a decrease in aggregate supply, which would shift the Phillips curve inward. Therefore, the correct answer is C.

Question 10

Which of the following techniques adopted by the central banks around the world have helped them to achieve credibility?

Accepted Answer

The answer of Which of the following techniques adopted by...

Question 11

Which of the following will be a short run impact of a pre-election expansionary fiscal policy, public expectations remaining constant?

Accepted Answer

Pre-election expansionary fiscal policy involves government increasing its spending, reduction of taxes or both. This increase in government expenditure or reduction of taxes will lead to an increase in disposable income which means more money is available to spend, thus increasing demand for goods and services. Therefore, firms will produce more to keep up with the increase in demand for their goods and services, leading to an increase in real GDP in the short run.

Question 12

A time-inconsistent monetary policy is one that:

Accepted Answer

A time-inconsistent monetary policy changes over time as economic conditions change, rather than adhering to a predetermined monetary target or goal. This can create uncertainty and unpredictability in the economy, as businesses and individuals may struggle to plan for the future if they are unsure how monetary policy will be implemented in the coming months or years.

Question 13

The figure given below represents the short run and long run Phillips curve.
Figure 14.4
 
-Refer to Figure 14.4. Suppose the economy is located at point A, but the government increases spending because it believes that 6 percent unemployment is unacceptably high. If the adaptive expectations hypothesis holds, in the short run, the economy will move to:

Accepted Answer

Under the adaptive expectations hypothesis, people adjust their expectations based on past experiences. In the short run, increased government spending will boost aggregate demand, reducing unemployment and moving the economy from point A to point B.

Question 14

Which of the following would not be considered a real variable in determining a real business cycle?

Accepted Answer

An increase in the money supply is not considered a real variable in determining a real business cycle as it is a monetary factor rather than a true economic shock. Real variables include changes in technology, labor strikes, changes in consumer preferences, and weather events as they directly impact the production and consumption of goods and services in an economy.

Question 15

Assume that a low-wage contract is in force in the society, and the central bank follows a low-money-growth policy. Which of the following will be observed?

Accepted Answer

A low-wage contract will keep wage growth low, and a low-money-growth policy will keep overall inflation low. As a result, the actual inflation rate will match the low rate that people had expected. Since wages are not rising rapidly, there is no need for inflation to be higher than the expected low rate. Thus, choice A is the best answer.

Question 16

If the public expects the incumbent administration to stimulate the economy shortly before an election:

Accepted Answer

The answer of If the public expects the incumbent administration...

Question 17

Suppose that the economy has witnessed an 8 percent increase in its money supply over the last few years and the Fed now announces a plan to increase the money supply by 4 percent per year. What will be the public response, assuming that the Fed has a reputation for always implementing its announced plans?

Accepted Answer

The answer of Suppose that the economy has witnessed an...

Question 18

The business cycle that results from the election campaign of incumbent politicians is called a:

Accepted Answer

The business cycle resulting from the election campaign of incumbent politicians is known as the political business cycle. During the election campaign, incumbent politicians tend to pursue expansionary fiscal policies, such as increasing government spending or cutting taxes, to boost the economy and increase their chances of re-election. These policies can lead to short-term economic growth, resulting in a cyclical pattern known as the political business cycle.

Question 19

Critics of the Federal Reserve maintain that, to correct the credibility problem of monetary policy, the Fed should:

Accepted Answer

Critics of the Federal Reserve believe that fixing the growth rate of the money supply by law would give the public more confidence in the Fed's ability to maintain a stable economy. This would take away from the discretionary power of the Fed, but it would also ensure that the Fed's actions are more predictable and transparent.

Question 20

The figure given below depicts the equilibrium level of real GDP and the price level in an economy, derived from the aggregate demand aggregate supply model.
Figure 14.3
 
-Refer to Figure 14.3. Consider that the economy initially operates at point A. Therefore, according to the theory of rational expectations, an unanticipated increase in consumer confidence will cause the economy to move along the path:

Accepted Answer

An unanticipated increase in consumer confidence will shift the aggregate demand curve to the right, from AD to AD'. This will cause the economy to move from point A to point B, along the short-run aggregate supply curve (SRAS). As output increases, firms may start to face higher costs as they start using more inputs, and this will cause the SRAS to shift upwards to SRAS'. The final equilibrium will be at point C, with higher output and higher prices. Therefore, the economy will move along the path ABC.

Quiz 14: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, and Sources of Business Cycles