Question 1

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.

Question 2

Figure 14.4
 
-Refer to Figure 14.4. A movement from point A to point C would be associated with an:

Accepted Answer

A movement from point A to point C would represent an increase in output (real GDP) along with an increase in the price level. This suggests an increase in overall demand (Shift in the Aggregate Demand Curve) while the supply curve shifts inward (as firms have less room to expand their output without encountering higher costs, given the current levels of technology, labor force etc.)

Question 3

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 operating at:

Accepted Answer

At point A, the actual unemployment rate equals the natural rate of unemployment, and the expected rate of inflation equals zero. This implies that the economy is operating at its potential output with no inflationary or recessionary pressures.

Question 4

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

The answer of Suppose that the Fed announces a low-money-growth...

Question 5

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 6

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 form their expectations about inflation based on past experiences. In this case, people would expect inflation to be at the same rate as it was at point C, which is 4 percent. Therefore, the answer is B.

Question 7

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 a political business cycle. This cycle is characterized by economic policies implemented by politicians seeking re-election, which may involve stimulating the economy by increasing government spending or lowering interest rates in order to boost the incumbent's chances of re-election.

Question 8

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 9

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

Accepted Answer

Expansionary fiscal policy increases government spending and/or decreases taxes, which can stimulate aggregate demand and lead to an increase in real GDP in the short run. The increase in demand can also lead to higher inflation, but since public expectations remain constant, there will not be a fall in the rate of inflation in the short run. A and B are incorrect because they suggest a decrease in economic growth and employment, which is not consistent with an expansionary policy. E is also incorrect because a recession is defined as a period of significant economic decline, which is not consistent with an expansionary policy.

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 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 credibility problem of deviating from its planned policies due to new economic developments. This inconsistency makes it difficult for market participants to form expectations and trust the Fed's actions, ultimately leading to a credibility problem.

Question 12

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

Accepted Answer

During the 1970s, the U.S. economy experienced stagflation, characterized by an increase in the price level (inflation) and an increase in the unemployment rate, due to real shocks such as oil price hikes. This period contradicted the traditional Phillips curve, which posited an inverse relationship between inflation and unemployment.

Question 13

Figure 14.4
 
-Refer to Figure 14.4. Suppose the economy is operating 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 adaptive expectations, people adjust their expectations based on past experiences. An increase in government spending will initially boost demand, moving the economy from point A to point B in the short run, as output increases and unemployment decreases.

Question 14

According to the rational expectations view, _____.

Accepted Answer

According to the rational expectations view, individuals form their expectations based on all available information including past data, current economic conditions, and anticipated policy changes. Therefore, if a policy change (such as a monetary policy) is anticipated, it will not have an impact on the economy as individuals will have already factored it into their expectations. This implies that the economy will always be at its "natural rate" of unemployment, which is the rate of unemployment consistent with stable inflation in the long run. Thus, choice A is correct. Choices B, C, D, and E are false statements about the rational expectations view.

Question 15

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

Accepted Answer

By fixing the growth rate of the money supply by law, the Fed's actions would become more predictable and transparent, which would increase its credibility. This would also limit the Fed's discretion and prevent it from pursuing short-term goals that may conflict with long-term stability. Tightening monetary policy would be another option to increase credibility, but it could also harm economic growth. Giving more power to the FOMC or ignoring public opinion would not necessarily solve the credibility problem. Merging with the Treasury and dissolving as an independent agency would fundamentally change the structure of the Fed, but it would not necessarily improve its credibility.

Question 16

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

When a low-wage contract is in force, workers and firms agree on a low rate of wage increase, which is incorporated into prices. If the central bank follows a low-money-growth policy, it will lead to a low level of demand in the economy, which will result in a low level of expected inflation. Therefore, the actual inflation rate will match the low rate that people had expected.

Question 17

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

Accepted Answer

Changes in the money supply are considered part of monetary policy, rather than real economic variables. Real business cycles focus on changes in real economic variables such as technology, labor, production, and consumer behavior. The other listed options (A, B, D, and E) would all be considered real economic variables.

Question 18

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

If workers do not believe the Fed's announcements, implementing a policy of high money growth can stimulate the economy and reduce unemployment, even if it leads to higher inflation.

Question 19

A time-inconsistent monetary policy is one that:

Accepted Answer

A time-inconsistent monetary policy refers to a situation where a central bank's policy changes over time as economic conditions change. This can create uncertainty for investors and can hinder the effectiveness of the overall policy.

Question 20

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 Figure 14.4
 
-Refer to Figure 14.4. Suppose...

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

Figure 14.4 -Refer to Figure 14.4. A movement from point A to point C would be associated with an:

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 operating at: