Question 1

More stable macroeconomic policy does not contribute to less variability in real output.

Accepted Answer

More stable macroeconomic policy typically reduces uncertainty, leading to less variability in real output by promoting consistent economic growth and reducing the likelihood of economic shocks.

Question 2

If credible low-money-growth policies were continually pursued by the Fed, nominal wages and prices would eventually fall as the economic agents would expect lower inflation rates over time.

Accepted Answer

This is because if the Fed consistently implements low-money-growth policies, it would result in lower inflation expectations and thus lead to lower nominal wages and prices over time.

Question 3

According to the regulation Q, the maximum interest rate that the U.S.banks could pay on deposits were limited by the Federal Reserve.This reduced volatility in the financial markets and largely benefited the U.S.banks.

Accepted Answer

The answer of According to the regulation Q, the maximum...

Question 4

In the long run, the economy is better off if policymakers exploit the short-run tradeoff between inflation and the unemployment rate.

Accepted Answer

This statement goes against the conventional wisdom of macroeconomic policy, which asserts that there is no long-run tradeoff between inflation and unemployment. The idea that policymakers can exploit such a tradeoff is known as the Phillips curve and has been largely discredited by empirical evidence. In the long run, attempts to reduce unemployment through monetary or fiscal stimulus will eventually lead to higher inflation without any lasting improvement in employment. Therefore, the economy is not better off if policymakers try to manipulate the short-run tradeoff between inflation and unemployment.

Question 5

Other things equal, the higher the fiscal deficit, the higher the required increase in base money.

Accepted Answer

Fiscal deficit refers to the excess of government spending over its revenue. To finance this deficit, the government may borrow from the central bank or commercial banks. When the central bank lends money to the government, it creates new base money, which increases the monetary base. Therefore, the higher the fiscal deficit, the higher the required increase in base money to finance it.

Question 6

If the Fed aims to achieve a level of unemployment below its natural rate, it must follow time-inconsistent policies.

Accepted Answer

This statement is based on the concept of the Phillips curve, which suggests that there is an inverse relationship between unemployment and inflation. According to this theory, when unemployment is below its natural rate (also known as the non-accelerating inflation rate of unemployment or NAIRU), inflation tends to rise. To keep inflation under control, the Fed would need to tighten monetary policy, which would increase interest rates and reduce economic activity, leading to higher unemployment. However, if the Fed pursues expansionary policies to keep unemployment low, it would risk triggering inflation in the long run. This dilemma creates a time inconsistency problem because what might seem like the optimal policy in the short-term (e.g., lowering interest rates to boost employment) could have negative consequences in the future (e.g., higher inflation expectations). Hence, the Fed faces a trade-off between short-term goals and long-term objectives, which requires making difficult choices that may not be compatible with a consistent policy rule.

Question 7

The hypothesis of political business cycles is based on the assumption that a vertical Phillips curve always holds.

Accepted Answer

The hypothesis of political business cycles states that incumbent politicians manipulate economic policy to stimulate the economy before an election in order to increase their chances of winning. This theory does not require the assumption that a vertical Phillips curve always holds. Rather, it suggests that policy changes may lead to shifts in the Phillips curve, depending on the specific policy implemented.

Question 8

Since the growth in the money supply is unrelated to government spending, fiscal policy and monetary policy can be conducted independently.

Accepted Answer

The growth in the money supply is directly influenced by monetary policy, which is controlled by the central bank, and government spending is a component of fiscal policy. Therefore, fiscal and monetary policies cannot be conducted independently.

Question 9

A recessionary real shock is associated with an outward shift of the short-run Phillips curve and with a leftward shift of the short-run aggregate supply curve.

Accepted Answer

A recessionary real shock reduces aggregate supply, shifting the short-run aggregate supply curve to the left. It also reduces aggregate demand, shifting the short-run Phillips curve outward.

Question 10

The introduction of a new currency is generally sufficient to achieve a permanent reduction in the inflation rate.

Accepted Answer

Introducing a new currency alone is not sufficient to achieve a permanent reduction in the inflation rate. Other economic policies, such as reducing government spending or increasing interest rates, may also be necessary to control inflation in the long term.

Question 11

In order to achieve an unemployment rate below the natural rate of unemployment, the Fed must pursue a policy of low-monetary-growth during a time when the public expects high inflation.

Accepted Answer

In order to achieve an unemployment rate below the natural rate of unemployment, the Fed must pursue a policy of high-monetary-growth. Low-monetary-growth would actually increase unemployment as it would reduce the overall output and demand for labor. Additionally, pursuing low-monetary-growth during a time when the public expects high inflation would likely lead to even higher inflation as it may signal the Fed's inability to control the money supply.

Question 12

Irrespective of whether the inflation rate is high or low, if the inflation rate is above the expected level, the unemployment rate in the economy will remain stable.

Accepted Answer

This statement is false. If the inflation rate is above the expected level, it can lead to an increase in interest rates to control inflation, which can then lead to a decrease in investments and consumption, and ultimately a rise in unemployment. In other words, high inflation can lead to an increase in unemployment if it is not managed properly.

Quiz 23: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, and Sources of Business Cycles