Deck 13: Stabilization Policy

Question 1

The questions with which Chapter 13 is concerned include each of the following except

A) what are the goals of stabilization policy?
B) what aspects of stabilization policy do economists argue about today?
C) why is fiscal policy more effective as a stabilization policy?
D) how does uncertainty affect the way stabilization policy should be made?

Answer 1

why is fiscal policy more effective as a stabilization policy?

Question 2

The questions with which Chapter 13 is concerned include each of the following except

A) how long are the lags associated with stabilization policy?
B) why are economists in such agreement about stabilization policy?
C) is monetary or fiscal policy a more effective mode of stabilization policy?
D) how does uncertainty affect the way stabilization policy should be made?

Answer 2

why are economists in such agreement about stabilization policy?

Question 3

The questions with which Chapter 13 is concerned include each of the following except

A) how does the Federal Reserve work?
B) what aspects of stabilization policy do economists argue about today?
C) is stabilization policy better conducted according to fixed rules or by authorities with substantial discretion?
D) how does certainty affect the way stabilization policy should be made?

Answer 3

how does certainty affect the way stabilization policy should be made?

Question 4

Government tries to manage the macroeconomy by attempting to

A) stabilize the macroeconomy by maximizing the impact of the shocks that cause business cycles.
B) decrease the unemployment rate to zero percent.
C) stabilize the macroeconomy by minimizing the impact of the shocks that cause business cycles.
D) eliminate inflation.

Question 5

Changes in fiscal policy

A) shift the LM curve.
B) shift the Phillips curve.
C) shift the MPRF curve out and back.
D) move the economy along the MPRF curve.

Question 6

Changes in monetary policy

A) shift the IS curve.
B) shift the Phillips curve.
C) shift the MPRF curve out and back.
D) move the economy along the MPRF curve.

Question 7

Fiscal and monetary policy, along with the economic environment,

A) set the level of aggregate supply and move the economy along the Phillips curve, raising and lowering inflation and unemployment.
B) set the level of planned expenditure and move the economy along the Phillips curve, raising and lowering inflation and unemployment.
C) set the level of aggregate supply and move the economy along the monetary policy reaction curve, raising and lowering inflation and unemployment.
D) set the level of planned expenditure and move the economy along the planned expenditure curve, raising and lowering inflation and unemployment.

Question 8

Changes in expectations of inflation, changes in the natural rate of unemployment, and supply shocks

A) change the level of planned expenditure and move the economy along the Phillips curve, raising and lowering inflation and unemployment.
B) change the level of aggregate supply and move the economy along the Phillips curve, raising and lowering inflation and unemployment.
C) change the level of planned expenditure and move the economy along the aggregate demand curve, raising and lowering inflation and unemployment.
D) change the position of the short-run Phillips curve, raising and lowering inflation and unemployment.

Question 9

The principal policy-making body of the Federal Reserve System is

A) the Federal Open Records Committee.
B) the Federal Open Market Committee.
C) the Senate Finance Committee.
D) the House Appropriations Committee.

Question 10

The Board of Governors of the Federal Reserve is composed of

A) a Chair, Vice Chair, and five Governors, all nominated by the President and confirmed by the House of
Representatives.
B) a Chair, Vice Chair, and five Presidents of Federal Reserve Banks, all nominated by the President and confirmed by the Senate.
C) a Chair, Vice Chair, and five Governors, all nominated by the President and confirmed by the Senate.
D) a Chair, Vice Chair, five Governors, and five Presidents of Federal Reserve Banks, all nominated by the President and confirmed by the Senate.

Question 11

The voting members of the Federal Open Market Committee are

A) the Chair, Vice Chair, and five Governors of the Board of Governors.
B) the Chair and Vice Chair of the Board of Governors, and five Presidents of Federal Reserve Banks.
C) the Chair, Vice Chair, and five Governors of the Board of Governors and the Presidents of each of the
Federal Reserve Banks.
D)the Chair, Vice Chair, five Governors, and five Presidents of Federal Reserve Banks, one of which is the President of the New York Federal Reserve Bank.

Question 12

If the Federal Open Market Committee wishes to decrease interest rates,

A) it would buy U.S. government bonds.
B) it would buy stocks.
C) it would sell U.S. government bonds.
D) it would buy municipal bonds.

Question 13

If the Federal Open Market Committee wishes to increase interest rates,

A) it would buy U.S. government bonds.
B) it would sell stocks.
C) it would sell U.S. government bonds.
D) it would buy municipal bonds.

Question 14

If the Federal Reserve wanted to pursue an expansionary monetary policy, it could

A) raise the discount rate.
B) buy U.S. government bonds.
C) increase the reserve requirement.
D) raise credit card interest rates.

Question 15

If the Federal Reserve wanted to pursue a contractionary monetary policy, it could

A) raise the discount rate.
B) buy U.S. government bonds.
C) decrease the reserve requirement.
D) raise credit card interest rates.

Question 16

There is one important restriction on the Federal Reserve's power to set interest rates:

A) it cannot decrease nominal interest rates below the rate of inflation.
B) it cannot decrease nominal interest rates below the expected returns on stocks.
C) it cannot decrease nominal interest rates below zero.
D) it cannot affect long-term interest rates.

Question 17

If prices are expected to decrease, and the nominal interest rate is close to zero,

A) the real interest rate will be less than zero.
B) the real interest rate could still be rather high.
C) the real interest rate is unaffected.
D) the real interest rate is no longer important.

Question 18

If prices are expected to decrease, and the nominal interest rate is close to zero,

A) the real interest rate will be less than zero, so investment spending will increase a lot.
B) the real interest rate could still be rather high, so investment spending will not be stimulated by an expansionary monetary policy
C) the real interest rate is unaffected, so investment spending continues as before.
D) the real interest rate is no longer important in investment spending decisions.

Question 19

One country has experienced a liquidity trap problem in the 1990s:

A) the United States.
B) Mexico.
C) France.
D) Japan.

Question 20

Which of the following is not a policy option if a country finds itself in a liquidity trap situation?

A) Expansionary fiscal policy via increased government purchases.
B) Expansionary monetary policy designed to decrease interest rates and increase investment spending.
C) Expansionary fiscal policy via decreased taxes.
D) Expansionary monetary policy designed to increase inflation expectations.

Question 21

Fiscal policy in the United States today

A) is managed by the Congress (subject to the veto by the President).
B) is managed by the President (subject to the veto of the Congress).
C) is managed by the Board of Governors of the Federal Reserve.
D) is managed by the Treasury Department.

Question 22

The steps in the Budget Process include each of the following except

A) planning by departments.
B) negotiations between departments and the President's Office of Management and Budget.
C) negotiations between the President's Office of Management and Budget and the Federal Reserve.
D) Congress passes its budget resolution.

Question 23

The steps in the Budget Process include each of the following except

A) President adds his priorities and submits a budget to the Congress.
B) negotiations between the Congress the Federal Reserve.
C) negotiations between departments and the President's Office of Management and Budget.
D) Congressional committees accept, amend, and reject Presidential budget proposals.

Question 24

The steps in the Budget Process include each of the following except

A) President adds his priorities and submits a budget to the Congress.
B) Congress passes its budget resolution.
C) Congress considers and votes on spending bills.
D) Congressional committees negotiate with the Federal Reserve.

Question 25

The federal government's year for budget purpose - its fiscal year -

A) runs from October 1 of one year to September 30 of the next year.
B) runs from April 16 of one year to April 15 of the next year.
C) runs from January 1 of one year to December 31 of the same year.
D) runs from July 1 of one year to June 30 of the next year.

Question 26

The past forty years have seen the level of Federal Government spending

A) as a share of GDP increase significantly, with the share of national defense and international affairs spending also increasing significantly.
B) as a share of GDP remain roughly constant, with the share of Federal welfare spending increasing significantly.
C) as a share of GDP remain roughly constant, with the share of national defense and international affairs spending increasing significantly.
D) as a share of GDP remain roughly constant, with the share of national defense and international affairs spending decreasing significantly.

Question 27

The past forty years have seen the level of Federal Government spending

A) as a share of GDP increase significantly, with the share of mandatory spending decreasing and discretionary spending increasing.
B) as a share of GDP remain roughly constant, with the share of mandatory spending decreasing and discretionary spending increasing.
C) as a share of GDP remain roughly constant, with the share of mandatory spending increasing and discretionary spending decreasing.
D) as a share of GDP has decreased, with the share of mandatory spending increasing and discretionary spending decreasing.

Question 28

The making of fiscal policy in the United States is ______________ while the making of monetary policy tends to be_____________.

A) quick and easy; complicated and time-consuming.
B) complicated and time-consuming; much quicker and easier.
C) a waste of time; not usually worthwhile.
D) quick and easy; not quite as quick and easy.

Question 29

Each of the following was a part of the Employment Act of 1946 except

A) establishing Congress's Joint Economic Committee.
B) establishing the President's Council of Economic Advisors.
C) calling on the President to estimate and forecast the current and future level of economic activity in the United States.
D) establishing the Federal Reserve System.

Question 30

Between the mid-1950s and the late 1960s in the United States,

A) unemployment and inflation were low and stable.
B) unemployment and inflation were high and volatile.
C) unemployment was high and inflation was low.
D) unemployment was low and inflation was high.

Question 31

Between 1967 and 1975 in the United States,

A) the natural rate of unemployment decreased and expected inflation increased.
B) the natural rate of unemployment and expected inflation increased.
C) the natural rate of unemployment increased and expected inflation decreased.
D) the natural rate of unemployment and expected inflation decreased.

Question 32

Stagflation means

A) a combination of relatively low unemployment and low inflation.
B) a combination of relatively low unemployment and high inflation.
C) a combination of relatively high unemployment and high inflation.
D) a combination of relatively high unemployment and low inflation.

Question 33

The stagflation of the early 1970s was the result of

A) expansionary aggregate demand policies and an increase in expected inflation.
B) expansionary aggregate demand policies and a decrease in expected inflation.
C) contractionary aggregate demand policies and a decrease in expected inflation.
D) expansionary aggregate demand policies.

Question 34

The velocity of money from 1960 until 1980 was

A) unstable and predictable around a steady upward trend.
B) unstable and unpredictable around a steady upward trend.
C) stable and predictable with a constant downward trend.
D) stable and predictable with a constant upward trend.

Question 35

The velocity of money since 1980 has been

A) unstable and predictable around a steady upward trend.
B) unstable and unpredictable without any discernable trend.
C) stable and predictable with a constant downward trend.
D) stable and predictable with a constant upward trend.

Question 36

The controversy over macroeconomic policy can be characterized as a continuum with one end of the spectrum being held by those economists who advocate _______________, and the other end of the spectrum being held by those economists who advocate ___________________.

A) that a passive role for government is best; that an active role for government is necessary.
B) an activist monetary policy; an activist fiscal policy.
C) an activist structural policy; an activist monetary policy.
D) a passive fiscal policy; an activist fiscal policy.

Question 37

The two general approaches that economists take in trying to forecast the near-term future of the economy are

A) to use small-scale physical models and to search for leading indicators.
B) to use large-scale econometric models and to search for lagging indicators.
C) to use large-scale econometric models and to search for leading indicators.
D) to use large-scale physical models and to search for lagging indicators.

Question 38

Each of the following is a component of the Conference Board's Index of Leading Indicators except

A) average weekly hours, manufacturing.
B) average weekly initial claims for unemployment insurance.
C) manufacturers' new orders, consumer goods and materials.
D) building permits, new public housing units.

Question 39

Each of the following is a component of the Conference Board's Index of Leading Indicators except

A) average weekly hours, service sector.
B) average weekly initial claims for unemployment insurance.
C) vendor performance, slower deliveries diffusion index.
D) building permits, new private housing units.

Question 40

Each of the following is a component of the Conference Board's Index of Leading Indicators except

A) money supply, M2.
B) average weekly initial claims for disability insurance.
C) manufacturers' new orders, nondefense capital goods.
D) stock prices, 500 common stocks.

Question 41

Each of the following is a component of the Conference Board's Index of Leading Indicators except

A) average weekly hours, manufacturing.
B) interest rate spread, 10-year Treasury bonds minus federal funds.
C) bond prices, 500 common bonds.
D) index of consumer expectations.

Question 42

A big problem with using only the money supply as a leading indicator is that

A) money supply changes lag behind fiscal policy changes.
B) money supply changes are hard to implement.
C) there is more one money supply measure, and the different measures don't always move together.
D) money supply changes don't have much impact on the economy.

Question 43

As an example of the problem of using only the money supply as a leading indicator, during 1992 if M1 were used as the measure of the money supply rather than M3

A) monetary policy would have been deemed contractionary, deepening the 1990-92 recession.
B) monetary policy would have been deemed expansionary, resulting in short-term nominal interest rates of less than zero.
C) monetary policy would have been deemed neutral.
D) monetary policy would have been deemed expansionary, resulting in short-term real interest rates of less than zero.

Question 44

As an example of the problem of using only the money supply as a leading indicator, during 1992 if M3 were used as the measure of the money supply rather than M1

A) monetary policy would have been deemed contractionary, deepening the 1990-92 recession.
B) monetary policy would have been deemed expansionary, resulting in short-term nominal interest rates of less than zero.
C) monetary policy would have been deemed neutral.
D) monetary policy would have been deemed expansionary, resulting in short-term real interest rates of less than zero.

Question 45

If the reserve requirement is 5% and the Federal Reserve increases the reserves in the banking system by $20 billion, the potential increase in the money supply is

A) $4 billion.
B) $40 billion.
C) $400 billion.
D) $4000 billion.

Question 46

If the reserve requirement is 5%, the money multiplier is

A) 2.
B) 20.
C) 200.
D) .2.

Question 47

If the reserve requirement is 5%, and households' and businesses' desired holding ratio of currency-to-deposits is .2, the money multiplier is

A) 4.
B) 40.
C) 24.
D) 4.8.

Question 48

If the reserve requirement is 5%, households' and businesses' desired holding ratio of currency-to-deposits is .1, and the ratio of excess reserves to total deposits that banks desire to hold is .05, the money multiplier is

A) 5.5.
B) 2.2.
C) 22.
D) 5.

Question 49

If the reserve requirement is 5%, households' and businesses' desired holding ratio of currency-to-deposits is .1, the ratio of excess reserves to total deposits that banks desire to hold is .05, and the Federal Reserve increases the monetary base by $100 billion, the increase in the money supply would be

A) $500 billion.
B) $220 billion.
C) $550 billion.
D) $2200 billion.

Question 50

If the reserve requirement is 5%, households' and businesses' desired holding ratio of currency-to-deposits is .2, and the Federal Reserve increases the monetary base by $100 billion, the increase in the money supply would be

A) $400 billion.
B) $4000 billion.
C) $2400 billion.
D) $480 billion.

Question 51

If the Federal Reserve increases the reserve requirement,

A) the value of the money multiplier will increase.
B) the value of the money multiplier will decrease.
C) the value of the autonomous spending multiplier will increase.
D) the value of the autonomous spending multiplier will decrease.

Question 52

If the Federal Reserve decreases the reserve requirement,

A) the value of the money multiplier will increase.
B) the value of the money multiplier will decrease.
C) the value of the autonomous spending multiplier will increase.
D) the value of the autonomous spending multiplier will decrease.

Question 53

If the Federal Reserve increases the monetary base,

A) the value of the money multiplier will increase.
B) the value of the money multiplier will decrease.
C) the value of the money multiplier will not change.
D) the value of the autonomous spending multiplier will decrease.

Question 54

If the ratio of excess reserves to total deposits that banks desire to hold increases,

A) the value of the autonomous spending multiplier will decrease.
B) the value of the money multiplier will increase.
C) the value of the money multiplier will not change.
D) the value of the money multiplier will decrease.

Question 55

If the ratio of excess reserves to total deposits that banks desire to hold decreases,

A) the value of the autonomous spending multiplier will increase.
B) the value of the money multiplier will increase.
C) the value of the money multiplier will not change.
D) the value of the money multiplier will decrease.

Question 56

If households' and businesses' desired holding ratio of currency-to-deposits increases,

A) the value of the autonomous spending multiplier will decrease.
B) the value of the money multiplier will increase.
C) the value of the money multiplier will decrease.
D) the value of the money multiplier will not change.

Question 57

If households' and businesses' desired holding ratio of currency-to-deposits decreases,

A) the value of the autonomous spending multiplier will decrease.
B) the value of the money multiplier will increase.
C) the value of the money multiplier will decrease.
D) the value of the money multiplier will not change.

Question 58

Households' and businesses' desired holding ratio of currency-to-deposits __________ until the late-1970s and has ___________ since then.

A) was fairly stable; fluctuated substantially
B) was fairly stable; decreased substantially
C) decreased substantially; been fairly stable
D) increased substantially; fluctuated substantially

Question 59

The one kind of fiscal policy that does work rapidly enough to be important is

A) discretionary fiscal policy.
B) mandatory fiscal policy.
C) fiscal automatic stabilizers.
D) tax reductions.

Question 60

The automatic revenue and spending changes built into the federal budget have the effect of

A) increasing the marginal propensity to expend, thus reducing the value of the multiplier.
B) reducing the marginal propensity to expend, this reducing the value of the multiplier.
C) reducing the marginal propensity to expend, this increasing the value of the multiplier.
D) increasing the marginal propensity to expend, this increasing the value of the multiplier.

Question 61

If the principal instability in the economy is due to shifts in the IS curve,

A) targeting interest rates will do little or nothing to stabilize the magnitude of shocks to the economy.
B) targeting interest rates will stabilize the magnitude of shocks to the economy.
C) targeting the exchange rate will stabilize the magnitude of the shocks to the economy.
D) the Federal Reserve should take monetary policy action to shift the IS curve in the opposite direction of the shock.

Question 62

If the principal instability in the economy is due to shifts in the IS curve,

A) targeting interest rates will stabilize the magnitude of shocks to the economy.
B) targeting the exchange rate will stabilize the magnitude of shocks to the economy.
C) it would be better to have a monetary policy reaction function that reacts to leading indicators and outcomes.
D) the Federal Reserve should take monetary policy action to shift the IS curve in the opposite direction of the shock.

Question 63

If the principal instability in the economy is due to instability in the velocity of money,

A) targeting interest rates will do little or nothing to stabilize the magnitude of shocks to the economy.
B) targeting interest rates will stabilize the magnitude of shocks to the economy.
C) it would be better to have a monetary policy reaction function that reacts to leading indicators and outcomes.
D) the Federal Reserve should take monetary policy action to shift the IS curve in the opposite direction of the shock.

Question 64

If the principal instability in the economy is due to instability in the relationship between the monetary base and the money supply (because the currency-to-deposits and reserves-to-deposits ratios vary)

A) targeting interest rates will do little or nothing to stabilize the magnitude of shocks to the economy.
B) the Federal Reserve to take monetary policy action to shift the IS curve in the opposite direction of the shock.
C) it would be better to have a monetary policy reaction function that reacts to leading indicators and outcomes.
D) targeting interest rates will stabilize the magnitude of shocks to the economy.

Question 65

In recent years instability

A) has been primarily due to adverse supply shocks.
B) has been primarily in the velocity of money and the sign of the money multiplier.
C) has been primarily in shifts in the IS curve.
D) has been primarily slope changes in the IS curve.

Question 66

Each of the following is a reason why macroeconomic policy should be conducted by automatic rules rather than discretion by authorities except

A) the fear that people appointed to authorities will be incompetent.
B) the fear that the appointed authorities might not have the right objectives.
C) the fear that the appointed authorities will use good judgment and make the correct decisions.
D) the fear that short-run political objectives will outweigh longer-run economic objectives.

Question 67

Evidence of a politics-influenced component to the business cycle has led some economist to think that Democrats and Republican have different macroeconomic objectives; namely that

A) Republicans have less tolerance for unemployment and more tolerance for inflation than do Democrats.
B) Republicans have less tolerance for economic growth and more tolerance for inflation than do Democrats.
C) Republicans have less tolerance for unemployment and more tolerance for high interest rates than do Democrats.
D) Republicans have less tolerance for inflation and more tolerance for unemployment than do Democrats.

Question 68

In a study of the independence of central banks, Economists Alberto Alesina and Lawrence Summers concluded that

A) the more independent a central bank, the better its inflation performance.
B) the more independent a central bank, the worse its inflation performance.
C) the more independent a central bank, the worse its unemployment performance.
D) the more independent a central bank, the worse the real GDP of the country.

Question 69

Each of the following is a method by which central banks can acquire credibility about their determination to maintain price stability except

A) complaining that inflation may be rising.
B) refusing to admit even the possibility that monetary expansion might reduce unemployment.
C) refusing to raise interest rates no matter what the level of planned expenditure may be.
D) repeatedly declaring that price stability is the primary objective.

Question 70

The Taylor rule for the operation of monetary policy is for the central bank

A) to target the growth rate of real GDP and raise or lower real interest rates as necessary to achieve the target.
B) to target the unemployment rate and raise or lower real interest rates as necessary to achieve the target.
C) to target the inflation rate and raise or lower real interest rates as necessary to achieve the target.
D) to target the exchange rate and raise or lower real interest rates as necessary to achieve the target.

Question 71

If _________ is above the target level, the central bank should

A) inflation; lower real interest rates.
B) inflation; raise real interest rates.
C) real GDP; lower real interest rates.
D) unemployment; raise real interest rates.

Question 72

If _________ is below the target level, the central bank should

A) inflation; lower real interest rates.
B) inflation; raise real interest rates.
C) real GDP; raise real interest rates.
D) unemployment; lower real interest rates.

Question 73

An activist central bank concerned with _________ would

A) inflation; lower real interest rates if inflation was above its target level.
B) inflation; raise real interest rates if inflation was below its target level.
C) unemployment; lower real interest rates if unemployment was above the natural rate.
D) unemployment; raise real interest rates if unemployment was above the natural rate.

Question 74

An activist central bank concerned with _________ would

A) real GDP; lower real interest rates if real GDP was above its potential level.
B) real GDP; raise real interest rates if real GDP was below its target level.
C) unemployment; lower real interest rates if unemployment was below the natural rate.
D) inflation; raise real interest rates if unemployment was below the natural rate.

Question 75

An activist central bank concerned with _________ would

A) inflation; raise real interest rates if real GDP was above its potential level.
B) real GDP; raise real interest rates if real GDP was below its target level.
C) unemployment; lower real interest rates if unemployment was below the natural rate.
D) unemployment; raise real interest rates if unemployment was above the natural rate.

Question 76

An activist central bank concerned with _________ would

A) real GDP; lower real interest rates if real GDP was above its potential level.
B) real GDP; lower real interest rates if real GDP was below its target level.
C) unemployment; lower real interest rates if unemployment was below the natural rate.
D) unemployment; raise real interest rates if unemployment was above the natural rate.

Question 77

Each of the following is a characteristic of a financial crisis except

A) prices of stocks or of other assets crash.
B) everyone tries to move their wealth into safer forms at the same time.
C) confidence in the financial system tends to increase.
D) panic among investors can lead to a prolonged and serious depression.

Question 78

Federal deposit insurance was created

A) to insulate bank depositors from the effects of financial crises.
B) to protect the federal government from default on its loans.
C) to protect lenders to the federal government from government defaulting on its obligations.
D) to protect Federal Reserve Banks from bankruptcy.

Question 79

The central bank serves as a lender of last resort

A) to loan to individuals which are basically solvent but are temporarily insolvent.
B) to loan to businesses which are basically solvent but are temporarily insolvent.
C) to loan to banks which are basically solvent but are temporarily insolvent.
D) so that bankruptcy will never occur.

Question 80

Since the 1930s, federal deposit insurance has acted

A) as a fiscal automatic stabilizer.
B) as a real automatic stabilizer.
C) as a nominal automatic stabilizer.
D) as a monetary automatic stabilizer.