Deck 16: Macro Policy Debate: Active or Passive

Question 1

An economy that self-corrects a recessionary gap will experience falling nominal wages,rising real wages,and falling output.​

Answer 1

False

Question 2

Advocates of the passive approach to government economic policy believe that the government should lower tax rates when there is a recessionary gap.​

Answer 2

False

Question 3

An economy that self-corrects an expansionary gap will experience stagflation.​

Answer 3

True

Question 4

Adaptive expectations is a school of thought that argues people form expectations based on all available information,including the likely future actions of government policy makers.​

Question 5

Both those who favor an active approach as well as those who favor a passive approach to policy believe that the economy can suffer from extreme and long-lasting swings in real GDP.​

Question 6

According to the rational expectations theory,people's predictions about the future course of governmental economic policy influence the position of the short-run aggregate supply curve.​

Question 7

The country of Erbia has been experiencing high unemployment over a period of seven years.A likely outcome of such a situation is that potential GDP will fall.​

Question 8

If self-correction causes prices to fall less than nominal wages,both output and real wages will decrease.​

Question 9

Advocates of an active approach think that only when unemployment is high,the natural adjustments of wages and prices can be effective.​

Question 10

The effectiveness lag for monetary policy is short.​

Question 11

According to the passive approach,discretionary fiscal or monetary policy can reduce the costs of an unstable economy.​

Question 12

A policy to increase aggregate demand to cure a recessionary gap may succeed; however,inflation is a likely result.​

Question 13

Passive macroeconomic policy would rely on natural market forces and automatic stabilizers to close an expansionary gap.​

Question 14

If the price level increases by more than expected,output can be expected to decrease as a result.​

Question 15

Active macroeconomic policy would move to close an expansionary gap by decreasing aggregate demand.​

Question 16

Those who favor an active approach to policy and those who favor a passive approach disagree not only on how quickly the government can act but also on how stable the economy basically is.​

Question 17

Advocates of the active approach believe that discretionary government policy can restore economic stability and improve economic performance.​

Question 18

One of the reasons fiscal and monetary policy can stimulate output and employment in the short run is that nominal wages increase faster than the price level.​

Question 19

According to the rational expectations approach ,if policy makers consistently stimulate aggregate demand when real output falls below the economy's potential output,then people will not be able to anticipate the effects of this policy on the price level,unemployment,and the real output level.​

Question 20

As long as wage increases do not exceed labor productivity growth rates,a stable price level should be the result.​

Question 21

According to the rational expectations school,when the economy is operating at the potential output level,a temporary decrease in unemployment is possible through appropriate monetary policy-but only if workers and employers are aware in advance of the Fed's intentions.​

Question 22

The short-run Phillips curve is drawn for a given expected inflation rate and so it shifts as inflation expectations change.​

Question 23

The early Phillips curve showed a trade-off between unemployment and inflation because it was drawn for a period in which the main source of instability was aggregate demand.​

Question 24

The long-run Phillips curve suggests that changing the rate of unemployment in the economy has no impact on the inflation rate.​

Question 25

Inflation target refers to the commitment of central bankers to keep inflation below a certain rate for the next year or two.​

Question 26

Only long-run changes in output can be brought about by unexpected change in policy.​

Question 27

Those who prefer a passive approach to the conduct of macroeconomic policy tend to believe that markets are self-correcting.​

Question 28

In the event of a recession,which of the following is the most likely policy stance of those who advocate a passive approach to economic policy?​

A)Cutting taxes
B)Increasing government spending
C)Reducing interest rates
D)Increasing the money supply
E)Doing nothing

Question 29

In its original form,the Phillips curve depicted a situation in which an economy could reduce its unemployment rate by holding the inflation rate steady.​

Question 30

A credible policy designed to lower inflation is likely to push the economy into recession.​

Question 31

Before discovering that the short-run Phillips curve does not show the true long-run situation,policy makers were successful in trying to bring the economy to the zero-inflation,zero-unemployment point on the short-run curve.​

Question 32

An increase in price expectations shifts the long-run Phillips curve,but not the short-run Phillips curve.​

Question 33

Contrary to what the Phillips curve would have predicted,the U.S.economy in the 1970s experienced simultaneous increases in inflation and unemployment.​

Question 34

Some economists believe that in the long run,the unemployment rate is independent of the inflation rate and so the Phillips curve becomes a vertical line.​

Question 35

If rational expectations cause people's price expectations to be generally correct,active policy will influence the price level but not output.​

Question 36

Along the long-run Phillips curve,the economy is at an unemployment level that corresponds to an output level lower than the potential output level.​

Question 37

The wage rate considered acceptable to workers engaged in collective bargaining will be determined in part by what monetary policy workers expect in the near future.​

Question 38

As people come to expect higher inflation,the long-run Phillips curve shifts leftward.​

Question 39

According to the rational expectations school,when monetary policy makers do exactly what is expected of them,their efforts to stimulate the economy will have no effect on employment.​

Question 40

The long-run Phillips curve is located at the natural rate of unemployment.​

Question 41

If an active approach is followed in closing an expansionary gap,_____.​

A)the aggregate demand curve would shift rightward
B)the aggregate demand curve would shift leftward
C)the short-run aggregate supply curve would shift rightward
D)the short-run aggregate supply curve would shift leftward
E)there would be a movement up and to the left along the short-run supply curve

Question 42

The reason why self-correction works to close a recessionary gap is because:​

A)a labor shortage causes wages to increase.
B)a labor surplus causes wages to increase.
C)a labor shortage causes wages to fall.
D)a labor surplus causes wages to fall.
E)a labor surplus causes price to fall.

Question 43

The figure below shows the relationship between an economy's potential output,price level,and real GDP.According to those who favor an active approach to policy,the economy will end up at _____when it attains the potential output level.​ ​
Exhibit 16-1

A)point A
B)point B
C)point C
D)a point between A and B
E)a point between A and C

Question 44

The figure below shows the price level,real GDP,and the potential output for an economy.According to those who favor a passive approach to policy,the economy will attain equilibrium at potential output when:​ ​
Figure 16-2
​

A)the SRAS curve will shift to the left.
B)the SRAS curve will shift to the right.
C)either the money supply or government spending is increased.
D)the money supply is decreased.
E)aggregate demand will decrease.

Question 45

For those who favor an active approach,public policy changes are necessary to cure a recessionary gap because:​

A)the short-run aggregate supply curve will otherwise shift quickly to the right.
B)prices and wages are flexible downward but not upward.
C)the required decrease in output can be achieved only by shifting the aggregate demand curve.
D)real wages must fall in order to increase aggregate supply in the economy.
E)falling money wages will cause the AD curve to shift leftward unless policy counters this movement.

Question 46

Which of the following is consistent with an active approach to policy?​

A)The natural rate of unemployment being uncertain
B)Wages and prices being relatively quick to adjust
C)The short-run aggregate supply curve being slow to shift in the presence of a recessionary gap
D)The size of the multiplier being irrelevant
E)The aggregate demand curve being slow to shift in the presence of a recessionary gap

Question 47

The figure below shows the price level,real GDP,and the potential output for an economy.According to those who favor an active approach to policy,once the expansionary gap is eliminated,the economy can attain equilibrium at:​ ​
Figure 16.2
​

A)point A.
B)point B.
C)point C.
D)a point above point A on the SRAS curve.
E)at a point below point C on the SRAS curve.

Question 48

Which of the following is a difference between an active approach to close a recessionary gap and a passive approach to close a recessionary gap?​

A)The level of real GDP would be higher in the long run with the active approach,while it will be lower with the passive approach.
B)The level of real GDP would be lower in the long run with the active approach,while it will be higher with the passive approach.
C)The price level would be higher and the level of real GDP would be lower in the long run with the active approach,whereas the price level would be lower and real GDP level would be higher with the passive approach.
D)Only the price level would be lower in the long run with the active approach,whereas it would be higher with the passive approach.
E)Only the price level would be higher in the long run with the active approach,whereas it would be lower with the passive approach.

Question 49

If the price level in an economy rises and its output level decreases as it gravitates toward its potential GDP,then:​

A)a policy to manipulate the aggregate supply is being used.
B)an active approach to correcting a recessionary gap is being used.
C)an active approach to correcting an expansionary gap is being used.
D)a passive approach to correcting a recessionary gap is being used.
E)a passive approach to correcting an expansionary gap is being used.

Question 50

If we observe an economy adjusting to potential GDP as prices fall and real output increases,we can conclude that _____.​

A)the economy was experiencing an expansionary gap
B)there is a labor surplus
C)the economy was experiencing a recessionary gap
D)self-correction is not the process that is occurring
E)there are widespread labor shortages

Question 51

Which of the following is not consistent with a self-correcting economy?​

A)Falling wages that correct a recessionary gap
B)Falling prices that correct a recessionary gap
C)Rising prices that correct an expansionary gap
D)Tendency of the short-run aggregate supply to shift until it intersects aggregate demand at potential GDP
E)An active approach to a recession or depression

Question 52

If an economy's actual GDP exceeds its potential GDP,_____.​

A)wages and prices must fall
B)self-correcting forces will shift the SRAS curve to the left
C)self-correcting forces will shift the AD curve to the left
D)inflation will occur when AD shifts to the left
E)unemployment is likely to be unusually high

Question 53

According to the active policy approach,the elimination of a recessionary policy _____.​

A)can only be achieved by decreasing wages
B)requires a public policy of wage and price controls
C)should be accomplished by stimulating aggregate demand
D)will increase unemployment
E)will cause a recession

Question 54

The country of Glassen has experienced an expansionary gap for the last three years.The advocates of passive policy are likely to suggest a policy which causes _____.​

A)the short-run aggregate supply to shift to the left.
B)the short-run aggregate supply to shift to the right.
C)rising prices to shift the aggregate demand to the left.
D)wages to fall relatively quickly.
E)aggregate demand to shift to the right as wages increase.

Question 55

If a passive approach is followed in closing an expansionary gap,_____.​

A)restrictive fiscal policy would be used
B)restrictive monetary policy would be used
C)the short-run aggregate supply curve would shift to the right
D)the price level would decrease in the long run
E)an economy would experience inflationary pressure

Question 56

When self-correction works to eliminate an expansionary gap,_____.​

A)both money wages and real wages increase
B)money wages increase while real wages decrease
C)both money wages and real wages decrease
D)money wages decrease while real wages increase
E)money wages remain unchanged

Question 57

The figure below shows the relationship between an economy's potential output,price level,and real GDP.According to those who favor a passive approach to policy,the economy will attain equilibrium at potential output when: ​
Figure 16.1​
​

A)the short-run aggregate supply curve shifts to the left.
B)the short-run aggregate supply curve shifts to the right due to a fall in real wages.
C)either the money supply or government spending is increased.
D)either the money supply or government spending is decreased.
E)aggregate demand is decreased.

Question 58

An economy experiencing an expansionary gap:​

A)operates in an environment in which labor shortages drive up money wages,real wages,and prices.
B)has an excess supply of labor due to rising money wages and prices.
C)will self-correct as rising money wages decrease faster than rising prices.
D)will experience rising money wages and prices but falling real wages.
E)will have excessive involuntary unemployment.

Question 59

The figure below shows the price level,real GDP,and the potential output for an economy.According to those who favor an active approach to policy,the economy can attain equilibrium at potential output if:​ ​
Figure 16.2
​

A)the SRAS curve shifts to the left.
B)the SRAS curve shifts to the right.
C)money supply is increased.
D)government spending is decreased.
E)aggregate demand increases.

Question 60

The figure below shows the price level,real GDP,and the potential output for an economy.According to those who favor a passive approach to policy,once the expansionary gap is eliminated,the economy will end up at:​ ​
Figure 16.2
​

A)point A.
B)point B.
C)point C.
D)a point to the right of point A.
E)a point below C.

Question 61

Long time lags hamper the effectiveness of economic policy because:​

A)people don't want to wait for economic recovery.
B)the longer unemployment lasts,the more intense inflation becomes.
C)by the time the impact of a policy is felt,a new problem may have come along that requires a different policy,which may make the economic situation even worse.
D)if inflation is allowed to continue for too long,it becomes immune to policy interference.
E)if unemployment is allowed to continue for too long,it becomes immune to policy interference.

Question 62

The time it takes for a new policy to register its full impact on the economy after it has been put in force is known as the_____.​

A)activity lag
B)decision-making lag
C)effectiveness lag
D)implementation lag
E)recognition lag

Question 63

If the short-run equilibrium output of the United States exceeds the potential output,the Fed:​

A)employs an active monetary policy to close a recessionary gap.
B)employs an active monetary policy to close an expansionary gap.
C)relies on a passive approach to close a recessionary gap.
D)relies on a passive approach to close an expansionary gap.
E)employs an expansionary fiscal policy.

Question 64

Which of the following lags reduces the effectiveness of active policy?​

A)Preliminary lag
B)Accounting lag
C)Self-correction lag
D)Recognition lag
E)Execution lag

Question 65

The selection of a new policy takes place during a period of time known as the _____.​

A)activity lag
B)decision-making lag
C)effectiveness lag
D)implementation lag
E)recognition lag

Question 66

Suppose policy makers are concerned about a shortage of long-term capital investment.To remedy the problem,various plans to cut capital gains taxes have been suggested.The delay in picking a plan is called the _____.​

A)implementation lag
B)policy coordination problem
C)decision-making lag
D)recognition lag
E)effectiveness lag

Question 67

Policy makers may not know that the economy is in a recession until six months after the recession starts; this phenomenon is known as the _____.​

A)implementation lag
B)policy coordination problem
C)decision-making lag
D)recognition lag
E)effectiveness lag

Question 68

The time it takes to identify and examine the nature and seriousness of an economic problem is the _____.​

A)activity lag
B)decision-making lag
C)effectiveness lag
D)implementation lag
E)recognition lag

Question 69

An implementation lag is the time it takes:​

A)for policy makers to decide what to do.
B)for the chosen policy to have its full impact on the economy.
C)to identify trouble in the economy and to assess its severity.
D)to put a selected policy into action.
E)before a policy's effects on the economy are noticed by ordinary people.

Question 70

Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy?​

A)The recognition lag and the implementation lag
B)The effectiveness lag and the decision-making lag
C)The decision-making lag and the implementation lag
D)The implementation lag and the effectiveness lag
E)The recognition lag and the effectiveness lag

Question 71

The _____ lag is typically longer for fiscal policy than monetary policy.​

A)supply
B)cyclical
C)effectiveness
D)implementation
E)recognition

Question 72

Which of the following is true of lags associated with discretionary policy?​

A)Such lags extend only from the time a problem occurs in the economy through the time it is recognized by the government.
B)Such lags extend only from the time a problem is recognized by the government through the time an agreed-on policy is approved of.
C)Such lags extend only from the time a policy is approved through the time the policy is implemented.
D)Such lags can be reduced by taxation.
E)Such lags extend only from the time a problem occurs in the economy through the time a corrective policy has an impact on the economy.

Question 73

Those who favor a passive approach to policy often argue that changes in prices and wages will shift the:​

A)short-run aggregate supply curve before active policy shifts the aggregate demand curve.
B)short-run aggregate supply curve only after active policy shifts the aggregate demand curve.
C)short-run aggregate supply curve more than active policy shifts the aggregate demand curve.
D)short-run aggregate supply curve less than active policy shifts the aggregate demand curve.
E)short-run aggregate supply curve in a direction opposite the shift in the aggregate demand curve

Question 74

During inflation,the optimal discretionary fiscal policy would be _____.​

A)to decrease taxes
B)to increase government spending
C)to decrease the reserve ratio
D)to increase taxes
E)to decrease the market interest rate

Question 75

The time it takes for the Fed's purchase of government securities to ultimately change aggregate demand is called the _____.​

A)recognition lag
B)implementation lag
C)effectiveness lag
D)decision-making lag
E)self-correction lag

Question 76

After World War II the average U.S.recession has lasted:​

A)a few months.
B)about half a year.
C)a little less than a year.
D)about three weeks.
E)about two years.

Question 77

Suppose a recession surprises economic forecasters who did not see it coming.This is an example of a _____.​

A)cyclical lag
B)recognition lag
C)decision-making lag
D)implementation lag
E)effectiveness lag

Question 78

If the time for an economy to self-correct is shorter than the active policy lags,then:​

A)active policy should be strengthened.
B)active policy is likely to destabilize the economy.
C)time is required to accumulate evidence that the economy is performing below its potential.
D)the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve.
E)active policy will work better than passive policy.

Question 79

The time required _____ is not a time lag associated with using discretionary policy to correct an economic problem.​

A)to recognize the problem
B)to decide how to handle the problem
C)to set a policy change in action
D)for a policy to affect economic variables
E)to observe public reaction after a policy announcement is made

Question 80

Those who favor a passive approach to policy believe that:​

A)discretionary monetary policy can be used to help the economy since monetary policy lags are short.
B)discretionary fiscal policy can be used to help the economy since fiscal policy lags are short.
C)lags associated with implementing policies are too long and unstable for discretionary policy to be effective.
D)despite the lags involved,implementing discretionary policy is preferable to inaction.
E)automatic stabilizers cannot be used to help the economy since monetary policy lags are short.