Deck 17: Issues in Macroeconomic Theory and Policy

Question 1

Proponents of the monetary rule believe that a constant growth rate in the money supply will lead to less uncertainty and greater credibility.

Answer 1

True

Question 2

Empirical evidence shows a weak correlation between declining productivity and the business cycle.

Answer 2

False

Question 3

According to real business cycle theorists, negative shocks cause recessions, and positive shocks cause expansion.

Answer 3

True

Question 4

When the crowding-out (or crowding in) effect of a decrease in government purchases is included in the analysis:

A)AD shifts left.
B)AD doesn't change.
C)AD shifts right, but by more than the simple multiplier analysis would imply.
D)AD shifts right, but by less than the simple multiplier analysis would imply.

Question 5

Indexing involves the use of payment contracts that automatically adjust for changes in inflation.

Question 6

Using Taylor rule, the federal funds rate is increased or decreased according to what is happening to both real GDP and inflation.

Question 7

A decrease in government purchases or an increase in taxes, other things being equal, will tend to:

A)increase interest rates and decrease investment as a result.
B)increase interest rates and increase investment as a result.
C)decrease interest rates and decrease investment as a result.
D)decrease interest rates and increase investment as a result.

Question 8

A larger crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on investment.
B)increases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on investment.
C)decreases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on investment.
D)decreases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on investment.

Question 9

Rule advocates believe that the central bank should target the inflation rate.

Question 10

Targeting a zero inflation rate could possibly lead to deflation.

Question 11

The use of financial leveraging on mortgage backed securities played a central role in the 2008 financial crisis.

Question 12

A smaller crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on investment.
B)increases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on investment.
C)decreases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on investment.
D)decreases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on investment.

Question 13

In the real business cycle theory, it is the potential output that fluctuates; not the output deviating from potential output.

Question 14

When the crowding-out effect of a decrease in taxes is included in the analysis:

A)AD shifts left.
B)AD doesn't change.
C)AD shifts right.
D)any change in AD is indeterminate.

Question 15

The 2008 financial crisis was caused by the decline of real estate values as well as several other factors.

Question 16

Indexing reduces the ability for relative price changes to allocate resources where they are more valuable.

Question 17

Assuming wages are indexed to inflation, if prices rose by 1.4 percent this month and your last month's wage was $1,000, your wage this month would be $1,140.

Question 18

Activists believe that monetary and fiscal policy will only work if it comes as a surprise to the public.

Question 19

An increase in government purchases or a decrease in taxes, other things being equal, will tend to:

A)increase interest rates and decrease investment.
B)increase interest rates and increase investment.
C)decrease interest rates and decrease investment.
D)decrease interest rates and increase investment.

Question 20

Rational expectations theory suggests that government or central bank policies designed to change aggregate demand will be effective.

Question 21

Which of the following is true?

A)When the federal budget moves toward deficit, net exports tend to increase as a result.
B)When the federal budget moves toward deficit, net exports tend to decrease as a result.
C)When the federal budget moves toward deficit, net exports do not change as a result.
D)When the federal budget moves toward deficit, there is an indeterminate effect on net exports that results.

Question 22

A larger crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on net exports.
B)increases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on net exports.
C)decreases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on net exports.
D)decreases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on net exports.

Question 23

Due to crowding-out effects, other things being equal:

A)net exports and investment will tend to move in the same direction as a change in transfer payments.
B)net exports and investment will tend to move in the opposite direction from a change in transfer payments.
C)net exports will tend to move in the same direction as a change in transfer payments and investment will tend to move in the opposite direction.
D)net exports will tend to move in the opposite direction from a change in transfer payments and investment will tend to move in the same direction.

Question 24

A larger crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on AD and increases the magnitude of its effects on investment.
B)increases the magnitude of a given fiscal policy's effect on AD and decreases the magnitude of its effects on investment.
C)decreases the magnitude of a given fiscal policy's effect on AD and increases the magnitude of its effects on investment.
D)decreases the magnitude of a given fiscal policy's effect on AD and decreases the magnitude of its effects on investment.

Question 25

Due to crowding-out effects, other things being equal:

A)net exports and investment will tend to move in the same direction as a change in government purchases.
B)net exports and investment will tend to move in the opposite direction from a change in government purchases.
C)net exports will tend to move in the same direction as a change in government purchases and investment will tend to move in the opposite direction.
D)net exports will tend to move in the opposite direction as a change in government purchases and investment will tend to move in the same direction.

Question 26

A smaller crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on real output in the short run and increases the magnitude of its effects on investment.
B)increases the magnitude of a given fiscal policy's effect on real output in the short run and decreases the magnitude of its effects on investment.
C)decreases the magnitude of a given fiscal policy's effect on real output in the short run and increases the magnitude of its effects on investment.
D)decreases the magnitude of a given fiscal policy's effect on real output in the short run and decreases the magnitude of its effects on investment.

Question 27

A larger crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on AD and increases the magnitude of its effects on net exports.
B)increases the magnitude of a given fiscal policy's effect on AD and decreases the magnitude of its effects on net exports.
C)decreases the magnitude of a given fiscal policy's effect on AD and increases the magnitude of its effects on net exports.
D)decreases the magnitude of a given fiscal policy's effect on AD and decreases the magnitude of its effects on net exports.

Question 28

Which of the following is false?

A)Expansionary fiscal policy will tend to cause net exports to fall.
B)The larger the crowding out effect, the smaller the actual effect of a given change in fiscal policy.
C)The crowding out effect does not occur with a tax change.
D)Starting from an initial recession equilibrium, expansionary fiscal policy could potentially increase employment to the full employment level.
E)Starting from an initial recession equilibrium, a government tax increase would tend to increase the severity of the recession.

Question 29

An increase in government purchases or a decrease in taxes, other things being equal, will tend to:

A)increase interest rates and increase net exports.
B)increase interest rates and decrease net exports.
C)decrease interest rates and increase net exports.
D)decrease interest rates and decrease net exports.

Question 30

A larger crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on real output in the long run and increases the magnitude of its effects on net exports.
B)increases the magnitude of a given fiscal policy's effect on real output in the long run and decreases the magnitude of its effects on net exports.
C)decreases the magnitude of a given fiscal policy's effect on real output in the long run and increases the magnitude of its effects on net exports.
D)decreases the magnitude of a given fiscal policy's effect on real output in the long run and decreases the magnitude of its effects on net exports.
E)does not affect the magnitude of a given fiscal policy's effect on real output in the long run.

Question 31

A smaller crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on AD and increases the magnitude of its effects on net exports.
B)increases the magnitude of a given fiscal policy's effect on AD and decreases the magnitude of its effects on net exports.
C)decreases the magnitude of a given fiscal policy's effect on AD and increases the magnitude of its effects on net exports.
D)decreases the magnitude of a given fiscal policy's effect on AD and decreases the magnitude of its effects on net exports.

Question 32

A decrease in government purchases or an increase in taxes, other things being equal, will tend to:

A)increase interest rates and increase net exports as a result.
B)increase interest rates and decrease net exports as a result.
C)decrease interest rates and increase net exports as a result.
D)decrease interest rates and decrease net exports as a result.

Question 33

A larger crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on real output in the short run and increases the magnitude of its effects on investment.
B)increases the magnitude of a given fiscal policy's effect on real output in the short run and decreases the magnitude of its effects on investment.
C)decreases the magnitude of a given fiscal policy's effect on real output in the short run and increases the magnitude of its effects on investment.
D)decreases the magnitude of a given fiscal policy's effect on real output in the short run and decreases the magnitude of its effects on investment.

Question 34

Which of the following is false?

A)The result of an expansionary fiscal policy in the short run would be an increase in the price level and an increase in RGDP.
B)Starting at a full-employment equilibrium, the only long-term effect of an increase in aggregate demand includes an increase in real output.
C)Starting at a full-employment equilibrium, once the economy has returned to its long run equilibrium after an increase in government purchases, employment will be equal to full employment.
D)When the government borrows money to finance a deficit, it increases the overall demand for money in the money market, driving interest rates up.
E)None of the above are false; all are true.

Question 35

A larger crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on real output in the short run and increases the magnitude of its effects on net exports.
B)increases the magnitude of a given fiscal policy's effect on real output in the short run and decreases the magnitude of its effects on net exports.
C)decreases the magnitude of a given fiscal policy's effect on real output in the short run and increases the magnitude of its effects on net exports.
D)decreases the magnitude of a given fiscal policy's effect on real output in the short run and decreases the magnitude of its effects on net exports.

Question 36

Which of the following is true?

A)When the federal budget moves toward surplus, net exports tend to increase as a result.
B)When the federal budget moves toward surplus, net exports tend to decrease as a result.
C)When the federal budget moves toward surplus, net exports do not change as a result.
D)When the federal budget moves toward surplus, there is an indeterminate effect on net exports that results.

Question 37

A smaller crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on AD and increases the magnitude of its effects on investment.
B)increases the magnitude of a given fiscal policy's effect on AD and decreases the magnitude of its effects on investment.
C)decreases the magnitude of a given fiscal policy's effect on AD and increases the magnitude of its effects on investment.
D)decreases the magnitude of a given fiscal policy's effect on AD and decreases the magnitude of its effects on investment.

Question 38

A smaller crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on unemployment in the long run and increases the magnitude of its effects on net exports.
B)increases the magnitude of a given fiscal policy's effect on unemployment in the long run and decreases the magnitude of its effects on net exports.
C)decreases the magnitude of a given fiscal policy's effect on unemployment in the long run and increases the magnitude of its effects on net exports.
D)decreases the magnitude of a given fiscal policy's effect on unemployment in the long run and decreases the magnitude of its effects on net exports.
E)does not affect the magnitude of a given fiscal policy's effect on unemployment in the long run.

Question 39

Due to crowding-out effects, other things being equal:

A)net exports and investment will tend to move in the same direction as a change in taxes.
B)net exports and investment will tend to move in the opposite direction from a change in taxes.
C)net exports will tend to move in the same direction as a change in taxes and investment will tend to move in the opposite direction.
D)net exports will tend to move in the opposite direction as a change in taxes and investment will tend to move in the same direction.

Question 40

A smaller crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on real output in the short run and increases the magnitude of its effects on net exports.
B)increases the magnitude of a given fiscal policy's effect on real output in the short run and decreases the magnitude of its effects on net exports.
C)decreases the magnitude of a given fiscal policy's effect on real output in the short run and increases the magnitude of its effects on net exports.
D)decreases the magnitude of a given fiscal policy's effect on real output in the short run and decreases the magnitude of its effects on net exports.

Question 41

The time span between the beginning of a downturn and the time by which hard data to indicate a downturn is made available is called:

A)the signal lag.
B)the implementation lag.
C)the impact lag.
D)the recognition lag.

Question 42

Rational expectations are:

A)forecasts that are technically correct.
B)forecasts that, while not necessarily correct, are the best that can be made given the available data.
C)forecasts that accurately predict the short-term future for wages and prices.
D)forecasts made by economists based on sophisticated econometric models.

Question 43

If people have rational expectations and correctly estimate the effects of a change in government policy, when the economy is initially at full employment, any anticipated increase in aggregate demand will result in:

A)a decrease in both aggregate demand and short-run aggregate supply.
B)an increase in short-run aggregate supply that will maintain full employment.
C)higher prices that will reduce aggregate demand to its original level.
D)a decrease in short-run aggregate supply that will maintain full employment.
E)no shift in either aggregate demand or short-run aggregate supply.

Question 44

If a foreign trading partner of the United States decreases its budget deficit, decreasing interest rates in that country:

A)U.S. exports and AD will both tend to rise.
B)U.S. exports and AD will both tend to fall.
C)U.S. exports will increase but AD will be unchanged.
D)there will be an indeterminate effect on U.S. exports and AD.

Question 45

If the public has rational expectations, an attempt to increase aggregate demand to stimulate the economy will:

A)be less inflationary in the short run than if the public alters their expectations slowly in response to changes in government policy.
B)be more effective than if the public alters their expectations slowly in response to changes in government policy.
C)be ineffective if the shift in aggregate demand is predictable.
D)be all of the above.

Question 46

Which of the following is false?

A)If people can anticipate the plans of policy makers and alter their behavior quickly, their behavior could neutralize the intended impact of government action on real GDP.
B)The theory of rational expectations leads to optimistic conclusions regarding macroeconomic policy's ability to achieve its intended economic goals.
C)Rational expectation economists believe that wages and prices are flexible, and that workers and consumers incorporate the likely consequences of government policy changes quickly into their expectations.
D)Catching consumers and businessmen off-guard with macroeconomic policy changes gets harder the more you try to do it.
E)None of the above are false; all are true.

Question 47

According to rational expectations theory:

A)a large reduction in unemployment can be achieved with a relatively small increase in inflation.
B)people are not easily fooled by changes in government fiscal policy.
C)inflation rates that rise 3 percentage points each year will keep unemployment below its natural rate for a sustained period of time.
D)the Phillips curve will slope downward to the right, if people correctly anticipate the inflation rate.
E)none of the above is true.

Question 48

If the shifts in AD that will result from policy changes are fully and accurately anticipated, an increase in government purchases or a decrease in taxes would result in which of the following in the short run?

A)a higher level of real output and a higher price level
B)a higher level of real output but no change in the price level
C)a higher price level and a reduced level of real output
D)a higher price level but no change in real output

Question 49

Which assumption is common to the real business cycle theory and the rational expectations model?

A)completely flexibility of wages and prices
B)technological changes resulting in the growth rate of productivity
C)unexpected changes in the money supply causing fluctuations in RGDP
D)labor rates are inflexible downward

Question 50

If the rational expectation theory is accurate, equilibrium real GDP will change in the short run:

A)whenever the aggregate demand curve shifts.
B)only if discretionary fiscal policy is used.
C)only if there is a shift in aggregate demand that could not have been predicted from the information available to the public.
D)only if discretionary monetary policy is used.

Question 51

If a foreign trading partner of the United States increases its budget deficit, raising interest rates in that country:

A)U.S. exports and AD will both tend to rise.
B)U.S. exports and AD will both tend to fall.
C)U.S. exports will increase but AD will be unchanged.
D)there will be an indeterminate effect on U.S. exports and AD.

Question 52

The time span between recognition of the need for a policy change and the legislation being signed into a law is known as:

A)signal lag.
B)implementation lag.
C)impact lag.
D)recognition lag.

Question 53

After legislation is signed into law, the time it takes before actual fiscal stimulus is noticed is termed as:

A)signal lag.
B)implementation lag.
C)impact lag.
D)recognition lag.

Question 54

Rational expectation theory implies that accurately anticipated change in aggregate demand:

A)will increase RGDP in the long run.
B)will affect RGDP and inflation only in the long run.
C)may affect RGDP but not nominal GDP.
D)will tend to be offset by the actions of input suppliers as they react to their inflation expectations.

Question 55

With rational expectations, a policy that would increase AD would lead to:

A)higher inflation and higher real output in the short run.
B)higher inflation and lower real output in the short run.
C)higher inflation and an indeterminate effect on real output in the short run, if people's expectations were correct.
D)higher inflation and no change in real output, if people's expectations were correct.

Question 56

Which of the following is true about time lags and fiscal policy?

A)Changes in federal taxes can be implemented easily by the President without the approval of Congress.
B)Changes in fiscal policy that involves changes in government spending on public works projects do not involve significant time lags.
C)Once an appropriate fiscal policy has been determined it can be implemented quickly.
D)The lag time between when a fiscal policy is needed and when it is actually implemented is considerable.
E)None of the above.

Question 57

Which of the following is true?

A)When increased government purchases or expansionary monetary policy does give the economy a boost, no one knows precisely how long it will take to do so.
B)Given the difficulties of timing stabilization policy, an expansionary monetary policy intended to reduce the severity of a recession may instead add inflationary pressures to an economy that is already overheating.
C)If velocity changes, but it moves in a fairly predictable pattern, the connection between money supply and GDP is still fairly predictable.
D)Economic advisors, even using sophisticated econometric models, cannot forecast what economy will do in the future with a high degree of accuracy.
E)All of the above are true.

Question 58

A smaller crowding-out effect:

A)increases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on net exports.
B)increases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on net exports.
C)decreases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on net exports.
D)decreases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on net exports.

Question 59

Which of the following is false?

A)The multiplier effect of an increase in government purchases implies that the increase in aggregate demand will tend to be greater than the initial fiscal stimulus, other things equal.
B)Expansionary fiscal policy will tend to decrease the demand for dollars relative to other currencies.
C)Big increases and big decreases in real GDP are both lessened by automatic changes in income tax receipts.
D)None of the above are false; all are true.

Question 60

Expansionary fiscal policy can lead to a decline in net exports because:

A)it increases interest rates, increasing the exchange value of the dollar and decreasing net exports.
B)it increases interest rates, decreasing the exchange value of the dollar and decreasing net exports.
C)it decreases interest rates, increasing the exchange value of the dollar and decreasing net exports.
D)it decreases interest rates, decreasing the exchange value of the dollar and decreasing net exports.

Question 61

If expectations are rational, can monetary and fiscal policy makers accurately control the effects their policies have on unemployment?

A)Yes, provided they announce policies in advance.
B)Yes, both policies are effective in altering unemployment in the desired ways.
C)No, because these effects depend on whether and to what extent people are fooled by those policies.
D)No, only fiscal policy can alter unemployment.
E)No, only monetary policy can alter unemployment.

Question 62

If expectations are rational, how can government influence unemployment in a predictable way?

A)with the normal tools, used in the normal fashion
B)with fiscal policy; monetary policy will not work
C)with monetary policy; fiscal policy will not work
D)with surprise changes in policy only
E)with carefully planned and announced changes in policy only

Question 63

Rational expectation theory implies that accurately anticipated change in aggregate demand:

A)will increase RGDP in the short run.
B)will affect RGDP and inflation only in the long run.
C)may affect RGDP but not nominal GDP in the short run.
D)will do none of the above.

Question 64

Critics of rational expectation theory believe:

A)most people are truly not very informed about the effects of a policy change.
B)most people do not adjust their behavior very rapidly to changes in government policies, in part because they are not informed about the effects of policy changes.
C)that wages and prices are not as flexible as the rational expectation theory assumes.
D)all of the above.

Question 65

According to the rational expectation view, does the government have the ability to control the level of real output and unemployment?

A)Only in the SR if it makes unexpected changes in aggregate demand.
B)Only in the SR if it announces plans well in advance, so that expectations are affected.
C)Only in the LR if it shifts AS instead of AD.
D)Only in the LR if it uses monetary policy instead of fiscal policy.

Question 66

Which of the following is false?

A)Rational expectations theory suggests that government economic policies designed to alter aggregate demand to meet macroeconomic goals are of very limited effectiveness, because when policy targets become public, people will alter their own behavior from what it would otherwise have been, and in so doing, they largely negate the intended impact of policy changes.
B)If changes in inflation surprise people, they will have little effect on unemployment or real output in the short run.
C)An unanticipated increase in AD as a result of an expansionary monetary policy stimulates real output and employment in the short run, but an anticipated increase in AD does not.
D)Unanticipated increases in AD expands output and employment in the short run, but only increases the price level in the long run.
E)None of the above are false; all are true.

Question 67

According to the rational expectation view, the government can change real output:

A)with appropriate, well-publicized fiscal and monetary policies.
B)with appropriate, well-publicized fiscal and monetary policies in the short run, but not in the long run.
C)only by making unexpected changes in aggregate demand.
D)without ever affecting the price level.

Question 68

A conclusion of the theory of rational expectations is that, in the short run, the impact of discretionary fiscal policies designed to shift the AD curve will:

A)result in no net change in AD once people's expectations adjustments have been accounted for.
B)shift AD in the opposite direction intended once people's expectations adjustments have been accounted for.
C)be anticipated and compensated for, causing no significant effect on real or nominal GDP or employment.
D)have to be a surprise to change real output in the intended direction.

Question 69

The Taylor rule is an example of:

A)a non-discretionary rule.
B)a discretionary policy.
C)a hybrid - part rule, part discretion.
D)neither a rule nor a discretionary policy.

Question 70

If inflation is underestimated by decision makers in the economy when it is rising, the SRAS curve will tend to be:

A)vertical.
B)horizontal.
C)downward sloping.
D)upward sloping.

Question 71

Rational expectation theory implies that accurately anticipated change in aggregate demand:

A)will increase real GDP in the short run.
B)will affect real GDP and inflation only in the long run.
C)may affect nominal GDP but not real GDP in the short run.
D)will do none of the above.

Question 72

Which of the following is closely associated with activists?

A)external shocks to the economy
B)aggregate demand management
C)policy changes that come as a surprise
D)avoiding supply shocks

Question 73

The real business cycle theorists believe that ____ lead to changes in the growth rate of productivity.

A)technological changes
B)unexpected changes in the money supply
C)changes in fiscal and monetary policies
D)foreign competition

Question 74

Which of the following believe that discretionary monetary policy and discretionary fiscal policy are effective countercyclical policy actions?

A)real business cycle theorists
B)activists
C)new classical economists
D)rational expectations theorists

Question 75

Which of the following observations is not aligned closely with the real business cycle theory?

A)Technological changes lead to changes in the growth of productivity.
B)Positive and negative productivity shocks are the cause of the business cycle.
C)Wages and prices are completely flexible.
D)Unexpected changes in the money supply causes fluctuations in real GDP.

Question 76

If the economy is fully employed, then the inflationary costs of expansionary policy are likely to be:

A)low, and the unemployment gains minimal.
B)low, and the unemployment gains large.
C)high, and the unemployment gains minimal.
D)high, and the unemployment gains large.

Question 77

According to real business cycle theory:

A)a short-term trade-off exists between unemployment and inflation but not a permanent trade-off.
B)economic fluctuations are the result of external negative and positive productivity shocks to the economy.
C)workers and consumers incorporate the likely consequences of government policy changes into their expectations by quickly adjusting wages and prices.
D)the economy will self-correct to the natural rate of unemployment.

Question 78

If the fixed rule is followed and the growth rate is 4 percent per year and the monetary growth rate is 4 percent per year, the average rate of inflation is:

A)8 percent.
B)4 percent.
C)zero.
D)1-2 percent.

Question 79

If the economy has substantial unemployment, then the inflationary costs of expansionary policy are likely to be:

A)low, and the unemployment gains minimal.
B)low, and the unemployment gains large.
C)high, and the unemployment gains minimal.
D)high, and the unemployment gains large.

Question 80

Which of the following statements was probably made by an adherent of rational expectations?

A)It is rational to pursue any full employment policy because more employment is better than less.
B)Unemployment is clearly a case of market failure.
C)Programs designed to stimulate employment will only stimulate the price level with no employment gain.
D)It is inhumane to have a single person unemployed whatever the inflation cost.