Question 1

The political business cycle refers to the:
A)pattern of holding primaries, conventions, and general elections every four years.
B)cycle of electing U.S. representatives every two years, the U.S. president every four years, and U.S. senators every six years.
C)manipulation of the economy to win elections.
D)pattern of recession and expansion that follows every election.

Accepted Answer

The political business cycle refers to the manipulation of the economy to win elections. This may include policies designed to boost the economy in the run-up to elections or a deliberate slowing down of the economy to undermine the opposition's chances.

Question 2

Policymakers may be better able to achieve their goals using a fixed policy rule rather than using discretion if they face the problem of:
A)short and predictable inside lags.
B)time-inconsistent policy.
C)short and predictable outside lags.
D)weak automatic stabilizers.

Accepted Answer

The problem of time-inconsistent policy, where policymakers may not follow through with their stated goals, can be better addressed with a fixed policy rule that removes discretion and ensures consistency. Short and predictable inside or outside lags do not necessarily require a fixed policy rule, and weak automatic stabilizers may be addressed through discretionary actions.

Question 3

Policy is conducted by rule if policymakers:
A)announce in advance how policy will respond to various situations and commit themselves to following through on this announcement.
B)are free to size up the situation case by case and choose whatever policy seems appropriate at the time.
C)set policy according to election results, i.e., set policy by rule of the ballot box.
D)manipulate policy to ensure both low inflation and unemployment on election day.

Accepted Answer

Policy conducted by rule means that policymakers announce in advance how policy will respond to various situations and commit themselves to following through on this announcement. This provides transparency and predictability to the public and stakeholders, which can improve confidence in the policymaking process. Option B, where policymakers are free to choose policies case by case, is known as discretionary policy. Option C is not a clear definition of policy conducted by rule, as election results do not necessarily determine policy in this way. Option D describes policymakers trying to manipulate policy to align with political goals, rather than following a clear rule or guideline.

Question 4

A time-inconsistency problem in macroeconomic policy can occur when the policymaker:
A)is made to follow a strict and an inflexible rule.
B)has discretion in the short run but follows a rule in the long run.
C)has discretion to act as it seems best in each situation, based on his or her own knowledge and experience.
D)has no discretion.

Accepted Answer

The answer of A time-inconsistency problem in macroeconomic policy can...

Question 5

A situation where policymakers have the incentive to deviate from their initial course of action once other agents in the economy have acted is called a(n):
A)rational expectation.
B)outside lag.
C)time inconsistent policy.
D)active policy rule.

Accepted Answer

A time inconsistent policy occurs when policymakers have a short-term incentive to deviate from their original course of action, even if it contradicts their long-term objectives. This occurs when other agents in the economy have already acted, making it more difficult for policymakers to achieve their goals. As a result, policymakers may be tempted to adjust their policy stance to accommodate these changes, leading to inconsistency over time. This is a common problem in monetary policy, where central banks may be tempted to increase inflation expectations in the short-term to boost economic growth, even if it contradicts their long-term goal of price stability.

Question 6

If the Fed has discretion to choose its own policy and announces a policy of low inflation, then:
A)the policymaker is required to make the money supply grow at a low rate.
B)private economic agents are sure to believe the announcement because it is credible.
C)private economic actors are likely to discount the policy because the Fed has an incentive to renege on its policy once expectations are formed.
D)the Fed is certain to renege on its policy once expectations are formed because then it can lower unemployment with minimum inflation.

Accepted Answer

Private economic actors are likely to discount the policy because the Fed has an incentive to renege on its policy once expectations are formed. While the Fed may announce a policy of low inflation, there is no guarantee that they will follow through on this policy, especially if it conflicts with other goals such as boosting employment. Therefore, private economic actors are likely to discount the policy and not fully believe the announcement, leading to potentially mixed or limited effects on the economy.

Question 7

Assume that there is a short-run tradeoff between inflation and unemployment, that the central bank desires both low inflation and low unemployment, and that the central bank follows a fixed rule in conducting monetary policy. Initially, households and firms expect high inflation. Following a credible announcement by the central bank of a low-inflation policy, households and firms will the central bank's announcement and their expectations of inflation.
A)believe; lower
B)not believe; not change
C)believe; not change
D)not believe; lower

Accepted Answer

If the central bank's announcement is credible, then households and firms will believe it and adjust their expectations accordingly. This means that they will expect lower inflation in the future, which should lead to lower inflation in the short run. The short-run tradeoff between inflation and unemployment implies that lower inflation should also lead to higher unemployment in the short run. Therefore, if households and firms believe the central bank's announcement, they will expect both lower inflation and higher unemployment.

Question 8

Policy is conducted by discretion if policymakers:
A)announce in advance how policy will respond to various situations and commit themselves to following through on this announcement.
B)are free to size up the situation case by case and choose whatever policy seems appropriate at the time.
C)announce and maintain a constant growth rate of the money supply.
D)announce and achieve a balanced government budget.

Accepted Answer

Policy conducted by discretion means that policymakers are free to use their judgment and choose the best policy depending on the specific circumstances at the time. This is in contrast to pre-determined policies, such as a constant growth rate of the money supply or a balanced budget, which do not allow for flexibility in response to changing economic conditions.

Question 9

Assume that there is a short-run tradeoff between inflation and unemployment, that the central bank desires both low inflation and low unemployment, and that the central bank uses discretion in conducting monetary policy. Initially, households and firms expect high inflation. Following an announcement by the central bank of a low-inflation policy, households and firms will the central bank's announcement and their expectations of inflation.
A)believe; lower
B)not believe; not change
C)believe; not change
D)not believe; lower

Accepted Answer

Given the context of discretion in monetary policy and an initial expectation of high inflation, households and firms are likely to doubt the central bank's commitment to a low-inflation policy. This skepticism stems from the central bank's past behavior or the lack of a credible commitment mechanism, leading them to maintain their high inflation expectations.

Question 10

Conducting fiscal policy so that G = T + β (u - u ), where G is government expenditures, T is n
Tax revenue, u is the unemployment rate, u
N
Is the natural rate of unemployment, and β is a
Positive number, is an example of a(n):
A)active rule. passive
B)rule. discretionary
C)policy. automatic
D)stabilizer.

Accepted Answer

The answer of Conducting fiscal policy so that G =...

Question 11

When a government honors its debt obligations, this is an example of:
A)discretionary fiscal policy.
B)discretionary monetary policy.
C)a fiscal policy rule.
D)a monetary policy rule.

Accepted Answer

Honoring debt obligations is a component of a fiscal policy rule, which is a specific guideline or framework established by the government to guide fiscal policy decisions. It is not a discretionary policy action that can be changed at the discretion of policymakers. Monetary policy, on the other hand, refers to the actions taken by a central bank to manage the supply of money and interest rates in an economy.

Question 12

A policy rule:
A)must specify money growth at a constant rate.
B)must specify an active policy.
C)must specify a passive policy.
D)may specify either an active or a passive policy.

Accepted Answer

A policy rule can specify either an active or a passive policy depending on the economic objective and circumstances. It does not necessarily have to mandate a constant rate of money growth.

Question 13

If policymakers are free to analyze events as they occur and choose whatever policy seems appropriate at the time, then this is:
A)policy by rule.
B)policy by discretion.
C)monetary policy.
D)fiscal policy.

Accepted Answer

Policymakers who analyze events as they occur and choose policies that seem appropriate at the time are using discretionary policy.

Question 14

If citizens vote on the basis of both low inflation and low unemployment at the time of the election, then presidents might, in order to ensure their reelection:
A)spur inflation soon after their elections, and then cause a recession.
B)stimulate the economy throughout their terms.
C)cause a recession soon after their elections, and then stimulate the economy.
D)run a tight monetary and fiscal policy throughout their terms.

Accepted Answer

The answer of If citizens vote on the basis of...

Question 15

If policymakers announce in advance how policy will respond to various situations and commit themselves to following through on this announcement, this is:
A)policy by rule.
B)policy by discretion.
C)time inconsistent policy.
D)monetary policy.

Accepted Answer

This is known as policy by rule, as policymakers are announcing and committing themselves to follow through on a specific set of rules or guidelines.

Question 16

Conducting fiscal policy so that G = T, where G is government expenditures and T is tax revenue, is an example of a(n):
A)active rule. passive
B)rule. discretionary
C)policy. automatic
D)stabilizer.

Accepted Answer

The answer of Conducting fiscal policy so that G =...

Question 17

As Secretary of the Treasury, Alexander Hamilton opposed the time-inconsistent policy of:
A)repaying the debt.
B)raising taxes.
C)repudiating the debt.
D)reducing taxes.

Accepted Answer

Alexander Hamilton opposed repudiating the debt, which means refusing to pay it back. He believed in honoring the national debt and implementing policies to pay it off over time. Therefore, options A, B, and D are not correct choices as they all involve some form of fiscal responsibility and debt repayment.

Question 18

Conducting monetary policy so that FF rate = inflation+ 0.5 (inflation - 2) + 0.5 (GDP gap), where FF rate is the nominal federal funds interest rate and GDP gap if the percentage shortfall of real GDP from its natural level, is an example of:
A)an active policy rule.
B)a passive policy rule.
C)discretionary policy.
D)an automatic stabilizer.

Accepted Answer

This is an example of an active policy rule because it explicitly sets a target for the federal funds rate based on current economic conditions (inflation and the GDP gap). It does not rely on discretion or automatic stabilizers.

Question 19

The manipulation of the economy to win elections is called:
A)discretionary monetary policy.
B)discretionary fiscal policy.
C)the political business cycle.
D)an automatic stabilizer.

Accepted Answer

The political business cycle refers to the practice of manipulating economic policies to gain electoral advantage. Discretionary monetary and fiscal policies are tools that can be used to achieve this, but they are not specific to the phenomenon of the political business cycle. Automatic stabilizers are policies that activate automatically in response to changes in the economy, without requiring explicit government action, and are typically not used to achieve electoral advantage.

Question 20

Conducting monetary policy so that FF rate = .05 where FF rate is the nominal federal funds interest rate, is an example of :
A)an active policy rule.
B)a passive policy rule.
C)discretionary policy.
D)an automatic stabilizer.

Accepted Answer

Conducting monetary policy to maintain a specific FF rate is an example of a passive policy rule, where the central bank adjusts its policies based on changes in the economy, rather than actively trying to manipulate it.

Quiz 13: Stabilization Policy

The political business cycle refers to the:

Policymakers may be better able to achieve their goals using a fixed policy rule rather than using discretion if they face the problem of:

Policy is conducted by rule if policymakers:

A time-inconsistency problem in macroeconomic policy can occur when the policymaker:

A situation where policymakers have the incentive to deviate from their initial course of action once other agents in the economy have acted is called a(n) :

If the Fed has discretion to choose its own policy and announces a policy of low inflation, then:

Policy is conducted by discretion if policymakers:

Conducting fiscal policy so that G = T + β (u - u ) , where G is government expenditures, T is n Tax revenue, u is the unemployment rate, u N Is the natural rate of unemployment, and β is a Positive number, is an example of a(n) :

When a government honors its debt obligations, this is an example of:

A policy rule:

If policymakers are free to analyze events as they occur and choose whatever policy seems appropriate at the time, then this is:

If citizens vote on the basis of both low inflation and low unemployment at the time of the election, then presidents might, in order to ensure their reelection:

If policymakers announce in advance how policy will respond to various situations and commit themselves to following through on this announcement, this is:

Conducting fiscal policy so that G = T, where G is government expenditures and T is tax revenue, is an example of a(n) :

As Secretary of the Treasury, Alexander Hamilton opposed the time-inconsistent policy of:

Conducting monetary policy so that FF rate = inflation+ 0.5 (inflation - 2) + 0.5 (GDP gap) , where FF rate is the nominal federal funds interest rate and GDP gap if the percentage shortfall of real GDP from its natural level, is an example of:

The manipulation of the economy to win elections is called:

Conducting monetary policy so that FF rate = .05 where FF rate is the nominal federal funds interest rate, is an example of :