Question 1

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

Accepted Answer

Achieving an unemployment rate below the natural rate typically requires an expansionary monetary policy, which involves higher monetary growth, not low. The expectation of high inflation alone does not dictate the need for low monetary growth to reduce unemployment below its natural rate.

Question 2

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

Accepted Answer

The growth in the money supply is related to monetary policy, which is conducted by the central bank. Fiscal policy, which involves government spending and taxation, can also have an impact on the money supply through its effect on the economy as a whole. Therefore, fiscal and monetary policies are not completely independent of each other.

Question 3

The only difference between adaptive and rational expectations is that the theory of adaptive expectations assumes economic agents to be irrational.

Accepted Answer

The theory of adaptive expectations does not assume economic agents to be irrational, but instead assumes that agents base their expectations on past experiences and make adjustments over time as those experiences change. Rational expectations, on the other hand, assume that economic agents have all available information and make rational predictions based on that information.

Question 4

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

Accepted Answer

In the long run, exploiting the short-run trade-off between inflation and unemployment can lead to higher inflation expectations without reducing unemployment, as per the Phillips Curve. This can result in stagflation, harming the economy.

Question 5

A fiscal policy that changes over time as economic conditions change is considered to be time inconsistent.

Accepted Answer

A time inconsistent fiscal policy is one that may be optimal at one point in time, but becomes sub-optimal as economic conditions change. This can lead to a lack of credibility and consistency in the policy, which can ultimately lead to negative economic outcomes.

Question 6

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

Accepted Answer

This statement is incorrect. According to the Phillips curve, there is an inverse relationship between inflation and unemployment. If the inflation rate is above the expected level, it usually indicates that the economy is overheating and demand for goods and services is high, leading to a low unemployment rate.

Question 7

The pursuit of low unemployment rates must necessarily result in time-inconsistent government policies.

Accepted Answer

The pursuit of low unemployment rates may lead to policies that provide short-term benefits but have long-term consequences, such as unsustainable levels of government spending or inflation. These policies may become time-inconsistent, meaning that they are no longer optimal or feasible to implement in the long run. As a result, achieving low unemployment rates may require trade-offs and difficult choices that cannot be sustained over time.

Question 8

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

Accepted Answer

This is because if the Fed continually pursues low-money-growth policies, it will result in lower inflation rates and eventually lead to lower nominal wages and prices in the long run as economic agents adjust their expectations accordingly.

Question 9

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

Accepted Answer

The natural rate of unemployment is the rate at which there is no cyclical unemployment, and the economy is operating at full employment. If the Fed aims to achieve a lower unemployment rate than the natural rate, it may need to follow expansionary policies that could lead to inflation in the long run. However, because of the time inconsistency problem, the Fed may be tempted to pursue more expansionary policies than it originally intended, leading to higher inflation and lower long-term economic growth.

Question 10

If the Fed follows a high-growth monetary policy, but workers believe that the policy is time inconsistent, then low-wage contracts will be in force and unemployment will decline.

Accepted Answer

The answer of If the Fed follows a high-growth monetary...

Question 11

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

Accepted Answer

Regulation Q limited interest rates on deposits, which restricted banks' ability to attract deposits and led to disintermediation, ultimately not benefiting banks or reducing market volatility.

Question 12

According to the theory of rational expectations, the economy always remains at the natural rate of unemployment, irrespective of policy changes.

Accepted Answer

The theory of rational expectations suggests that although policy changes can't systematically manipulate real economic variables like unemployment in the long run (due to people's ability to anticipate policy effects), the economy does not always remain at the natural rate of unemployment. Short-term fluctuations around the natural rate can occur due to unexpected policy changes or other shocks.

Question 13

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

Accepted Answer

More stable macroeconomic policy, such as through consistent and predictable monetary and fiscal policy, can help reduce the volatility of real output by promoting economic stability and minimizing disruptions to economic activity.

Question 14

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

Accepted Answer

The introduction of a new currency alone is not sufficient to achieve a permanent reduction in the inflation rate. Other measures such as fiscal and monetary policies must also be implemented to ensure long-term price stability.

Question 15

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

Accepted Answer

Fiscal deficit refers to the state of government spending exceeding its revenue. To finance this deficit, often the government will resort to printing more money which results in an increase in the base money in the economy. Therefore, a higher fiscal deficit would require a higher increase in base money to finance it.

Question 16

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

Accepted Answer

The hypothesis of political business cycles is based on the assumption that politicians manipulate economic policies in order to maximize their chances of winning elections, rather than on the assumption that a vertical Phillips curve always holds.

Question 17

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

Accepted Answer

A recessionary real shock, such as a decrease in productivity or an increase in oil prices, leads to a reduction in aggregate supply in the short run, shifting the SRAS curve to the left. This increase in costs leads to higher prices and a lower quantity of output, causing an outward shift of the short-run Phillips curve.

Quiz 14: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, and Sources of Business Cycles