Question 1

A common example of indexing in the United States is:
A)​annual bonuses to workers.
B)​wage increases with seniority.
C)​30-year fixed-rate mortgage loans.
D)​escalator clauses tied to the CPI in wage agreements.

Accepted Answer

Escalator clauses tied to the Consumer Price Index (CPI) in wage agreements are a common example of indexing in the United States. This means that the wage increases are automatically adjusted based on changes in the CPI, allowing the workers to maintain their purchasing power even as inflation increases.

Question 2

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.

Accepted Answer

The theory of rational expectations suggests that people have rational expectations and will use all available information to make decisions. This means that people will anticipate the effects of macroeconomic policies and change their behavior accordingly. As a result, macroeconomic policies may not have the intended impact on the economy. Therefore, the theory of rational expectations leads to pessimistic conclusions regarding macroeconomic policy's ability to achieve its intended economic goals.

Question 3

Which of the following is closely associated with activists?
A)​external shocks to the economy
B)​aggregate demand management
C)​policy changes that come follow fixed rules
D)​avoiding supply shocks

Accepted Answer

Activists are typically associated with aggregate demand management as they advocate for active government intervention to stabilize the economy through fiscal and monetary policies.

Question 4

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 GDP or employment if people's anticipations are correct.
D)​have to be anticipated to change real output in the intended direction.

Accepted Answer

According to the theory of rational expectations, people will anticipate and adjust their behavior in response to any discretionary fiscal policies designed to shift the AD curve. As a result, once people's anticipations are correct, the impact of such policies will be nullified or diminished, causing no significant effect on real GDP or employment. Therefore, choice C is the best answer.

Question 5

If the public has correct rational expectations and the Fed increases both reserve requirements and the discount rate, it would be expected to result in:
A)​a higher level of real output and a lower price level.
B)​a lower price level but no change in real output.
C)​a higher price level and a reduced level of real output.
D)​a higher price level but no change in real output.

Accepted Answer

The answer of If the public has correct rational expectations...

Question 6

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.

Accepted Answer

The answer of A conclusion of the theory of rational...

Question 7

A conclusion of the theory of rational expectations is that, in the short run, the impact of a correctly anticipated fiscal policy designed to decrease AD 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)​decrease the price level.
D)​result in no change in the price level.

Accepted Answer

The answer of A conclusion of the theory of rational...

Question 8

The intent of indexing is to:
A)​reduce inflation gradually.
B)​shift the long-run Phillips curve to the right.
C)​take most of the sting out of inflation.
D)​raise tax revenue automatically during inflation.

Accepted Answer

Indexing is a method to adjust prices or wages automatically in response to changes in inflation. Therefore, its intent is to mitigate the impact of inflation by reducing its effect on real incomes and savings, which takes most of the sting out of inflation. It does not aim to reduce inflation, shift the long-run Phillips curve, or raise tax revenue automatically.

Question 9

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.

Accepted Answer

According to the rational expectation theory, people base their expectations of future economic conditions on all available information. Therefore, any shift in aggregate demand that could not have been predicted from the information available to the public would be the only situation in which equilibrium real GDP would change in the short run. The other options (A, B, and D) suggest changes in aggregate demand that could be anticipated by the public, so they would not cause a short-run change in equilibrium real GDP according to this theory.

Question 10

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.

Accepted Answer

The Taylor rule is considered a hybrid because it provides a systematic method for adjusting interest rates in response to changes in economic conditions (like inflation or output gaps), but it also allows for some discretion in its application by central banks.

Question 11

According to the Taylor rule, the Fed should:
A)​lower the fed funds rate by 2.0% if inflation rises 1.0% above its target of 1.0%.
B)​raise the fed funds rate by 2.0% if inflation rises 1.0% above its target of 1.0%.
C)​lower the fed funds rate by 0.5% if inflation rises 1.0% above its target of 2.0%.
D)​raise the fed funds rate by 0.5% if inflation rises 1.0% above its target of 2.0%.

Accepted Answer

The answer of According to the Taylor rule, the Fed...

Question 12

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.

Accepted Answer

Changes in inflation affect people's perception of the real value of their nominal wages. When inflation is higher than expected, the real wages decline, leading to a decrease in the aggregate supply. This, in turn, results in higher prices and lower output. As a result, unexpected inflation can lead to lower employment and GDP in the short run.

Question 13

If the public has correct rational expectations and the Fed reduces both reserve requirements and the discount rate, it would be expected to result in:
A)​a higher level of real output and a lower price level.
B)​a lower price level but no change in real output.
C)​a higher price level and a reduced level of real output.
D)​a higher price level but no change in real output.

Accepted Answer

Reducing reserve requirements and the discount rate typically increases the money supply, leading to higher price levels. With rational expectations, real output remains unchanged as people anticipate these effects.

Question 14

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.

Accepted Answer

The answer of If people have rational expectations and correctly...

Question 15

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.

Accepted Answer

Critics of rational expectation theory argue that people may not have enough information or be able to adjust their behavior quickly enough to match the predictions of the theory. They also argue that wages and prices may not be as flexible as the theory assumes, which can lead to unexpected outcomes when policies are implemented. Therefore, all of the above options are valid criticisms of the theory.

Question 16

If the public has correct rational expectations and the Fed reduces the level of banking reserves, it would be expected to result in:
A)​a higher level of real output and a lower price level.
B)​a lower price level but no change in real output.
C)​a higher price level and a reduced level of real output.
D)​a higher price level but no change in real output.

Accepted Answer

If the public has correct rational expectations, they would anticipate a decrease in the money supply due to the reduction in banking reserves. The decrease in the money supply would lead to a decrease in aggregate demand, which would result in a lower price level. However, there would be no change in real output, as the reduction in banking reserves would not directly affect the supply side of the economy.

Question 17

According to the Taylor rule, the Fed should:
A)​lower the fed funds rate by 0.5% if RGDP increases 1.0% over potential GDP.
B)​raise the fed funds rate by 0.5% if RGDP increases 1.0% over potential GDP.
C)​raise the fed funds rate by 1.0% if RGDP increases 0.5% over potential GDP.
D)​raise the fed funds rate by 2.0% if RGDP increases 0.5% over potential GDP.

Accepted Answer

According to the Taylor rule, when real GDP exceeds potential GDP, the Fed should raise the federal funds rate. The rule suggests that the federal funds rate should be increased by 0.5% for every 1 percentage point increase in real GDP above potential GDP. So, if RGDP increases 1.0% over potential GDP, the Fed should raise the fed funds rate by 0.5%.

Question 18

Which of the following believe that discretionary monetary policy and discretionary fiscal policy are effective countercyclical policy actions? activists
A)​rule advocates
B)​activists
C)​new classical economists
D)​rational expectations theorists

Accepted Answer

Activists believe in the use of discretionary monetary policy and discretionary fiscal policy to stabilize the economy during economic downturns. Rule advocates argue for a rules-based approach to monetary and fiscal policy, while new classical economists and rational expectations theorists believe that such policies are ineffective in the long run.

Question 19

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.

Accepted Answer

Rational expectations theory suggests that individuals use all available information to make forecasts and therefore cannot be systematically fooled by policy changes, including fiscal policy. This implies that people adjust their behavior in anticipation of policy effects, limiting the ability of such policies to manipulate economic outcomes like employment and inflation in the long term.

Question 20

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 decrease 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.

Accepted Answer

If people have rational expectations, they will anticipate the decrease in aggregate demand and adjust their production accordingly, leading to an increase in short-run aggregate supply. This increase in output will maintain full employment, despite the decrease in demand. Therefore, option B is correct. The other options are incorrect, as they do not take into account the rational expectations of individuals in the economy.

Quiz 19: Measuring Economic Performance

A common example of indexing in the United States is:

Which of the following is false?

Which of the following is closely associated with activists?

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:

If the public has correct rational expectations and the Fed increases both reserve requirements and the discount rate, it would be expected to result in:

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 conclusion of the theory of rational expectations is that, in the short run, the impact of a correctly anticipated fiscal policy designed to decrease AD will:

The intent of indexing is to:

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

The Taylor rule is an example of:

According to the Taylor rule, the Fed should:

Which of the following is false?

If the public has correct rational expectations and the Fed reduces both reserve requirements and the discount rate, it would be expected to result in:

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:

Critics of rational expectation theory believe:

If the public has correct rational expectations and the Fed reduces the level of banking reserves, it would be expected to result in:

According to the Taylor rule, the Fed should:

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

According to rational expectations theory:

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 decrease in aggregate demand will result in: