Question 1

Econometric models of the U.S.economy generally agree
A)on the quantitative impact of monetary policy over a horizon of several years.
B)that an increase in money growth will increase output in the short run.
C)that an increase in money growth will decrease output in the short run.
D)that an increase in money growth will decrease output in the long run.
E)that "rational expectations" is the best way to generate policy forecasts.

Accepted Answer

Econometric models generally agree that an increase in money growth will increase output in the short run, reflecting the idea that more money in the economy stimulates spending and investment, leading to higher demand and output.

Question 2

To solve the "time inconsistency" problem in macro policy,a nation may well have to
A)restrict itself in the present from taking certain policy moves in the future.
B)lift all restrictions on future policy moves.
C)present policy moves to the public,for example,in a referendum.
D)use the courts to settle policy disputes.
E)make the central bank more responsive to the popular will.

Accepted Answer

Restricting present policy moves can help to prevent the temptation of making short-term decisions that could have negative long-term consequences. This can promote consistency and stability in macro policy over time.

Question 3

The idea that the economy operates like a complicated,predictable machine is an important aspect of
A)game theory.
B)attrition theory.
C)the theory of strategic interaction.
D)time inconsistency theory.
E)optimal control theory.

Accepted Answer

The idea of the economy operating like a predictable machine is central to optimal control theory, which seeks to find the best way to control and manage economic systems. Game theory, attrition theory, the theory of strategic interaction, and time inconsistency theory are all also important in economics, but they do not specifically focus on the predictability of the economy as a machine.

Question 4

Once people believe the Fed's commitment to keep unemployment at the natural rate,the Fed can reduce unemployment below the natural rate
A)in both the short run and the long run.
B)in both the short run and the long run,but only after changing peoples' expectations.
C)in the long run,but not the short run.
D)in the short run,but not in the long run.
E)none of the above

Accepted Answer

The Fed can reduce unemployment below the natural rate in the short run by increasing aggregate demand, but in the long run, expectations adjust, and the natural rate of unemployment prevails, making such a reduction unsustainable.

Question 5

For this question,assume that the there exists uncertainty about the impact of monetary policy on the macroeconomy.Given this information,it would be most appropriate for the central bank to increase money growth
A)at the midpoint of a recession.
B)by more than the increase that will yield the desired response.
C)by less than the increase that will yield the desired response.
D)by an amount equal to the increase that will yield the desired response.
E)only after it is certain that the economy has entered a recession.

Accepted Answer

Given the uncertainty about the impact of monetary policy on the macroeconomy, it is prudent for the central bank to be cautious. Increasing money growth by less than the increase that will yield the desired response allows for adjustments based on observed effects, minimizing potential negative outcomes from overestimation.

Question 6

Suppose we compare the average growth rates of output for Republican and Democratic administrations.In which year,on average,is the difference in growth rates for Republican and Democratic administrations greatest?
A)first
B)second
C)third
D)fourth
E)the growth rates are nearly identical for both parties

Accepted Answer

The answer of Suppose we compare the average growth rates...

Question 7

In the United States,presidential elections occur every four years.If a political business cycle exists in the United States,in which year of a presidential term,all else fixed,would we expect output growth to be highest?
A)the first year
B)the second year
C)the third year
D)the fourth year

Accepted Answer

The answer of In the United States,presidential elections occur every...

Question 8

The existence of the time inconsistency problem in macro policy suggests which of the following?
A)use fiscal and monetary policy to fine tune the economy.
B)reduce the independence of the central bank.
C)appoint someone who is more conservative (economically)than the rest of the government to head the central bank.
D)intervene frequently in the foreign exchange market.
E)eliminate rational expectations from econometric models used for forecasting.

Accepted Answer

Appointing a conservative central bank head can help mitigate the time inconsistency problem by committing to low inflation policies, thus enhancing credibility and reducing the temptation to deviate from long-term goals for short-term gains.

Question 9

In macroeconomics,game theory focuses on the strategic interactions between which of the following groups of agents?
A)individuals; firms
B)individuals and firms; policy makers
C)policy makers; economic forecasters
D)individuals and firms; economic forecasters

Accepted Answer

Game theory in macroeconomics primarily focuses on the strategic interactions between individuals and firms on one side and policy makers on the other. This is because both groups make decisions that affect the overall economy, and their actions and reactions to each other's strategies can significantly influence economic outcomes.

Question 10

One surprising insight from viewing policy as a "game" is that
A)central bankers should project an image of being conservative on economic policy matters,regardless of their personal views.
B)it is more difficult to control inflation when the central bank is highly independent.
C)uncertainty over the impact of policy makes little difference in designing an optimal policy.
D)money growth has little or no impact on inflation in the long run.
E)decreasing money growth may substantially increase the rate of inflation in the long run.

Accepted Answer

Viewing policy as a "game" suggests that central bankers must consider the perceptions and beliefs of others involved in the game (e.g. market participants, politicians, other central bankers) in addition to their own personal views. projecting an image of being conservative on economic policy matters is a strategic move that can help build credibility and trust in the central bank's ability to control inflation.

Question 11

Research indicates that the more independent the central bank,
A)the smaller the budget deficit.
B)the higher the nominal interest rate.
C)the lower the rate of inflation.
D)the larger the time inconsistency problem in making policy.
E)the greater the likelihood of a "war of attrition" over policy.

Accepted Answer

Research suggests that an independent central bank is better able to control inflation as it is less susceptible to political pressure to pursue expansionary policies. Hence, the more independent the central bank, the lower the rate of inflation.

Question 12

All of the macroeconometric models currently in use
A)originate in the United States.
B)incorporate rational expectations into their predictions.
C)originate with government or international agencies.
D)originate with commercial firms who sell their forecasts to other firms and governments.
E)none of the above

Accepted Answer

Macro econometric models come from a variety of sources including the United States, but not exclusively. They also vary in their incorporation of rational expectations and their origins, which can be academic institutions, government or international agencies, and commercial firms, among others.

Question 13

In which of the following political systems would a political business cycle be more likely to occur?
A)a democracy with elections that occur on a regular basis
B)a parliamentary
C)communist-type economies
D)socialist-type economies
E)a democracy with elections that occur on an irregular basis

Accepted Answer

The answer of In which of the following political systems...

Question 14

In 1994,Republicans introduced their "Contract with America." This plan
A)included a PAYGO rule.
B)would restrict the ability of monetary policy to affect the economy in the short run.
C)included a line item veto.
D)would make the Federal Reserve even more independent than it already is.
E)all of the above

Accepted Answer

The Contract with America included a line item veto, which would allow the President to strike individual items from spending bills. However, it did not include a PAYGO rule or a proposal to restrict monetary policy. While Republicans generally support greater independence for the Federal Reserve, this specific proposal was not part of their Contract with America.

Question 15

Which of the following is the most powerful argument for putting restraints on policy makers (as opposed to self-restraint by policy makers themselves)?
A)time inconsistency
B)uncertainty about Okun's coefficient
C)uncertainty about the natural rate of unemployment
D)uncertainty about the timing of policy impacts
E)disagreements about the proper structure of an econometric model

Accepted Answer

Time inconsistency is the most powerful argument for putting restraints on policy makers. This is because policy makers may be tempted to prioritize short-term gains over long-term welfare, leading to suboptimal policy outcomes. By placing constraints on policy makers, such as independent central banks or fiscal rules, the temptation for short-term gains is reduced, leading to better policy outcomes in the long run. The other options are not as compelling as time inconsistency in arguing for the need for restraints on policy makers.

Question 16

Which of the following statements is true about the United States over the past fifty years?
A)there is no evidence of political business cycles in the United States
B)the debt-to-GDP ratio has been roughly constant
C)under either party,output growth has been generally higher in the year preceding an election than in other years
D)none of the above

Accepted Answer

Historically, there has been evidence of political business cycles in the United States, where economic growth tends to be higher in the year preceding an election, often due to expansionary fiscal or monetary policies.

Question 17

Given the uncertainty about the effects of macro policy,economists generally propose that
A)macro policies should be more active,the lower the level of unemployment or inflation.
B)changes in money growth should only be used for fine tuning the economy,not for correcting large imbalances (such as high inflation).
C)money growth should be set at zero by constitutional amendment.
D)elected officials should have more input in the determination of monetary policy.
E)none of the above

Accepted Answer

Given the uncertainty about the effects of macro policy, there isn't a consensus among economists that any of the specific strategies listed (A-D) should be universally applied. The effectiveness and appropriateness of these strategies can vary significantly depending on the economic context, making "none of the above" the correct choice.

Question 18

Which of the following best defines time inconsistency?
A)the increasing inaccuracy of econometric models as the time horizon becomes longer.
B)the tendency for the rise in output to be greater in the early years of a president's term,and smaller in the later years.
C)the effects of political electoral cycles on the business cycle.
D)the tendency for policy makers to deviate from a pre-announced optimal policy once agents in the economy have adjusted their behavior and expectations based on the pre-announced policy
E)the effect of economic uncertainty on short-run stabilization policy.

Accepted Answer

Time inconsistency refers to the deviation of policy makers from a pre-announced optimal policy once agents in the economy have adjusted their behavior and expectations based on the pre-announced policy. This behavior is known as time inconsistency because the optimal policy that is announced in advance becomes inconsistent with the policy that policy makers actually implement in the future. This tends to happen because policy makers have an incentive to renege on their promises in order to achieve some other objective that becomes more important to them later on.

Question 19

In the United States,presidential elections occur every four years.If a political business cycle exists in the United States,in which year of a presidential term,all else fixed,would we expect output growth to be lowest?
A)the first or second year
B)the second or third year
C)the third or fourth year
D)the fourth year

Accepted Answer

In the context of a political business cycle, output growth is often expected to be lowest in the first or second year of a presidential term. This is because newly elected officials may implement contractionary policies early in their term to address inflation or other issues, allowing time for the economy to recover and for expansionary policies to boost growth closer to the next election.

Question 20

During which of the following decades was the debt-to-GDP ratio generally highest in the United States?
A)1930s
B)1940s
C)1960s
D)1980s
E)1990s

Accepted Answer

The debt-to-GDP ratio was generally highest in the United States during the 1940s, primarily due to the massive borrowing to finance World War II.

Quiz 22: Should Policy Makers Be Restrained

Econometric models of the U.S.economy generally agree

To solve the "time inconsistency" problem in macro policy,a nation may well have to

The idea that the economy operates like a complicated,predictable machine is an important aspect of

Once people believe the Fed's commitment to keep unemployment at the natural rate,the Fed can reduce unemployment below the natural rate

For this question,assume that the there exists uncertainty about the impact of monetary policy on the macroeconomy.Given this information,it would be most appropriate for the central bank to increase money growth

Suppose we compare the average growth rates of output for Republican and Democratic administrations.In which year,on average,is the difference in growth rates for Republican and Democratic administrations greatest?

In the United States,presidential elections occur every four years.If a political business cycle exists in the United States,in which year of a presidential term,all else fixed,would we expect output growth to be highest?

The existence of the time inconsistency problem in macro policy suggests which of the following?

In macroeconomics,game theory focuses on the strategic interactions between which of the following groups of agents?

One surprising insight from viewing policy as a "game" is that

Research indicates that the more independent the central bank,

All of the macroeconometric models currently in use

In which of the following political systems would a political business cycle be more likely to occur?

In 1994,Republicans introduced their "Contract with America." This plan

Which of the following is the most powerful argument for putting restraints on policy makers (as opposed to self-restraint by policy makers themselves) ?

Which of the following statements is true about the United States over the past fifty years?

Given the uncertainty about the effects of macro policy,economists generally propose that

Which of the following best defines time inconsistency?

In the United States,presidential elections occur every four years.If a political business cycle exists in the United States,in which year of a presidential term,all else fixed,would we expect output growth to be lowest?

During which of the following decades was the debt-to-GDP ratio generally highest in the United States?