Question 1

A good reason for policy makers to pursue a goal of stabilizing economic activity is that ________.
A) high unemployment is always accompanied by high variability of unemployment
B) in a stable economy, there is little or no frictional unemployment
C) in a stable economy, there is little or no structural inflation
D) all of the above
E) none of the above

Accepted Answer

Stabilizing economic activity is pursued for various reasons, but the statements given in options A, B, and C are not universally accurate or direct reasons for policy makers to pursue economic stability. High unemployment does not always correlate with high variability of unemployment, a stable economy can still have frictional unemployment as it's a natural part of the job market, and structural inflation is related to factors other than just economic stability.

Question 2

Which of the following is a likely objective of monetary policy?
A) Achieving a zero inflation gap
B) Stabilizing economic activity
C) avoiding large changes in unemployment
D) all of the above
E) none of the above

Accepted Answer

Monetary policy typically aims to stabilize economic activity, control inflation, and minimize unemployment fluctuations, making all the options listed likely objectives.

Question 3

How do the hierarchical and dual mandates differ in terms of macroeconomic consequences?

Accepted Answer

A dual mandate implies more tolerance of inflation than a hierarchical mandate. Ceteris paribus, the creation and purchasing power of wealth receive more support from a hierarchical mandate. A dual mandate implies less tolerance of positive output gaps and more support for aggregate demand.

Question 4

Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007. Which of the following is a likely result of this financial disruption?
A) The AD curve likely shifted left which caused a positive inflation gap
B) The AD curve likely shifted right which caused a positive inflation gap
C) The AD curve likely shifted left which caused an upward movement along the MP curve to a higher general equilibrium interest rate
D) The AD curve likely did not shift
E) none of the above

Accepted Answer

The answer of Many borrowers defaulted on subprime mortgages ultimately...

Question 5

Some central banks pursue price stability before they pursue other goals. Which of the following central banks have this kind of hierarchical mandate? i. Bank of England
Ii) Bank of Canada
Iii) European Central Bank
Iv) Federal Reserve (U.S.A.)
A) i, ii, and iv only
B) i and iii only
C) i and iv only
D) ii, iii, and iv only
E) none of the above

Accepted Answer

The answer of Some central banks pursue price stability before...

Question 6

Every six weeks, the Federal Open Market Committee (FOMC) meets to discuss monetary policy. This discussion is mainly focused on ________.
A) information of the equilibrium real interest rate from the past three years
B) the current month's release of the CPI by the BLS
C) the three year projections of the equilibrium real interest rate
D) the past 18 month history and future 18 month projections of the discount rate
E) none of the above

Accepted Answer

The FOMC mainly discusses the three year projections of the equilibrium real interest rate during their meetings to decide on monetary policy actions. Option A is incorrect because it only considers past data, whereas the FOMC focuses on future projections. Option B is also incorrect because the CPI only measures inflation, which is only one aspect of monetary policy. Option D is incorrect because the FOMC focuses on the federal funds rate, not the discount rate. Therefore, option C is the best choice.

Question 7

In recent decades, the trend among central banks has been to adopt ________.
A) high employment as a central goal
B) a dual mandate that gives equal weight to both price stability and low unemployment.
C) price stability as a central goal
D) a target of zero inflation
E) none of the above

Accepted Answer

The trend among central banks in recent decades has been to adopt price stability as a central goal. This means that central banks aim to maintain low and stable inflation rates. While some central banks, like the Federal Reserve in the United States, have a dual mandate that gives weight to both price stability and low unemployment, price stability has remained a central goal for most central banks around the world.

Question 8

Every six weeks, the Federal Open Market Committee (FOMC) meets to discuss how to best adjust ________ to accommodate shocks that shift the level of ________.
A) the equilibrium real interest rate; the target Fed Funds rate
B) the target Fed Funds rate; the equilibrium real interest rate
C) the 3 month T-bill rate; the inflation gap
D) target rate of inflation; money demand
E) none of the above

Accepted Answer

The FOMC's primary tool for adjusting the economy is the target Fed Funds rate, which is the interest rate at which banks lend to each other overnight. The equilibrium real interest rate is the rate at which the supply and demand for loanable funds are equal, and it can shift due to various shocks such as changes in productivity and fiscal policy. Therefore, the FOMC adjusts the target Fed Funds rate to accommodate these shifts and keep the economy on track.

Question 9

A change in the equilibrium real interest rate may result from ________.
A) an autonomous monetary policy
B) a change in the central bank's target inflation rate
C) a change in expected inflation
D) all of the above
E) none of the above

Accepted Answer

The answer of A change in the equilibrium real interest...

Question 10

A good reason for policy makers to pursue a goal of stabilizing economic activity is that ________.
A) high inflation is always accompanied by high variability of inflation
B) high unemployment causes human misery and lost output
C) in a stable economy, there is little or no structural inflation
D) all of the above
E) none of the above

Accepted Answer

The answer of A good reason for policy makers to...

Question 11

Frictional unemployment is to ________ as structural unemployment is to ________.
A) search; mismatch
B) temperature; rigidity
C) job training; output gap
D) all of the above
E) none of the above

Accepted Answer

Frictional unemployment refers to the time it takes for workers to search for and find new jobs, while structural unemployment results from a mismatch between the skills workers possess and the skills needed for available jobs.

Question 12

A central bank with a hierarchical mandate will seek ________ as a condition of pursuing other goals.
A) stable inflation
B) high employment
C) moderate interest rates
D) the approval of the legislature
E) none of the above

Accepted Answer

A hierarchical mandate means that one goal is prioritized over others, and in this case, it is likely to be stable inflation. The central bank will prioritize this as a condition for pursuing other goals such as high employment and moderate interest rates.

Question 13

Which of the following is a likely objective of monetary policy?
A) Achieving price stability
B) Stabilizing economic activity
C) Closing the output gap to zero
D) all of the above
E) none of the above

Accepted Answer

Achieving price stability and stabilizing economic activity are both common objectives of monetary policy. Closing the output gap to zero is a more specific objective that may be pursued depending on the circumstances, but it is not always a primary objective.

Question 14

Which of the following is a primary objective of macroeconomic policy?
A) Achieving a zero rate of unemployment
B) Achieving a zero rate of inflation
C) Stabilizing economic activity
D) all of the above
E) none of the above

Accepted Answer

The primary objective of macroeconomic policy is to stabilize economic activity, which refers to managing fluctuations in economic output and employment. While achieving a zero rate of unemployment or inflation may be desirable, they are not necessarily realistic or achievable goals for macroeconomic policy.

Question 15

Ceteris Paribus, if current output has fallen below potential ________.
A) a positive inflation gap will ensue
B) it is likely that the equilibrium real rate has fallen below the policy rate
C) a negative unemployment gap will ensue
D) it is likely that the equilibrium real rate has risen above the policy rate
E) none of the above

Accepted Answer

When current output falls below potential, it often indicates that the equilibrium real interest rate (the interest rate at which the economy would be at its potential output) has fallen below the policy rate set by the central bank. This discrepancy can lead to decreased investment and spending, further suppressing economic activity.

Question 16

Which of the following is a primary objective of monetary policy?
A) Achieving a zero natural rate of unemployment
B) Targeting a zero rate of inflation
C) Achieving price stability
D) all of the above
E) none of the above

Accepted Answer

The primary objective of monetary policy is to achieve price stability, which refers to the stability in the general level of prices of goods and services in an economy over time. While achieving a low natural rate of unemployment and targeting a low rate of inflation are also important, they are not the primary objectives of monetary policy.

Question 17

Shocks to the macroeconomy will cause a change in the equilibrium real interest rate, except ________.
A) permanent supply shocks
B) aggregate demand shocks
C) temporary supply shocks
D) all of the above
E) none of the above

Accepted Answer

The answer of Shocks to the macroeconomy will cause a...

Question 18

Suppose that inflation is at the target rate and output has fallen substantially below potential output. A central bank with a primary objective of price stability should ________.
A) do nothing, because inflation cannot rise when unemployment is high
B) ease monetary policy, to avoid a decrease in the inflation rate
C) do nothing, because stabilizing economic activity is not a primary objective
D) ease monetary policy, because avoiding high unemployment is more important than avoiding high inflation
E) none of the above

Accepted Answer

A central bank with a primary objective of price stability should ease monetary policy when output falls substantially below potential output, to avoid a decrease in the inflation rate. This can help stimulate the economy and get output back to potential levels, without necessarily leading to a rise in inflation if there is still slack in the economy. Doing nothing would risk prolonged economic weakness and potentially even deflation, which could be more damaging to long-term price stability. While stabilizing economic activity may not be the primary objective, it is still important for achieving the central bank's overall mandate. Avoiding high unemployment is also important, but it should not come at the expense of price stability in the long run.

Question 19

The goal of maximum sustainable employment is roughly equivalent to achieving ________.
A) the natural rate of unemployment
B) an inflation target that is slightly above zero
C) the elimination of frictional and structural unemployment
D) all of the above
E) none of the above

Accepted Answer

Maximum sustainable employment refers to the highest level of employment that can be achieved without generating inflationary pressures. In other words, it is the level of employment consistent with the natural rate of unemployment, which is the rate of unemployment that exists when the economy is operating at its potential output and there is no cyclical or demand-deficient unemployment. Therefore, option A is the best choice as it correctly identifies the relationship between maximum sustainable employment and the natural rate of unemployment. Options B and C are incorrect because achieving maximum sustainable employment does not necessarily entail an inflation target that is slightly above zero or the elimination of frictional and structural unemployment. Option D is incorrect because it includes options that are not equivalent to maximum sustainable employment. Option E is also incorrect because it implies that there is no relationship between maximum sustainable employment and any of the given options.

Question 20

The equilibrium real interest rate is the rate ________.
A) at which the output gap is zero
B) at which the inflation rate is low
C) controlled by the central bank
D) all of the above
E) none of the above

Accepted Answer

The equilibrium real interest rate is the rate at which the output gap is zero, meaning the economy is producing at its full capacity without generating inflationary or deflationary pressures.

Quiz 13: Macroeconomic Policy and Aggregate Demand and Supply Analysis

A good reason for policy makers to pursue a goal of stabilizing economic activity is that ________.

Which of the following is a likely objective of monetary policy?

How do the hierarchical and dual mandates differ in terms of macroeconomic consequences?

Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007. Which of the following is a likely result of this financial disruption?

Some central banks pursue price stability before they pursue other goals. Which of the following central banks have this kind of hierarchical mandate? i. Bank of England Ii) Bank of Canada Iii) European Central Bank Iv) Federal Reserve (U.S.A.)

Every six weeks, the Federal Open Market Committee (FOMC) meets to discuss monetary policy. This discussion is mainly focused on ________.

In recent decades, the trend among central banks has been to adopt ________.

Every six weeks, the Federal Open Market Committee (FOMC) meets to discuss how to best adjust to accommodate shocks that shift the level of .

A change in the equilibrium real interest rate may result from ________.

A good reason for policy makers to pursue a goal of stabilizing economic activity is that ________.

Frictional unemployment is to as structural unemployment is to .

A central bank with a hierarchical mandate will seek ________ as a condition of pursuing other goals.

Which of the following is a likely objective of monetary policy?

Which of the following is a primary objective of macroeconomic policy?

Ceteris Paribus, if current output has fallen below potential ________.

Which of the following is a primary objective of monetary policy?

Shocks to the macroeconomy will cause a change in the equilibrium real interest rate, except ________.

Suppose that inflation is at the target rate and output has fallen substantially below potential output. A central bank with a primary objective of price stability should ________.

The goal of maximum sustainable employment is roughly equivalent to achieving ________.

The equilibrium real interest rate is the rate ________.