Question 1

Which of the following is a valid concern about the national debt for a country whose debt is held entirely by its citizens?

Accepted Answer

A)   The welfare of future generations will be directly related to the per-capita size of the national debt that they inherit.
B)   Growth of the national debt will eventually lead to the bankruptcy of the government.
C)   When the debt comes due, future generations may be unable to pay it off.
D)   If the increases in the national debt reduce private expenditures on capital formation, future generations may have lower incomes because they will inherit a smaller stock of capital.

Question 2

The rational expectations hypothesis indicates that people

Accepted Answer

A)   pay little attention to policy when forming their expectations about the future.
B)   expect the next period to be pretty much like the recent past, regardless of policy changes.
C)   will always be able to forecast the future accurately.
D)   change their expectations about the future if policy changes.

Question 3

From a public choice viewpoint, the persistent budget deficits of recent decades are

Accepted Answer

A)   surprising, because politicians have a strong incentive to balance the government's budget.
B)   an expected result, because the political incentive structure makes it attractive for politicians to levy taxes rather than spend on current programs.
C)   surprising, because politicians have a strong incentive to run budget surpluses and thereby indicate that their actions have generated a profit.
D)   an expected result, because the political incentive structure makes it attractive for politicians to spend on current programs rather than levy taxes.

Question 4

Under adaptive expectations, the short-term effect of an unanticipated shift to a more expansionary macroeconomic policy will be a

Accepted Answer

A)   temporary reduction in the unemployment rate.
B)   permanent reduction in the unemployment rate.
C)   temporary reduction in the inflation rate.
D)   permanent reduction in the inflation rate.

Question 5

Which of the following best reflects the nonactivist view of stabilization policy?

Accepted Answer

A)   Monetary and fiscal policies exert little impact on the economy.
B)   Discretionary policy changes often make matters worse.
C)   Fiscal policy should be used to help stabilize the economy; monetary policy should not.
D)   Expansionary monetary policy is the primary source of rapid economic growth.

Question 6

According to the modern expectational Phillips curve, unemployment will temporarily fall below the natural rate of unemployment when

Accepted Answer

A)   any inflation is present.
B)   inflation turns out to be lower than what people expected.
C)   inflation turns out to be higher than what people expected.
D)   inflation turns out to be equal to what people expected.

Question 7

Under the adaptive expectations hypothesis, which of the following is the most likely long-run effect of a move to a more expansionary monetary policy?

Accepted Answer

A)   higher prices and no change in real output
B)   higher prices and expansion in real output
C)   no change in prices but an expansion in real output
D)   no change in either prices or real output

Question 8

The proponents of adaptive expectations believe that

Accepted Answer

A)   there will be a substantial time lag before people anticipate the effects of a shift to a more expansionary macro-policy.
B)   macro-policies that stimulate demand and place upward pressure on the general level of prices will temporarily increase output and employment.
C)   discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.
D)   all of the above are true.

Question 9

Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more expansionary policy is in order?

Accepted Answer

A)   Commodity prices are falling, and the dollar is appreciating.
B)   Commodity prices are rising, and the dollar is appreciating.
C)   Commodity prices are rising, and the dollar is depreciating.
D)   Commodity prices are falling, and the dollar is depreciating.

Question 10

As measured by amount of time spent in recession, the ups and downs of the U.S. economy were

Accepted Answer

A)   less frequent during 1983-2015.
B)   less frequent during 1960-1982.
C)   less frequent during 1910-1959.
D)   more frequent during 1983-2015.

Question 11

According to the theory of rational expectations, errors in predicting inflation will

Accepted Answer

A)   be biased upward more often than not.
B)   be purely random.
C)   tend to be biased downward when inflation is rising, and tend to be biased upward when inflation is falling.
D)   tend to be biased upward when inflation is rising, and tend to be biased downward when inflation is falling.

Question 12

Which of the following is a widely-used and closely-watched forecasting tool concerning the future direction of the macro-economy?

Accepted Answer

A)   the excess reserves of commercial banks
B)   the Phillips curve
C)   the index of leading indicators
D)   the current budget deficit or surplus
E)   the velocity of the M1 money supply

Question 13

The rational expectations theory indicates that expansionary policy will

Accepted Answer

A)   stimulate real output in the long run but not in the short run.
B)   expand real output and employment if the public quickly anticipates the effects of the expansionary policy.
C)   equalize real and nominal interest rates during lengthy periods of inflation.
D)   fail to increase employment because individuals will anticipate it and take actions that will offset its impact.

Question 14

When the effects of a more expansionary macroeconomic policy are quickly and accurately anticipated, the policy will

Accepted Answer

A)   increase inflation without reducing unemployment.
B)   increase unemployment while exerting little impact on inflation.
C)   decrease unemployment while exerting little impact on inflation.
D)   fail to exert a significant impact on either unemployment or inflation.

Question 15

If indicators like weak demand and falling commodity prices caused concern about deflation (falling prices) , what could the Fed do to head off the deflationary threat?

Accepted Answer

A)   increase the reserve requirements imposed on banks
B)   buy bonds in order to expand the money supply
C)   increase the discount rate
D)   increase the national debt

Question 16

Activists believe that

Accepted Answer

A)   discretionary changes in macroeconomic policy can help smooth the ups and downs of the business cycle.
B)   balancing the federal budget is of primary importance to economic stability.
C)   the economy's self-correcting mechanism, if not stifled by perverse policies, will prevent prolonged periods of high unemployment.
D)   the M1 money supply should be increased at a steady annual rate.

Question 17

A decrease in a broad index of commodity prices suggests to the Fed that

Accepted Answer

A)   money is plentiful, and the Fed should conduct restrictive policy.
B)   money is plentiful, and the Fed should conduct expansionary policy.
C)   deflation is a potential future danger, and the Fed should conduct expansionary policy.
D)   future prices will likely increase, and the Fed should conduct expansionary policy.

Question 18

Why are the bonds held by the Fed and government agencies excluded from the privately held debt figures?

Accepted Answer

A)   The U.S. Treasury does not have to pay off these bonds.
B)   These bonds were not issued by the U.S. Treasury.
C)   These bonds do not create a net-interest obligation for the federal government.
D)   These bonds are not interest-bearing bonds.

Question 19

Economic analysis suggests that countercyclical macro-policy will

Accepted Answer

A)   be difficult to time properly because of uncertainty about the future direction of the economy.
B)   be difficult to implement because we do not know whether monetary policy is transmitted through the interest rate, or whether it affects aggregate demand directly.
C)   reduce the natural rate of unemployment when macro-policy is persistently expansionary.
D)   help reduce economic instability if, and only if, we are willing to tolerate double-digit inflation.

Question 20

Under which of the following conditions will the actual rate of unemployment tend to rise above the natural rate of unemployment?

Accepted Answer

A)   Prices are stable and have been for the last four years.
B)   Inflation is 3 percent and was widely anticipated more than a year ago.
C)   Expansionary monetary policies lead to an unexpected increase in inflation from 3 percent to 7 percent.
D)   Restrictive monetary policies lead to an unexpected reduction in inflation from 6 percent to 2 percent.

Exam 15: Stabilization Policy, Output, and Employment

Which of the following best reflects the nonactivist view of stabilization policy?

Correct AnswerverifiedShow Answer

Which of the following is a widely-used and closely-watched forecasting tool concerning the future direction of the macro-economy?

Correct AnswerverifiedShow Answer

Under the adaptive expectations hypothesis, which of the following is the most likely long-run effect of a move to a more expansionary monetary policy?

Correct AnswerverifiedShow Answer

Under adaptive expectations, the short-term effect of an unanticipated shift to a more expansionary macroeconomic policy will be a

Correct AnswerverifiedShow Answer

The proponents of adaptive expectations believe that

Correct AnswerverifiedShow Answer

As measured by amount of time spent in recession, the ups and downs of the U.S. economy were

Correct AnswerverifiedShow Answer

When the effects of a more expansionary macroeconomic policy are quickly and accurately anticipated, the policy will

Correct AnswerverifiedShow Answer

Economic analysis suggests that countercyclical macro-policy will

Correct AnswerverifiedShow Answer

The rational expectations hypothesis indicates that people

Correct AnswerverifiedShow Answer

According to the modern expectational Phillips curve, unemployment will temporarily fall below the natural rate of unemployment when

Correct AnswerverifiedShow Answer

The rational expectations theory indicates that expansionary policy will

Correct AnswerverifiedShow Answer

Activists believe that

Correct AnswerverifiedShow Answer

From a public choice viewpoint, the persistent budget deficits of recent decades are

Correct AnswerverifiedShow Answer

A decrease in a broad index of commodity prices suggests to the Fed that

Correct AnswerverifiedShow Answer

If indicators like weak demand and falling commodity prices caused concern about deflation (falling prices) , what could the Fed do to head off the deflationary threat?

Correct AnswerverifiedShow Answer

Which of the following is a valid concern about the national debt for a country whose debt is held entirely by its citizens?

Correct AnswerverifiedShow Answer

Under which of the following conditions will the actual rate of unemployment tend to rise above the natural rate of unemployment?

Correct AnswerverifiedShow Answer

According to the theory of rational expectations, errors in predicting inflation will

Correct AnswerverifiedShow Answer

Why are the bonds held by the Fed and government agencies excluded from the privately held debt figures?

Correct AnswerverifiedShow Answer

Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more expansionary policy is in order?

Correct AnswerverifiedShow Answer

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