Question 1

Figure 15-2 
-In Figure 15-2,suppose the economy is currently at an equilibrium at point C.Applying rational expectations theory,what will happen if the Bank of Canada announces that it is decreasing the money supply?

Accepted Answer

A)  the price level will increase
B)  real GDP per year will increase
C)  real GDP per year will decrease
D)  the price level will decreaseE) C) and D)
F) All of the above

Question 2

Parliament passing that mandates a balanced budget every year is an example of

Accepted Answer

A)  active policymaking.
B)  decisive policymaking.
C)  nondiscretionary policymaking.
D)  cooperative policymaking.E) B) and D)
F) None of the above

Question 3

An increase in employment insurance and other transfer payments may

Accepted Answer

A)  increase the natural rate of unemployment.
B)  increase the number of discouraged workers.
C)  reduce the rate of inflation at every level of unemployment.
D)  lead to less unanticipated inflation.E) A) and B)
F) A) and C)

Question 4

Economists Milton Friedman and E.S.Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policymakers because

Accepted Answer

A)  economic participants routinely incorporate changes in the inflation rate into their expectations.
B)  economic participants are not rational,and therefore act unpredictably to any policy change.
C)  unemployment levels and the inflation rate have a clear,positive relationship.
D)  unemployment levels and the inflation rate have a negative (inverse) relationship.E) All of the above
F) B) and C)

Question 5

If a policy is carried out by a rule,then we have an example of

Accepted Answer

A)  active policymaking.
B)  discretionary policymaking.
C)  nondiscretionary policymaking.
D)  natural policymaking.E) B) and C)
F) A) and B)

Question 6

The natural rate of unemployment is defined as the rate of unemployment that

Accepted Answer

A)  prevails in long-run macroeconomic equilibrium,when all workers and employers have fully adjusted to any changes in the economy.
B)  prevails in the short-run macroeconomic equilibrium,before workers and employers have had a chance to adjust to an economic shock.
C)  exists due to welfare and employment benefits that reduce potential workers' incentives to find work.
D)  exists only during periods of recession or depression in the economy.E) None of the above
F) B) and D)

Question 7

According to the rational expectations model,the attempt by the government to reduce unemployment below its natural rate through expansionary policies will

Accepted Answer

A)  succeed in the short run and can succeed in the long run as long as the government makes it clear what its goals are.
B)  succeed because the government knows how people will react to their policies and will adjust their policies accordingly.
C)  fail because people will figure out what the government is doing and alter their expectations and their behaviour in ways that counteract the government policy.
D)  fail because the economy can never achieve an unemployment rate below the natural level.E) None of the above
F) A) and D)

Question 8

Suppose the government abolished the minimum wage law,we would expect to see

Accepted Answer

A)  a decline in the natural rate of unemployment.
B)  an increase in claims for unemployment benefits.
C)  the duration of unemployment to increase.
D)  a recession.E) A) and B)
F) None of the above

Question 9

According to the work of Phillips,what Type of relationship was believed to exist between unemployment and inflation?

Accepted Answer

It was believed to be an inver...

Question 10

The rational expectations model is associated with

Accepted Answer

A)  the view that monopoly is widespread in modern industrial economies.
B)  monetarists.
C)  Keynesian economics.
D)  the new classical model.E) A) and B)
F) C) and D)

Question 11

Figure 15-4 
-In Figure 15-4,if C is the initial equilibrium point and there is an unanticipated decrease in aggregate demand from A D₂ to A D₁,then

Accepted Answer

A)  the new short run equilibrium will be at point B.
B)  the new long run equilibrium will be at point B.
C)  the new short run equilibrium will be at point D.
D)  real GDP per year will fall below Q₁.E) A) and D)
F) B) and C)

Question 12

The Federal Government initiates a contractionary monetary policy that is correctly anticipated by economic agents in the economy.The result is

Accepted Answer

A)  decreased prices,but no change in real national income.
B)  decreased prices and decreased real national income in the short run,but only decreased prices in the long run.
C)  decreased real national income in the short run and decreased prices in the long run.
D)  decreased real national income and prices in both the short run and the long run.E) None of the above
F) C) and D)

Question 13

The rate of unemployment below which the rate of inflation tends to rise and above which the rate of inflation tends to fall is called.

Accepted Answer

A)  structural unemployment.
B)  extraneous inflation rate.
C)  the unemployment rate.
D)  the NAIRU.E) B) and C)
F) B) and D)

Question 14

Use an aggregate demand and aggregate supply framework to illustrate why the existence of stickiness in prices would be extremely important for predicting the potential effects of policy actions on real GDP.

Accepted Answer

It should contain a graph as in 15-14 al...

Question 15

Rational expectations theory suggests that short-run stabilization policy

Accepted Answer

A)  is best achieved with monetary policy.
B)  is best achieved with fiscal policy.
C)  is equally easy to achieve with monetary or fiscal policy.
D)  should not be attempted.E) All of the above
F) A) and B)

Question 16

Critics of the Phillips curve contend that in the long run

Accepted Answer

A)  there is a trade-off between unemployment and inflation.
B)  for any given unemployment level there is a corresponding inflation rate to which the economy will automatically revert.
C)  employees are not able to anticipate future rates of inflation,and therefore unemployment can always be reduced by inflating the economy.
D)  there is no useful trade-off between inflation and unemployment because workers' expectations adjust to any systematic attempts to reduce unemployment below the natural rate.E) B) and D)
F) All of the above

Question 17

A Phillips curve shows

Accepted Answer

A)  the relationship between the rate of interest and planned investment.
B)  the relationship between the money supply and the price level.
C)  that an increase in government spending will decrease real national income.
D)  that an increase in inflation may be associated with a decrease in the rate of unemployment.E) A) and C)
F) A) and B)

Question 18

A Phillips curve shows the relationship between

Accepted Answer

A)  unemployment and inflation.
B)  unemployment and real national income.
C)  the interest rate and planned investment.
D)  money demand and the rate of interest.E) A) and B)
F) None of the above

Question 19

If cyclical unemployment is negative,then

Accepted Answer

A)  the actual unemployment rate is below the natural rate of unemployment.
B)  the natural rate of unemployment is getting smaller.
C)  there have been some errors in classifying the Type of unemployment experienced by some people.
D)  structural unemployment must be increasing.E) A) and B)
F) A) and C)

Question 20

Monetary and fiscal policymaking that is carried out in response to a pre-set rule,and which does not respond to changes in economic activity,is known as

Accepted Answer

A)  active policymaking.
B)  discretionary policymaking.
C)  nondiscretionary policymaking.
D)  Keynesian policymaking.E) B) and C)
F) C) and D)

Exam 15: Issues in Stabilization Policy

According to the work of Phillips,what Type of relationship was believed to exist between unemployment and inflation?

Correct AnswerverifiedIt was believed to be an inver...View AnswerShow Answer

Figure 15-2 -In Figure 15-2,suppose the economy is currently at an equilibrium at point C.Applying rational expectations theory,what will happen if the Bank of Canada announces that it is decreasing the money supply?

Correct AnswerverifiedShow Answer

Parliament passing that mandates a balanced budget every year is an example of

Correct AnswerverifiedShow Answer

Rational expectations theory suggests that short-run stabilization policy

Correct AnswerverifiedShow Answer

Figure 15-4 -In Figure 15-4,if C is the initial equilibrium point and there is an unanticipated decrease in aggregate demand from A D₂ to A D₁,then

Correct AnswerverifiedShow Answer

According to the rational expectations model,the attempt by the government to reduce unemployment below its natural rate through expansionary policies will

Correct AnswerverifiedShow Answer

Monetary and fiscal policymaking that is carried out in response to a pre-set rule,and which does not respond to changes in economic activity,is known as

Correct AnswerverifiedShow Answer

The rational expectations model is associated with

Correct AnswerverifiedShow Answer

If a policy is carried out by a rule,then we have an example of

Correct AnswerverifiedShow Answer

The natural rate of unemployment is defined as the rate of unemployment that

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The rate of unemployment below which the rate of inflation tends to rise and above which the rate of inflation tends to fall is called.

Correct AnswerverifiedShow Answer

Use an aggregate demand and aggregate supply framework to illustrate why the existence of stickiness in prices would be extremely important for predicting the potential effects of policy actions on real GDP.

Correct AnswerverifiedIt should contain a graph as in 15-14 al...View AnswerShow Answer

Suppose the government abolished the minimum wage law,we would expect to see

Correct AnswerverifiedShow Answer

The Federal Government initiates a contractionary monetary policy that is correctly anticipated by economic agents in the economy.The result is

Correct AnswerverifiedShow Answer

An increase in employment insurance and other transfer payments may

Correct AnswerverifiedShow Answer

Economists Milton Friedman and E.S.Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policymakers because

Correct AnswerverifiedShow Answer

Critics of the Phillips curve contend that in the long run

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A Phillips curve shows the relationship between

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A Phillips curve shows

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If cyclical unemployment is negative,then

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It was believed to be an inver...
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It should contain a graph as in 15-14 al...
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