Question 1

Discretionary policy advocates believe:

Accepted Answer

A)  that there is a high cost associated with the use of a discretionary policy.
B)  that self-corrective forces in an economy work slowly.
C)  that natural adjustments of wages and prices can help attain potential output.
D)  in rational expectations.
E)  that an active stabilization policy imposes troubling fluctuations in the price level and real GDP.

Question 2

Economist Alban William Phillips believed that:

Accepted Answer

A)  the Fed should follow a policy rule because it does not know the lag structure.
B)  the Fed should follow a policy rule to avoid monetary surprises.
C)  there is an inverse relationship between inflation and unemployment.
D)  private sector spending is inherently unstable.
E)  government spending is inherently unstable.

Question 3

According to the rational expectations approach ,if policy makers consistently stimulate aggregate demand when real output falls below the economy's potential output,then people will not be able to anticipate the effects of this policy on the price level,unemployment,and the real output level.
​

Accepted Answer

A) True 
 B)False

Question 4

If an active approach is followed in closing an expansionary gap,_____.

Accepted Answer

A)  the aggregate demand curve would shift rightward
B)  the aggregate demand curve would shift leftward
C)  the short-run aggregate supply curve would shift rightward
D)  the short-run aggregate supply curve would shift leftward
E)  there would be a movement up and to the left along the short-run supply curve

Question 5

Those who prefer a passive approach to the conduct of macroeconomic policy tend to believe that markets are self-correcting.

Accepted Answer

A) True 
 B)False

Question 6

An economy that self-corrects an expansionary gap will experience stagflation.

Accepted Answer

A) True 
 B)False

Question 7

If the time for an economy to self-correct is shorter than the active policy lags,then:

Accepted Answer

A)  active policy should be strengthened.
B)  active policy is likely to destabilize the economy.
C)  time is required to accumulate evidence that the economy is performing below its potential.
D)  the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve.
E)  active policy will work better than passive policy.

Question 8

Both those who favor an active approach as well as those who favor a passive approach to policy believe that the economy can suffer from extreme and long-lasting swings in real GDP.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is not consistent with a self-correcting economy?

Accepted Answer

A)  Falling wages that correct a recessionary gap
B)  Falling prices that correct a recessionary gap
C)  Rising prices that correct an expansionary gap
D)  Tendency of the short-run aggregate supply to shift until it intersects aggregate demand at potential GDP
E)  An active approach to a recession or depression

Question 10

The effectiveness lag for monetary policy is short.

Accepted Answer

A) True 
 B)False

Question 11

The figure below shows the relationship between an economy's potential output,price level,and real GDP.According to those who favor a passive approach to policy,the economy will attain equilibrium at potential output when:

Accepted Answer

A)  the short-run aggregate supply curve shifts to the left.
B)  the short-run aggregate supply curve shifts to the right due to a fall in real wages.
C)  either the money supply or government spending is increased.
D)  either the money supply or government spending is decreased.
E)  aggregate demand is decreased.

Question 12

One implication of the Phillips curve analysis is that:

Accepted Answer

A)  unemployment rates below the natural rate are only possible in the long run.
B)  unemployment rates below the natural rate lead to falling rates of inflation in the long run.
C)  if inflationary expectations are accurate,the economy is on the short-run Phillips curve but not on the long-run Phillips curve.
D)  unemployment rates below the natural rate may be achieved only with rising inflation rates.
E)  the natural rate of unemployment is strictly a short-run phenomenon.

Question 13

The time it takes to identify and examine the nature and seriousness of an economic problem is the _____.

Accepted Answer

A)  activity lag
B)  decision-making lag
C)  effectiveness lag
D)  implementation lag
E)  recognition lag

Question 14

Suppose the economy had been operating along a given short-run Phillips curve for several years and then experienced a year of stagflation.The year of stagflation would:

Accepted Answer

A)  be represented as a move upward along the short-run Phillips curve.
B)  be represented as a move downward along the short-run Phillips curve.
C)  be represented as a point above the short-run Phillips curve.
D)  be represented as a point below the short-run Phillips curve.
E)  correspond to the origin.

Question 15

For those who favor an active approach,public policy changes are necessary to cure a recessionary gap because:

Accepted Answer

A)  the short-run aggregate supply curve will otherwise shift quickly to the right.
B)  prices and wages are flexible downward but not upward.
C)  the required decrease in output can be achieved only by shifting the aggregate demand curve.
D)  real wages must fall in order to increase aggregate supply in the economy.
E)  falling money wages will cause the AD curve to shift leftward unless policy counters this movement.

Question 16

The time required _____ is not a time lag associated with using discretionary policy to correct an economic problem.

Accepted Answer

A)  to recognize the problem
B)  to decide how to handle the problem
C)  to set a policy change in action
D)  for a policy to affect economic variables
E)  to observe public reaction after a policy announcement is made

Question 17

The short-run Phillips curve shows that as the unemployment rate goes down,_____.

Accepted Answer

A)  unemployment benefit payments go up
B)  prices go down
C)  the Phillips curve shifts outward
D)  the inflation rate goes up
E)  there is no change in the rate of inflation

Question 18

Long time lags hamper the effectiveness of economic policy because:

Accepted Answer

A)  people don't want to wait for economic recovery.
B)  the longer unemployment lasts,the more intense inflation becomes.
C)  by the time the impact of a policy is felt,a new problem may have come along that requires a different policy,which may make the economic situation even worse.
D)  if inflation is allowed to continue for too long,it becomes immune to policy interference.
E)  if unemployment is allowed to continue for too long,it becomes immune to policy interference.

Question 19

The short-run Phillips curve is based upon labor contracts that reflect a given expected _____.

Accepted Answer

A)  price level
B)  unemployment level
C)  money supply
D)  aggregate demand
E)  unemployment rate

Question 20

Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy?

Accepted Answer

A)  The recognition lag and the implementation lag
B)  The effectiveness lag and the decision-making lag
C)  The decision-making lag and the implementation lag
D)  The implementation lag and the effectiveness lag
E)  The recognition lag and the effectiveness lag

Exam 16: The Policy Debate: Active or Passive

The time required _____ is not a time lag associated with using discretionary policy to correct an economic problem.

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One implication of the Phillips curve analysis is that:

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The time it takes to identify and examine the nature and seriousness of an economic problem is the _____.

Correct AnswerverifiedShow Answer

The figure below shows the relationship between an economy's potential output,price level,and real GDP.According to those who favor a passive approach to policy,the economy will attain equilibrium at potential output when:

Correct AnswerverifiedShow Answer

Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy?

Correct AnswerverifiedShow Answer

The effectiveness lag for monetary policy is short.

Correct AnswerverifiedShow Answer

For those who favor an active approach,public policy changes are necessary to cure a recessionary gap because:

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Suppose the economy had been operating along a given short-run Phillips curve for several years and then experienced a year of stagflation.The year of stagflation would:

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Economist Alban William Phillips believed that:

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An economy that self-corrects an expansionary gap will experience stagflation.

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Discretionary policy advocates believe:

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Both those who favor an active approach as well as those who favor a passive approach to policy believe that the economy can suffer from extreme and long-lasting swings in real GDP.

Correct AnswerverifiedShow Answer

Those who prefer a passive approach to the conduct of macroeconomic policy tend to believe that markets are self-correcting.

Correct AnswerverifiedShow Answer

If the time for an economy to self-correct is shorter than the active policy lags,then:

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The short-run Phillips curve shows that as the unemployment rate goes down,_____.

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Which of the following is not consistent with a self-correcting economy?

Correct AnswerverifiedShow Answer

According to the rational expectations approach ,if policy makers consistently stimulate aggregate demand when real output falls below the economy's potential output,then people will not be able to anticipate the effects of this policy on the price level,unemployment,and the real output level. ​

Correct AnswerverifiedShow Answer

Long time lags hamper the effectiveness of economic policy because:

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If an active approach is followed in closing an expansionary gap,_____.

Correct AnswerverifiedShow Answer

The short-run Phillips curve is based upon labor contracts that reflect a given expected _____.

Correct AnswerverifiedShow Answer

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According to the rational expectations approach ,if policy makers consistently stimulate aggregate demand when real output falls below the economy's potential output,then people will not be able to anticipate the effects of this policy on the price level,unemployment,and the real output level.

Correct Answer
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