Macroeconomics I 110461-1792 Spring Semester 2014/2015 Stabilization Policy (ch. 18) Government Debt and Budget Deficit (ch. 19) The Financial System: Opportunities and Dangers (ch. 20) 1. Active economic policy seeks to do all of the following except: a. offset fluctuations in real GDP. b. use monetary and fiscal policy to shift aggregate demand. c. respond to changing economic conditions. d. take a hands-off approach to macroeconomic policy. 2. Passive economic policy seeks to: a. offset fluctuations in real GDP. b. use monetary and fiscal policy to shift aggregate demand. c. respond to changing economic conditions. d. take a hands-off approach to macroeconomic policy. 3. The lags involved in implementing monetary and fiscal policy are: a. short and predictable. b. long and predictable. c. short and variable. d. long and variable. 4. The time between a shock to the economy and the policy action responding to that shock is called the: a. automatic stabilizer. b. time inconsistency of policy. c. inside lag. d. outside lag. 5. The time between a policy action and its influence on the economy is called the: a. automatic stabilizer. b. time inconsistency of policy. c. inside lag. d. outside lag. 6. Because monetary and fiscal lags are long and variable: a. stronger policies must be used. b. successful stabilization policy is completely impossible.
c. attempts to stabilize the economy are often destabilizing. d. policy must be completely passive. 7. What are two types of tools that economists use to forecast future economic developments? a. leading indicators and computer models b. direct imputations and indirect attributions c. visual assessment and global positioning d. monetary instruments and fiscal instruments 8. The Lucas critique argues that because the way people form expectations is based on government policies, economists predict the effect of a change in policy without taking changing expectations into account. a. partly; cannot b. only partly; can c. in no way; can d. in no way; cannot 9. Policy is conducted by rule if policymakers: a. announce in advance how policy will respond to various situations and commit themselves to following through on this announcement. b. are free to size up the situation case by case and choose whatever policy seems appropriate at the time. c. set policy according to election results, i.e., set policy by rule of the ballot box. d. manipulate policy to ensure both low inflation and unemployment on election day. 10. Policy is conducted by discretion if policymakers: a. announce in advance how policy will respond to various situations and commit themselves to following through on this announcement. b. are free to size up the situation case by case and choose whatever policy seems appropriate at the time. c. announce and maintain a constant growth rate of the money supply. d. announce and achieve a balanced government budget. 11. An argument in favor of allowing discretionary macroeconomic policy is that: a. policymakers may make erratic shifts in policy in response to changing political situations. b. uninformed policymakers may choose incorrect policies. c. the objectives of policymakers may be in conflict with the well-being of the public. d. giving policymakers flexibility will allow them to respond to changing conditions. 12. The political business cycle refers to the: a. pattern of holding primaries, conventions, and general elections every four years. b. cycle of electing U.S. representatives every two years, the U.S. president every four years, and U.S. senators every six years. c. manipulation of the economy to win elections. d. pattern of recession and expansion that follows every election.
13. Monetary policy rules that target nominal variables would target any of the following except the: a. price level. b. money supply c. unemployment rate. d. level of nominal GDP. 14. Unlike a monetarist policy rule, an inflation target has the advantage of: a. eliminating the need to announce the policy target. b. providing a real target rather than a nominal one. c. allowing the central bank unlimited discretion. d. insulating the economy from changes in money velocity. 15. Central-bank independence refers to: a. whether central banks pursue monetary policy by rules or discretion. b. the situation that occurs when the inside lag of monetary policy is not related to the outside lag. c. the extent to which automatic stabilizers are relied on to cushion economic volatility. d. the degree of separation between central-bank decision making and political influence. 16. Countries with greater central-bank independence can achieve lower rates of inflation: a. at the cost of higher levels of unemployment. b. at the cost of slower growth rates of real GDP. c. at the cost of greater volatility of real GDP. d. with no apparent real economic costs. 17. The fact that traditional methods of policy evaluation do not take into account the impact of policy on expectations is known as: a. stabilization policy. b. the political business cycle. c. the Lucas critique. d. Okun's law. 18. Are demographics an important factor when planning the federal budget? a. No, because government spending and taxation policies do not discriminate based on any demographic factors. b. No, because demographics do not change much from year to year. c. No, because federal budgets do not change much from year to year. d. Yes, because government benefits are allocated solely based on demographic factors. e. Yes, because many government benefits are received by the fast-growing elderly population, causing implications for future levels of taxation and government benefits for everyone. 19. The use of government spending and taxes to influence the economy is: a. called fiscal policy. b. called countercyclical policy.
c. called monetary policy. d. initiated through actions of the Federal Reserve. e. only done during times of recession. 20. The use of the money supply to influence the economy is: a. called fiscal policy. b. called countercyclical policy. c. called monetary policy. d. initiated through actions of Congress. e. part of automatic stabilization. 21. Which of the following would be the theoretical outcome of expansionary fiscal policy in the following aggregate demand aggregate supply model? a. The aggregate demand (AD) curve would shift from AD1 to AD2. b. The short-run aggregate supply (SRAS) curve would shift from SRAS2 to SRAS1. c. The SRAS curve would shift from SRAS1 to SRAS2. d. The AD curve would shift from AD1 to AD2 at the same time that the SRAS curve would shift from SRAS1 to SRAS2. e. The AD curve would shift from AD 2 to AD 1. 22. Contractionary fiscal policy occurs when: a. the government decreases spending or increases taxes to slow economic expansion. b. the government decreases spending or decreases taxes to slow economic expansion. c. the government increases spending or increases taxes to slow economic expansion. d. the government increases spending or decreases taxes to stimulate the economy toward expansion. e. the Federal Reserve decreases money supply to stimulate the economy toward expansion. 23. Which of the following would be the theoretical outcome of contractionary fiscal policy in the following aggregate demand aggregate supply model, where LRAS is long-run aggregate supply and SRAS is short-run aggregate supply?
a. The aggregate demand (AD) curve would shift from AD1 to AD2. b. The short-run aggregate supply (SRAS) curve would shift from SRAS2 to SRAS1. c. The SRAS curve would shift from SRAS1 to SRAS2. d. The AD curve would shift from AD1 to AD2 at the same time that the SRAS curve would shift from SRAS1 to SRAS2. e. The AD curve would shift from AD 2 to AD 1. 24. A government might want to reduce aggregate demand if it believes that: a. the economy is in long-run equilibrium. b. the economy is above the natural rate of unemployment. c. the economy is producing below full-employment output. d. the economy is expanding past its long-run capabilities. e. the economy is in a recession. 25. All else being equal, people generally prefer in their financial affairs. a. volatility b. smoothness and predictability c. uncertainty d. government intervention e. ups and downs 26. Countercyclical fiscal policy attempts to: a. smooth out expansions and recessions in the business cycle. b. prevent economies from falling into recession. c. prevent economies from entering into expansion. d. maximize expansions and minimize recessions. e. maximize expansions and maximize recessions. 27. Central banks can use monetary policy to: a. turn prices from inflexible to flexible. b. force private banks to lend out reserves. c. make it easier for people and businesses to borrow. d. print money.
e. steer the economy out of overexpansion. 28. is when a central bank acts to increase the money supply in an effort to stimulate the economy. a. Expansionary monetary policy b. Expansionary fiscal policy c. Contractionary monetary policy d. Contractionary fiscal policy e. Countercyclical monetary policy 29. The two types of monetary policy are: a. monetary and fiscal. b. expansionary and contractionary. c. countercyclical and procyclical. d. positive and negative. e. pro and con. 30. Expansionary monetary policy makes the aggregate demand curve: a. shift to the left. b. become flatter. c. become steeper. d. shift to the right. e. stay static. 31. Expansionary monetary policy: a. lowers interest rates, causing aggregate demand to shift to the right. b. lowers interest rates, causing aggregate demand to shift to the left. c. raises interest rates, causing aggregate demand to shift to the right. d. raises interest rates, causing aggregate demand to shift to the left. e. lowers interest rates, causing short-run aggregate supply to shift to the right. Refer to the following figure to answer the next two questions: 32. According to the figure, expansionary monetary policy will cause an economy that is initially at full-employment output to go from equilibrium to equilibrium in the short run. a. A; C
b. A; B c. A; D d. C; B e. C; D 33. According to the figure, if the economy started at full-employment output, expansionary monetary policy would cause real gross domestic product (GDP) to in the short run. a. increase from Y1 to Y2 b. increase from Y1 to Y3 c. decrease from Y2 to Y1 d. decrease from Y3 to Y2 e. increase from Y 2 to Y 3 34. Injecting new money into the economy eventually causes: a. a recession. b. deflation. c. stagflation. d. unemployment. e. inflation. 35. As the prices of goods and services decrease, the value of money: a. stays the same. b. increases. c. decreases. d. increases initially and then decreases. e. decreases initially and then increases.