Chapter 16
____ 1.
When self-correcting forces cure a contractionary gap,
a.
money wages and real wages both increase
b.
money wages remain constant while real wages fall
c.
money wages and real wages both decrease
d.
money wages fall while real wages increase
e.
real wages must increase regardless of what happens to money wages
____ 2.
According to the active policy position, eliminating a contractionary gap
a.
can only be achieved by decreasing wages
b.
requires a public policy of wage and price controls
c.
should be accomplished by stimulating aggregate demand
d.
will increase unemployment
e.
will cause a recession
____ 3.
If the advice of those who favor a passive approach to policy is correct, how would a contractionary gap eventually close?
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 upward along the aggregate demand curve.
____ 4.
To favor a passive approach to policy is to believe that the private sector is
a.
relatively stable and both wages and prices adjust quickly to eliminate excess supply or excess demand for labor
b.
basically unstable, although both wages and prices adjust quickly to eliminate excess supply or excess demand for labor
c.
relatively stable, although both wages and prices tend to be very sticky downward
d.
basically unstable and both wages and prices tend to be very sticky downward
e.
so stable that wages and prices rarely change
____ 5.
Which of the following is consistent with an active approach to policy?
a.
The natural rate of unemployment is uncertain.
b.
Wages and prices adjust relatively quickly.
c.
The short-run aggregate supply curve is slow to shift in the presence of a contractionary gap.
d.
The size of the multiplier is irrelevant.
e.
Self-correction lags are not a problem.
____ 6.
If self-correction works, a policy that continually increases aggregate demand will
a.
have a strong impact on GDP
b.
cause permanent inflation
c.
eventually cause the SRAS curve to shift to the right
d.
have relatively large impact on GDP
e.
will cause inflation to continually diminish
____ 7.
The formulation of active policy is
a.
made easier if the natural unemployment rate can be easily calculated
b.
made easier if the natural unemployment rate cannot be easily calculated
c.
made more difficult if the natural unemployment rate can be easily calculated
d.
made more difficult if the natural unemployment rate cannot be easily calculated
e.
done without considering the natural unemployment rate because such a policy focuses on rules to follow in any unemployment situation
____ 8.
Long lags make discretionary policy less effective because
a.
in the long run, we shall all be dead
b.
by the time the impact of a policy is felt, the problem it was meant to cure may have been corrected
c.
lags are longer in contractions than in expansions
d.
lags are longer in expansions than in contractions
e.
automatic stabilizers are subject to longer lags than are discretionary policies
____ 9.
Policy makers may not know that the economy is in a recession until six months after the recession starts; this is a phenomenon known as the
a.
implementation lag
b.
policy coordination problem
c.
decision-making lag
d.
recognition lag
e.
effectiveness lag
____ 10.
Those who favor an active approach to policy believe that
a.
discretionary monetary policy cannot be used to help the economy since monetary policy lags are long
b.
discretionary fiscal policy cannot be used to help the economy since fiscal policy lags are long
c.
lags associated with implementing policies are too long and unstable for discretionary policy to be effective
d.
despite the lags involved, implementing discretionary policy is preferable to inaction
e.
none of the above
____ 11.
Which of the following is not a valid criticism of discretionary fiscal policy?
a.
Implementation of fiscal policy is sometimes difficult.
b.
Time lags in fiscal policy are long.
c.
Fiscal policy works only during periods of stagflation.
d.
Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income.
e.
Fiscal policy might have undesirable long-term effects on aggregate supply.
____ 12.
Economists of the rational expectations school believe that expansionary monetary policy is fully effective only if
a.
the policy is anticipated by workers and firms
b.
aggregate supply shifts to the left
c.
the economy is operating at or above its potential output level
d.
policy makers follow through on their previously announced plans
e.
the policy is totally unexpected
____ 13.
Some economists believe that when workers and firms come to expect an expansionary monetary policy and the resulting inflation,
a.
they act so as to prevent the inflation from occurring
b.
their actions lead to a further increase in output
c.
the expansionary monetary policy will have no effect on either output or employment
d.
the monetary authority will be forced to cancel its planned expansionary policy
e.
both output and employment will increase even more than was originally planned
____ 14.
The Fed is not completely independent because
a.
Congress could rewrite the laws that created the Fed
b.
it relies heavily on Congressional appropriations
c.
the president sits on the Board of Governors
d.
Congress must approve any new monetary policy
e.
the president must approve any new monetary policy
____ 15.
International evidence suggests that
a.
contrary to theory, there is little relationship between inflation and money supply growth
b.
the countries with the most independent central banks are the countries with the lowest inflation rates
c.
contrary to theory, there is little relationship between central bank independence and price stability
d.
the countries with the least independent central banks are the countries with the lowest inflation rates
e.
the most independent central banks are in Spain and Italy
____ 16.
In general, the Fed has not embraced a fixed-growth-rate monetary policy because
a.
its adoption would cost them their jobs
b.
no influential economists have yet come out in favor of it
c.
the Fed has to answer to Congress, and Congress is not in favor of it
d.
the Fed prefers active fiscal policy
e.
they believe the economy is too complex and too changeable to make such a policy work consistently
____ 17.
The inflation associated with the oil embargoes of the 1970s resulted in
a.
reduced unemployment because aggregate demand increased
b.
reduced unemployment because aggregate demand fell
c.
increased unemployment because aggregate demand increased
d.
increased unemployment because aggregate demand fell
e.
increased unemployment because aggregate supply fell
____ 18. If the economy in Exhibit 16-4 is initially at point c and aggregate demand decreases, the economy will (in the long run)
a.
move toward point a
b.
move toward point b
c.
stay at point c
d.
move toward point d
e.
move toward point f
____ 19.
Current thinking on the Phillips curve suggests that it would be best for policy makers to
a.
focus on controlling unemployment
b.
stimulate permanent shifts in aggregate supply
c.
focus on controlling inflation
d.
stimulate permanent shifts in aggregate demand
e.
develop a two-pronged policy to control both unemployment and inflation
____ 20.
An important implication of the natural rate hypothesis is that the government policy that results in low inflation is generally the optimal long-run policy
a.
only if there is no cyclical unemployment in the short run
b.
only if there is no structural unemployment in the short run
c.
regardless of concerns about unemployment
d.
regardless of concerns about currency exchange rates
e.
only if the dollar's exchange rate is stable
BUSC 1A QUIZ 13 Answers
1. ANS: C DIF: Hard TOP: Closing a Contractionary Gap
2. ANS: C DIF: Moderate TOP: Closing a Contractionary Gap
3. ANS: C DIF: Moderate TOP: Closing a Contractionary Gap
4. ANS: A DIF: Easy TOP: Closing a Contractionary Gap
5. ANS: C DIF: Moderate TOP: Closing a Contractionary Gap
6. ANS: B DIF: Hard TOP: Problems with Active Policy
7. ANS: D DIF: Easy TOP: Problems with Active Poli
8. ANS: B DIF: Moderate TOP: The Problem of Lags
9. ANS: D DIF: Moderate TOP: The Problem of Lags
10. ANS: D DIF: Easy TOP: A Review of Policy Perspectives
11. ANS: C DIF: Hard TOP: A Review of Policy Perspectives
12. ANS: E DIF: Hard TOP: Monetary Policy and Expectations
13. ANS: C DIF: Moderate TOP: Anticipating Monetary Policy
14. ANS: A DIF: Moderate TOP: Policy Credibility
15. ANS: B DIF: Moderate TOP: CASE STUDY: Central Bank Independence and Price Stability
16. ANS: E DIF: Moderate TOP: Rules and Rational Expectations
17. ANS: E DIF: Moderate TOP: The Phillips Curve
18. ANS: E DIF: Moderate TOP: The Long-Run Phillips Curve
19. ANS: C DIF: Moderate TOP: The Long-Run Phillips Curve
20. ANS: C DIF: Moderate TOP: The Natural Rate Hypothesis
