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Name: __________________________ Date: _____________
1.
Economists who view the economy as inherently unstable generally argue that:
A)
stabilization policy is too dangerous to be used.
B)
the economy should be stimulated when it is depressed and slowed when it is overheated.
C)
the economy should be slowed when it is depressed and stimulated when it is overheated.
D)
monetary and fiscal policies should follow rigid rules of constant growth.
2.
Economists who view the economy as naturally stable often argue that:
A)
monetary and fiscal policies should not be used to “fine-tune” the economy.
B)
the economy should be stimulated when it is depressed and slowed when it is overheated.
C)
the economy should be slowed when it is depressed and stimulated when it is overheated.
D)
economists should act to stimulate or slow the economy on the basis of forecasts in order to assure that the policy actions are timely.
3.
All of the following U.S. federal agencies are directly concerned with macroeconomic policy except the:
A)
Council of Economic Advisers.
B)
Congressional Budget Office.
C)
Federal Reserve.
D)
Department of Health and Human Services.
4.
The lawmakers who wrote the Employment Act of 1946 believed that:
A)
the economy was naturally stable.
B)
the Great Depression could not happen again.
C)
without active government policy the Great Depression could occur again.
D)
monetary policy should be conducted according to rules.
5.
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.
6.
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.
7.
Arguments in favor of passive economic policy include all of the following except:
A)
monetary and fiscal policies work with long and variable lags, which can produce destabilizing results.
B)
economic forecasts have too large a margin of error to be useful in formulating stabilization policy.
C)
recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary.
D)
the Great Depression could have been avoided if the Federal Reserve had pursued a policy of steady money growth.
8.
Arguments in favor of active economic policy include all of the following except:
A)
failing to use monetary and fiscal policy leads to inefficient fluctuations in output and employment.
B)
the Great Depression could have been avoided if the Federal Reserve had pursued a policy of steady money growth.
C)
fluctuations in real GDP have been less severe following World War II than prior to World War I.
D)
failure of policymakers to respond to large contractionary shocks to private spending caused the Great Depression.
9.
Increasing government spending when the economy is in a recession is an example of:
A)
active monetary policy.
B)
active fiscal policy.
C)
passive monetary policy.
D)
passive fiscal policy.
10.
Keeping the money supply constant over the business cycle is an example of:
A)
active monetary policy.
B)
active fiscal policy.
C)
passive monetary policy.
D)
passive fiscal policy.
11.
The concerns of economists who favor passive over active policy are most closely associated with their:
A)
preference for using monetary policy rather than fiscal policy for stabilization.
B)
view that policy made by rules is superior to policy made by discretion.
C)
belief that shocks to modern economies are not large enough to require any policy response.
D)
doubt that the correct policy will be implemented at the correct time.
12.
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.
13.
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.
14.
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.
15.
The inside lag is the time:
A)
before automatic stabilizers respond to economic activity.
B)
after automatic stabilizers respond to economic activity.
C)
between a shock to the economy and the policy action responding to the shock.
D)
between a policy action and its influence on the economy.
16.
The outside lag is the time:
A)
before automatic stabilizers respond to economic activity.
B)
when automatic stabilizers are not effective.
C)
between a shock to the economy and the policy action responding to the shock.
D)
between a policy action and its influence on the economy.
17.
Fiscal policy has a relatively long ______ lag, and monetary policy has a relatively long ______ lag.
A)
inside; outside
B)
outside; inside
C)
inside; inside
D)
outside; outside
18.
The lag between the time that economic stimulus is needed and the time that a tax cut is passed by Congress is an example of a:
A)
fiscal inside lag.
B)
fiscal outside lag.
C)
monetary inside lag.
D)
monetary outside lag.
19.
The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a:
A)
fiscal inside lag.
B)
fiscal outside lag.
C)
monetary inside lag.
D)
monetary outside lag.
20.
The time between when a recession begins and when the central bank lowers interest rates to stimulate aggregate demand is an example of an:
A)
inside lag of monetary policy.
B)
outside lag of monetary policy.
C)
inside lag of fiscal policy.
D)
outside lag of fiscal policy.
21.
The time between when government spending increases and when aggregate demand starts to increase is an example of an:
A)
inside lag of monetary policy.
B)
outside lag of monetary policy.
C)
inside lag of fiscal policy.
D)
outside lag of fiscal policy.
22.
Advocates of passive policy argue that because monetary and fiscal policy lags are:
A)
short and fixed, these policies should not be used to offset shocks.
B)
long and variable, these policies should not be used to offset shocks.
C)
short and fixed these, policies should be used to offset shocks.
D)
long and variable these, policies should be used to offset shocks.
23.
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.
24.
All of the following could be considered automatic stabilizers except:
A)
transfer payments that increase during recessions.
B)
discretionary changes in taxes.
C)
a system of unemployment insurance.
D)
the federal income tax.
25.
Automatic stabilizers:
A)
require congressional action before each time that they are put into effect.
B)
have no outside lag.
C)
have no inside lag.
D)
have long and variable inside lags.
26.
Policies that stimulate or depress the economy without any deliberate policy change are called:
A)
leading indicators.
B)
time-inconsistent policies.
C)
rational expectations policies.
D)
automatic stabilizers.
27.
Which of the following is an example of a fiscal policy that has no inside lag?
A)
a decrease in income tax rates
B)
an ongoing unemployment insurance program
C)
an increase in government spending for job training
D)
a reduction in the age at which people become eligible for retirement benefits
28.
The long and variable lag before a policy influences the economy makes the job of economic forecasters:
A)
impossible.
B)
easier.
C)
less important.
D)
more important.
29.
Computer models of the economy:
A)
usually consist of only a few equations.
B)
require no assumptions about monetary and fiscal policy.
C)
require assumptions about monetary and fiscal policy.
D)
give excellent predictions regardless of assumptions about monetary and fiscal policy.
30.
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
31.
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
32.
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.
33.
If people's expectations of inflation are formed rationally rather than based on adaptive expectations and if policymakers make a credible policy move to reduce inflation, then the costs of reducing inflation will be ______ traditional estimates of the sacrifice ratio.
A)
much higher than
B)
much lower than
C)
exactly equal to
D)
approximately two percent greater than
34.
According to advocates of rational expectations, traditional estimates of the sacrifice ratio are unreliable because they:
A)
ignore inside lags.
B)
overestimate outside lags.
C)
are based on adaptive expectations.
D)
are time inconsistent.
35.
According to the Lucas critique, when economists evaluate alternative policies they must take into consideration:
A)
how the policies will affect expectations and behavior.
B)
whether the policy will offset the impact of automatic stabilizers.
C)
the stage of the political business cycle in which the policy is to be implemented.
D)
the length of the inside lags associated with the policies.
36.
If past policies kept the economy insulated from shocks to aggregate demand and supply, the historical evidence would support using:
A)
active macroeconomic policy only.
B)
passive macroeconomic policy only.
C)
either active or passive macroeconomic policy.
D)
neither active nor passive macroeconomic policy.
37.
If past economic fluctuations resulted from inept economic policies, then the historical evidence would support using:
A)
active macroeconomic policy only.
B)
passive macroeconomic policy only.
C)
either active or passive macroeconomic policy.
D)
neither active nor passive macroeconomic policy.
38.
The differing interpretations of the historical record of the Great Depression provide support for using:
A)
active macroeconomic policy only.
B)
passive macroeconomic policy only.
C)
either active or passive macroeconomic policy.
D)
neither active nor passive macroeconomic policy.
39.
According to Christina Romer, the reduction in real economic volatility in the period since World War II compared to the period before World War I is the result of improved economic:
A)
policy.
B)
performance.
C)
data.
D)
forecasting.
40.
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.
41.
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.
42.
If policymakers announce in advance how policy will respond to various situations and commit themselves to following through on this announcement, this is:
A)
policy by rule.
B)
policy by discretion.
C)
time inconsistent policy.
D)
monetary policy.
43.
If policymakers are free to analyze events as they occur and choose whatever policy seems appropriate at the time, then this is:
A)
policy by rule.
B)
policy by discretion.
C)
monetary policy.
D)
fiscal policy.
44.
A policy rule:
A)
must specify money growth at a constant rate.
B)
must specify an active policy.
C)
must specify a passive policy.
D)
may specify either an active or a passive policy.
45.
Conducting fiscal policy so that G = T, where G is government expenditures and T is tax revenue, is an example of a(n):
A)
active rule.
B)
passive rule.
C)
discretionary policy.
D)
automatic stabilizer.
46.
Conducting fiscal policy so that G = T + b (u – un), where G is government expenditures, T is tax revenue, u is the unemployment rate, un is the natural rate of unemployment, and b is a positive number, is an example of a(n):
A)
active rule.
B)
passive rule.
C)
discretionary policy.
D)
automatic stabilizer.
47.
Conducting monetary policy so that the FF rate = p + 0.5(p – 2) + 0.5 (GDP gap), where the FF rate is the nominal federal funds interest rate, p is the annual inflation rate, and GDP gap is the percentage shortfall of real GDP from its natural level, is an example of :
A)
an active policy rule.
B)
a passive policy rule.
C)
discretionary policy.
D)
an automatic stabilizer.
48.
Conducting monetary policy so that the FF rate = 0.05, where the FF rate is the nominal federal funds interest rate, is an example of :
A)
an active policy rule.
B)
a passive policy rule.
C)
discretionary policy.
D)
an automatic stabilizer.
49.
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.
50.
If citizens vote on the basis of both low inflation and low unemployment at the time of the election, then presiden
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