Questions:
1-A very low rate of inflation during a recession can lead to:
a. government budget surpluses. Incorrect
b. a liquidity trap, which makes monetary policy ineffective.
c. government budget deficits.
d. a liquidity trap, which makes monetary policy effective.
2-Christina is an economist who believes that shifts in aggregate demand cause a change in both real output and the price level. She believes that an economic recession will not necessarily self-correct in the long run, and therefore she believes that active fiscal and monetary policy is justified to smooth out the business cycle. Christina is best described as a:
a. classical economist.
b. monetarist. Incorrect
c. Keynesian economist.
d. supply-side economist.
3-Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the aggregate demand curve would cause a(n):
a. decrease in the level of income. Incorrect
b. increase in the unemployment level.
c. change in the long-run aggregate supply curve.
d. increase in employment, production, and income.
4-Keynes's theory did not endorse the use of monetary policy because:
a. monetary expansions were impossible under a gold standard.
b. under the gold standard, the zero-bound on nominal interest rates did not exist. Incorrect
c. during WW II, the convertibility of the pound sterling into gold was suspended.
d. at the time, the nominal interest rate was very close to zero.
5-Monetarists argue that:
a. fiscal policy should always be used before monetary policy. Incorrect
b. self-correction is less effective than activist monetary policy.
c. the Federal Reserve System should allow the money supply to increase at a slow, steady annual rate.
d. since the velocity of money is unstable, a fixed annual increase in the money supply will exacerbate inflation in the long run.
6-The Great Moderation consensus about macroeconomic policy is that:
a. only monetary policy works against recessions, but fiscal policy is effective only in the long run.
b. expansionary monetary and fiscal policies can both reduce unemployment in the long run. Incorrect
c. discretionary monetary and fiscal policies are effective in the short run and in the long run.
d. expansionary monetary and fiscal policies are both effective in the short run but not in the long run.
7-The Great Moderation consensus regarding the use of monetary or fiscal policy to reduce unemployment in the long run is that:
a. the only effective policy is to maintain a constant growth rate of the money supply.
b. unemployment can be constantly decreased as long as expectations of inflation are kept low. Incorrect
c. the natural rate of unemployment limits what monetary and fiscal policy can accomplish.
d. the concept of the nonaccelerating inflation rate of unemployment, or NAIRU, was a mistake.
8-The theory of rational expectations contends that policy activism is:
a. not warranted, because we don't know enough about the workings of the economy to stabilize it.
b. warranted, because expectations are rational only in the short run. Incorrect
c. warranted, because discretionary policies have a strong effect on real output.
d. not warranted; the public defeats discretionary policies because everyone expects them and therefore their effectiveness is thwarted.
9-Which of the following does NOT represent the broad consensus among macroeconomists?
a. Discretionary fiscal policy can lower the natural rate of unemployment.
b. The central bank should be independent, insulated from political pressures, to avoid a political business cycle.
c. Monetary policy should play the main role in stabilization policy.
d. Discretionary fiscal policy should be used sparingly because of policy lags and the risks of the political business cycle. Incorrect