Economics Questions Chapter 34-36

If a central bank were required to target inflation at zero, then when there was a negative aggregate supply shock the central bank

would have to decrease the money supply. This would move unemployment further from the natural rate

Which of the following is correct?

Economic forecast are imprecise and aggregate spending responds to interest rate changes with a lag.

Tax laws do not give preferential treatment to some kinds of retirement saving

False

Although monetary policy cannot reduce the natural rate of unemployment, other types of government policies can

True

Forward-looking parents can reverse the adverse effects of government debt by saving more and leaving a larger bequest to their children

True

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion

True

Samuelson and Solow believed that the Phillips curve offered policymakers a menu of possible economic outcomes

True

The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output

True

Which of the following models imply that a decrease in the money supply reduces unemployment temporarily but not permanently?

both the long-run Phillips curve and the aggregate supply and aggregate demand model

If people eventually adjust their inflation expectations so that in the long run actual and expected inflation are the same, then policymakers

can exploit a tradeoff between inflation and unemployment in the short run but not in the long run.

The principal reason that monetary policy has lags is that it takes a long time for

changes in the interest rate to change aggregate demand

Permanent tax cuts shift the AD curve

farther to the right than do temporary tax cuts.

A program to reduce inflation is likely to have higher costs if the sacrifice ratio is

high and the reduction is unexpected

Policymakers following a "lean against the wind" policy would

increase government expenditures when output is low and decrease them when output is high.

From 1993-2001 the U.S. economy experienced

relatively low inflation and unemployment rates.

The Federal Reserve

requires little time to change policy but aggregate demand responds slowly.

In the long run, a decrease in the money supply growth rate

shifts the short-run Phillips curve left so unemployment returns to its natural rate

The political business cycle refers to

the potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected

Monetary Policy in Southland In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years. Refer to Monetary Policy in Southland. Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but it actually raises inflation to 30%. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then

unemployment falls, but it would have fallen less if people had been expecting 25% inflation

Monetary Policy in Southland In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years. Refer to Monetary Policy in Southland. Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then

unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.

Monetary Policy in Southland In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years. Refer to Monetary Policy in Southland. Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then

unemployment rises, but it would have risen more if people had been expecting 25% inflation

In his famous article published in an economics journal in 1958, A.W. Phillips

used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate

Which of the following statements generates the greatest amount of disagreement among economists? a. In the long run, increases in the money supply increase prices, but not output. b. Recessions are associated with decreases in consumption, investment, and employment. c. Government should use fiscal policy to try to stabilize the economy. d. Increases in the money supply shift aggregate demand to the right.

Government should use fiscal policy to try to stabilize the economy

Which of the following is correct according to the long-run Phillips curve

Monetary policy cannot change the natural rate of unemployment, but other government policies can

In theory the severity of recessions can be diminished with

an increase in government spending, which the length of the political process can delay

According to liquidity preference theory, a. an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand rightward. b. an increase in the interest rate increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand leftward. c. an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right. d. an increase in the price level increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand leftward.

an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right

Proponents of tax-law changes to encourage saving would

argue that corporate tax rates should be decreased

A tax increase has

both a crowding out and multiplier effect

Other things the same, which of the following responses would we expect to result from an decrease in U.S. interest rates? a.U.S. citizens decide to hold more foreign bonds. b. People choose to hold more currency. c. You decide to purchase a new oven for your cookie factory. d. all of the above

d. (All of the above are correct)

People are likely to want to hold more money if the interest rate a. decreases, making the opportunity cost of holding money rise. b. increases, making the opportunity cost of holding money rise. c. increases, making the opportunity cost of holding money fall. d. decreases, making the opportunity cost of holding money fall.

decreases, making the opportunity cost of holding money fall

Which among the following assets is the most liquid

deposits that can be withdrawn using ATMs

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by a. decreasing the money supply, which lowers interest rates. b. increasing the money supply, which lowers interest rates. c. decreasing the money supply, which raises interest rates. d. increasing the money supply, which raises interest rates

increasing the money supply, which lowers interest rates.

Changes in the interest rate bring the money market into equilibrium according to a. classical theory, but not liquidity preference theory. b. both liquidity preference theory and classical theory. c. neither liquidity preference theory nor classical theory. d. liquidity preference theory, but not classical theory.

liquidity preference theory, but not classical theory

Stimulus spending in 2009 was used for

making payments to the unemployed,building roads and bridges,providing aid to local and state governments (All of the above are correct)