Econ 100B Final Review
2. Suppose the central bank decreases the monetary base by 10%. However, the money supply increases by 5%. This could be due to: a. A decrease in currency holding and a decrease in excess reserves. b. A decrease in currency holding and an increase in excess reserves. c. An increase in currency holding and a decrease in excess reserves. d. An increase in currency holding and an increase in excess reserves.
a
4. Suppose the economy has a positive output gap. If the central bank now increases the monetary base, then: a. The cyclical budget balance will increase. b. The cyclical budget balance will decrease. c. The structural budget balance will increase. d. The structural budget balance will decrease.
a
A cut in the payroll tax on both employers and employees will tend to cause, other things the same: a. A change in both aggregate demand and supply. b. No change in either aggregate demand or supply. c. A change in aggregate demand, with no effect on supply. d. A change in aggregate supply, with no effect on demand.
a
A foreign exchange intervention that lowers the exchange rate will also: a. Increase investment. b. Decrease the money supply. c. Increase the real interest rate. d. Decrease international reserves.
a
A(n) ________ in aggregate demand will result from a decrease in: a. increase; taxes. b. decrease; inflation. c. increase; the budget deficit. d. increase; government purchases.
a
According to Ricardian Equivalence theory, a tax cut: a. Will tend to have little economic effect. b. Can be an effective policy tool in the midst of an economic downturn. c. Must be used in conjunction with money supply changes over the course of the business cycle. d. Will tend to reduce the magnitude of the trade-off between inflation and the rate of unemployment.
a
An example of a government-based approach to improve the quality of information in financial markets is: a. Mandatory disclosures. b. Government safety nets. c. Financial news networks. d. Government-directed credit. e. None of the above.
a
Firms can acquire access to savings directly: a. By issuing securities. b. By borrowing from banks. c. Through the payment of taxes to the federal government. d. Through the depositing of funds in depository institutions. e. None of the above.
a
If one economic agent possesses more information than their counter-party, then: a. Asymmetric information exists. b. Economic transactions cannot occur. c. The moral hazard problem has been eliminated. d. The adverse section problem has been eliminated. e. None of the above.
a
In the United States, most homeowners have a fixed rate mortgage on their houses. Subsequent periods of lowflation or deflation are generally ______ to homeowners who are ______ as a group. a. harmful; debtors b. harmful; creditors c. advantageous; debtors d. advantageous; creditors
a
Nonfinancial businesses may acquire funds by borrowing from a commercial bank or by: a. Issuing securities. b. Trading on an exchange. c. Issuing insurance policies. d. Purchasing short-term assets. e. All of the above.
a
One of the chief advantages of exchange rate pegging is that: a. It can be an effective means of reducing inflation. b. The currency can be used to promote export growth. c. A country is able to pursue an independent monetary policy over the course of the business cycle. d. It allows the monetary authorities to actively respond to the problems of inflation and unemployment.
a
Other things the same, if participants in foreign exchange markets come to expect an increase in the value of the U.S. dollar: a. The actual value of the U.S. dollar will rise. b. The actual value of the U.S. dollar will fall. c. The actual value of the U.S. dollar will not be affected. d. One cannot predict the movement of the U.S. dollar in the future.
a
Supply-side economics focuses on: a. The positive effect of tax cuts on aggregate supply. b. The impact of changes in aggregate supply on market demand. c. The trade-off between aggregate demand and aggregate supply. d. The impact of an increase in the rate of inflation on aggregate supply.
a
Suppose the U.S. dollar depreciates, and there is no change in monetary policy. Which of the following is a correct description of the short-run consequences? a. Output, inflation, and the real interest rate have all increased. b. Output and inflation are higher, while the real interest rate has fallen. c. Output, inflation, and the real interest rate have returned to their original values. d. Output and inflation have returned to their original values, while the real interest rate is increased.
a
The argument that ______ receives strong support from the innovative policy response to the recent financial crisis. a. Rules can be too rigid. b. Discretionary policies are vulnerable to the time-inconsistency problem. c. Changes in the money growth rate are the sole source of fluctuations in aggregate demand. d. Changes in policies can affect the elasticities in macroeconomic models. e. All of the above.
a
The incentive to collect information is undermined by the: a. Free rider problem. b. Warren Buffet effect. c. Opportunity cost of collecting information. d. Asymmetric character of information flows. e. All of the above.
a
The theory of purchasing power parity suggests that, in the long-run, exchange rates are determined by: a. Relative price levels. b. Relative interest rate levels. c. The major central banks of the world. d. The GDP values for the two countries.
a
Though the theory of purchasing power parity applies in the long run, it is unlikely to apply in the short run, because: a. Prices are sticky. b. Price levels change quickly. c. Foreigners purchase only tradable goods. d. Countries do not produce identical goods.
a
Which of the following is an example of adverse selection? a. The shiniest packaging often contains disappointment. b. The foulest-tasting medicine is often the most effective. c. The clientele at a low-price restaurant are unlikely to leave generous tips. d. Having secured a loan, a business manager is more likely to have a lavish office party than to buy new equipment. e. All of the above.
a
With a flexible exchange rate and perfect capital mobility, expansionary fiscal policy will _____ economic output and _____ net capital inflows. a. Increase; increase b. Increase; decrease c. Decrease; increase d. Decrease; decrease
a
Tax rate smoothing is intended to: a. Reduce income inequality. b. Keep the tax wedge from shrinking. c. Shift the burden from current taxpayers onto future generations. d. Avoid fluctuations in the ratio of the government deficit to GDP.
c
3. Suppose the central bank increases the interest rate on reserves and the yield on long-term government bonds declines. In the context of the AD/AS model, this would be represented by: a. A leftward shift of the MP curve and a leftward shift of the IS curve. b. A leftward shift of the MP curve and a rightward shift of the IS curve. c. A rightward shift of the MP curve and a leftward shift of the IS curve. d. A rightward shift of the MP curve and a rightward shift of the IS curve.
b
6. Suppose that the economy is at potential output. If taxes are reduced, then in order to keep the economy at potential output, the central bank must ______ the monetary base, causing the real policy interest rate to ______ its initial level. a. increase; rise above b. decrease; rise above c. increase; fall below d. decrease; fall below
b
A federal government surplus is said to exist when: a. Federal outlays are equal to federal revenues. b. Federal outlays are less than federal revenues. c. Federal outlays are greater than federal revenues. d. None of the above; federal government surpluses don't exist.A federal government surplus is said to exist when: a. Federal outlays are equal to federal revenues. b. Federal outlays are less than federal revenues. c. Federal outlays are greater than federal revenues. d. None of the above; federal government surpluses don't exist.
b
A rightward shift in the demand curve for domestic assets can be caused by: a. A decrease in the domestic real interest rate. b. An increase in the domestic real interest rate. c. A leftward shift in the supply curve for domestic assets. d. A rightward shift in the supply curve for domestic assets.
b
A rise in the expected future exchange rate will tend to cause, other things the same: a. A depreciation of the domestic currency. b. An appreciation of the domestic currency . c. No effect on the value of the U.S. dollar. d. No effect on the value of the U.S. dollar in the short-run.
b
All of the following shocks to the macroeconomy will cause a change in the general equilibrium real interest rate EXCEPT: a. A permanent increase in technology. b. A permanent increase in the money supply. c. A permanent increase in government purchases. d. A permanent increase in autonomous investment. e. None of the above; all of them will cause a change in the general equilibrium real interest rate.
b
An increase in the domestic real interest rate will tend to cause, other things the same: a. A depreciation of the domestic currency. b. An appreciation of the domestic currency. c. An increase in the demand for domestic goods and services. d. An increase in demand for foreign currencies.
b
An increase in the foreign real interest rate will tend to cause, other things the same: a. An increase in the demand for dollars. b. Individuals to hold fewer dollar assets. c. An appreciation in the value of the U.S. dollar. d. An increase in the return on dollar assets relative to foreign assets.
b
An increase in the value of the U.S. dollar will tend to cause, other things the same: a. An increase in the volume of U.S. exports. b. An increase in the volume of U.S. imports. c. A decrease in the volume of U.S. exports and imports. d. An increase in the volume of U.S exports and imports.
b
Asymmetric information discourages the movement of funds from savers to borrowers, because: a. Taking risks is inefficient. b. Big risks have high payoffs. c. The safe choice is always preferable to the risky choice. d. The loss arising from a failed project must be borne by the borrower, rather than the lender. e. None of the above.
b
Central banks intervene directly in foreign exchange markets by buying and selling: a. Discount loans. b. Foreign currencies. c. Exports and imports. d. U.S. government debt.
b
Direct finance involves: a. Issuing insurance policies. b. Issuing securities in financial markets. c. Borrowing monies from commercial banks. d. Borrowing from the Federal Reserve System. e. None of the above.
b
Federal government outlays include: a. Transfer payments, grants to states, interest payments on the national debt and income tax revenues. b. Government purchases, transfer payments, grants to states and interest payments on the national debt. c. Grants to states, interest payments on the national debt, income tax revenues and government purchases. d. Interest payments on the national debt, income tax revenues, government purchases and transfer payments.
b
Firms can acquire access to savings indirectly through: a. Issuing securities. b. Borrowing from banks. c. The payment of taxes to the federal government. d. The depositing of funds in depository institutions. e. All of the above.
b
Suppose the federal government borrows funds to build a new dam in North Dakota which has a rate of return above its borrowing rate. If the government later increases federal income taxes to pay the interest of the borrowing funds then future economic welfare is: a. Redistributed and reduced. b. Redistributed but not reduced. c. Not redistributed but reduced. d. Not redistributed and not reduced.
b
Suppose the nominal exchange rate — Canadian dollar per Brazilian real — is constant. If the price level in Brazil rises by four percent, while the price level in Canada rises by eight percent, then the real exchange rate — Brazilian goods for Canadian goods — has ________ by ________ percent. a. risen; two b. declined; four c. risen; one-half d. declined; one-half
b
Suppose total government spending is increased permanently by ten percent, with no change in tax rates. In the long run, the resulting deficit will disappear: a. If the government debt is sold to foreigners. b. If economic growth raises tax revenue by ten percent. c. Unless the money is spent entirely on government consumption. d. Only if government spending is brought back down to the original level.
b
Suppose you reserve a hotel room in Madrid for $300 per night. When you check out, you are charged only $285 per night. Assuming that the price of the room in euros had not changed, and that the nominal exchange rate had been 0.8 (euros/$) when the reservation was made, the new nominal exchange rate is: a. 0.76 b. 0.84 c. 0.95 d. 1.05
b
The circumstance in which financial assets are traded freely between countries is referred to as: a. Free trade. b. Capital mobility. c. Asset appreciation. d. Purchasing power parity.
b
The full employment surplus is: a. G + T. b. T + t*YP - G. c. Y - T - t*YP. d. YP + G + T + t*YP.
b
The government budget constraint says that: a. Increases in spending must be matched by increases in revenue. b. The difference between spending and revenues must equal the amount of new bond issues. c. State and local governments, in aggregate, cannot spend more than the federal government. d. Interest on government debt must be paid before tax revenues are spent on goods and services or disbursed as transfer payments.
b
The major component of federal government consumption is spending on: a. Foreign aid. b. National defense. c. Social Security, Medicare and Medicaid. d. Capital goods, e.g. highways and schools.
b
The quantity of U.S. dollars demanded in foreign exchange markets is related negatively to: a. The U.S. interest rate. b. Foreign interest rates. c. The demand for U.S. goods. d. The expected return on U.S. dollar assets relative to foreign assets.
b
Under a fixed exchange rate system, if an appreciation in the value of a country's currency develops, the monetary authorities must intervene by: a. Selling foreign exchange. b. Buying foreign exchange. c. Raising the foreign interest rate. d. Buying and selling the domestic currency.
b
10. A financial institution faces a higher risk of a solvency crises: a. The lower its leverage ratio and the lower the quality of its loans. b. The higher its leverage ratio and the higher the quality of its loans. c. The higher its leverage ratio and the lower the quality of its loans. d. The lower its leverage ratio and the higher the quality of its loans
c
Suppose that wages and prices are quite flexible. In this case: a. Price shocks will destabilize inflation but have a minimal impact on output. b. Demand shocks will destabilize output but have a minimal impact on inflation. c. Policies to stabilize inflation are probably needed more than policies to stabilize output. d. All of the above. e. None of the above.
c
5. According to supply-side economics, a permanent reduction in marginal personal income tax rates will have the following effects on tax revenues: a. Both the static and dynamic changes will be positive. b. Both the static and dynamic changes will be negative. c. The static change will be negative but the dynamic change will be positive. d. The static change will be positive but the dynamic change will be negative.
c
7. Government spending and taxation decisions determine the position of the ______ curve. Where that curve intersects the potential output line generates the ______ target for monetary policy. a. IS; inflation b. MP; inflation c. IS; real policy interest rate d. MP; real policy interest rate
c
9. Suppose that a country has a flexible exchange rate and perfect capital mobility. If the country's currency depreciates and the monetary authorities react to stabilize both economic output and inflation, then in the short-run: a. Economic output, inflation, and the real policy interest rate have all increased. b. Economic output, inflation, and the real policy interest rate have all decreased. c. Economic output and inflation are unchanged but the real policy interest rate has increased. d. Economic output and inflation are unchanged but the real policy interest rate has decreased.
c
A requirement that the government have a balanced budget each year would make macroeconomic stabilization policy _____ by requiring _____ fiscal policy during economic booms. a. Less difficult; expansionary b. Less difficult; contractionary c. More difficult; expansionary d. More difficult; contractionary
c
Adverse selection exists because: a. Moral hazard exists. b. Of government regulation. c. Asymmetric information exists. d. Financial innovation continually occurs. e. All of the above.
c
An appreciation of the U.S. dollar will tend to encourage, other things the same: a. The purchase of U.S. goods by U.S. economic agents. b. The purchase of U.S. goods by foreign economic agents. c. The purchase of foreign goods by U.S. economic agents. d. The purchase of U.S. assets by foreign economic agents.
c
An appreciation of the domestic currency can be caused by: a. A decrease in the domestic interest rate. b. The expectation of a decrease in the value of the domestic currency. c. An increase in the domestic interest rate and expectation of an increase in the value of the domestic currency. d. An increase in the domestic interest rate and the expectation of a decrease in the value of the domestic currency.
c
If the nominal exchange rate between the U.S. dollar and the Japanese yen (yen per dollar) is lower that the relative purchasing power between the two countries, which of the following would be true? a. Purchasing power parity predicts that the Japanese yen is undervalued. b. Purchasing power parity predicts that the value of the U.S. dollar will fall. c. A profitable arbitrage opportunity exists for buying goods in the U.S. and selling them in Japan. d. A profitable arbitrage opportunity exists for buying goods in Japan and selling them in the U.S.
c
In many countries, choosing a fixed-exchange rate substitutes for: a. Setting an inflation target. b. Discretionary fiscal policy. c. Discretionary monetary policy. d. Setting a real policy interest rate target.
c
In the short run, who tends to benefit from a decrease in the exchange rate? a. Foreign producers. b. Domestic consumers. c. Domestic producers. d. Owners of domestic-currency assets.
c
Moral hazard and adverse selection are the result of: a. Prudential supervision. b. Excessive price fluctuations. c. Asymmetries of information. d. Any and all government policy. e. All of the above.
c
Providers of health care insurance require applicants to provide information on their medical history. The purpose may be to minimize which of the following problems? a. Moral hazard. b. Opportunity cost. c. Adverse selection. d. Government taxes. e. All of the above.
c
Suppose an item sells for $125 in the United States and for 62,500 pesos in Chile. According to the law of one price, the nominal exchange rate (pesos/dollar) should be: a. 0.002 b. either $125 or 62,500 pesos, but not both c. 500 d. 31,313
c
Suppose that the economy is in general equilibrium but that the policymakers believe that inflation is too high. Using fiscal policy to reduce inflation to a more acceptable level will initially: a. Reduce output but not inflation. b. Reduce inflation but not output. c. Reduce both output and inflation. d. Reduce both unemployment and inflation. e. None of the above.
c
The actual government budget deficit ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________. a. can; it includes non-discretionary spending changes b. can; it excludes automatic stabilization expenditures c. cannot; it includes non-discretionary spending changes d. cannot; it excludes non-discretionary spending changes
c
The collapse of one bank might lead easily to the failure of several others, because: a. Deposit insurance renders all banks equally fragile. b. No bank can survive when its competitors cease to operate. c. Depositors cannot trust each other to keep their money in the bank. d. Government regulators will step in to punish any bank suspected of poor management. e. All of the above.
c
The impact of a change in taxes on income is likely to be less than the effect resulting from a change in government spending since: a. The federal government typically operates in a deficit situation. b. Changes in the supply of money will be necessary if government spending is increased. c. Changes in taxes have an indirect impact on total spending through changes in consumption. d. Exports and imports can only assume positive values, but net exports can be positive or negative.
c
The most important source of funds for nonfinancial businesses is: a. Hedge funds. b. Insurance companies. c. Financial intermediaries. d. State and local governments. e. None of the above.
c
The negative impact of government debt on the economy is mitigated by: a. The phenomenon of crowding-out. b. The impact of the debt on national saving. c. Government spending on schools and highways. d. The interest rate effects of government budget deficits.
c
The time inconsistency problem involves: a. The difficulties in traveling across time zones. b. The use of adaptive expectations in macroeconomic models. c. The tendency to deviate from good long-run plans to pursue short-run goals. d. The lag between the implementation of a policy and its ultimate and complete results. e. None of the above.
c
What is the relationship between fiscal multipliers and the "zero lower bound"? a. Fiscal multipliers cannot fall below zero. b. At the zero lower bound, a fiscal contraction is actually expansionary. c. When monetary policy has hit the zero lower bound, fiscal multipliers are likely to be larger than normal. d. At the zero lower bound, fiscal policy works by shifting the aggregate supply curve, rather than shifting the aggregate demand curve.
c
When a government has decided on a permanent spending increase, a valid reason to increase borrowing rather than taxes might be: a. To avoid an increase in income inequality. b. To avoid an unnecessary stimulus to aggregate demand. c. To avoid distortions that might reduce long-run aggregate supply. d. To shift the burden from domestic taxpayers to foreign bond holders.
c
Which of the following statements is correct? a. Assets plus liabilities equal net worth. b. Assets plus net worth equal liabilities. c. Assets equal liabilities plus net worth. d. Liabilities minus net worth equal assets. e. None of the above.
c
Which of these policies is the best example of constrained discretion? a. The government budget shall be balanced every year. b. The government budget deficit shall not exceed 3% of GDP. c. The government budget shall be balanced over the course of the business cycle. d. A government budget deficit in one year shall be followed by an equivalent government budget surplus the following year. e. None of the above; constrained discretion is a monetary policy concept.
c
8. Which statement is a good argument in support of policy activism? a. Activist policies can help to insure the stability of inflation. b. Activist policies can help to insure the stability of the real policy interest rate. c. Policy lags are generally longer than the time it takes for the self-correcting mechanism to work. d. Well-considered activist policies can assist the economy's self-correcting mechanism and reduce the variability of both inflation and unemployment.
d
A central bank with a fixed exchange rate must, in response to an interest rate decline in the anchorcurrency economy: a. Revalue its currency. b. Sell the anchor currency. c. Convene a currency board. d. Purchase the anchor currency.
d
A decline in the value of net exports in the U.S. is most likely to result from an increase in: a. U.S. exports. b. Foreign income. c. Foreign real interest rates. d. The value of the U.S. dollar.
d
A loan contract that requires the borrower to keep a certain percentage of its assets in cash is an example of: a. Screening. b. Monitoring. c. A patent contract. d. A restrictive covenant. e. None of the above.
d
According to Ricardian equivalence, a long-run impact on the economy occurs when the government: a. Raises taxes. b. Lowers taxes. c. Issues more government bonds. d. Increases spending on capital goods.
d
According to the Taylor rule, which of the following will lead to a higher nominal federal funds rate? a. A positive output gap. b. A positive inflation gap. c. An increase in inflation. d. All of the above. e. None of the above.
d
Activists believe that: a. It takes a very long time to reach the long run. b. Keynes was right with his statement that "in the long-run, we are all dead." c. Frictions in labor and product markets prevent wages and prices from being very flexible. d. All of the above. e. None of the above.
d
An extinguishing policy response to an unfavorable price shock ultimately: a. Changes expected inflation. b. Attempts to keep real GDP from changing. c. Maintains a fixed growth rate of real GDP. d. Causes a downward shift of the SRAS curve. e. None of the above.
d
An increase in the tax rate, t: a. Will rotate the budget line upward. b. Will shift the budget line downward. c. Will increase the slope of the budget line. d. Both a. and c.
d
Constrained discretion: a. Requires policymakers to follow a rule. b. Eliminates all discretion in policymaking. c. Imposes an inherent discipline on consumers and businesses. d. Imposes an inherent discipline on policymakers but does not eliminate all of their flexibility. e. None of the above.
d
In many countries, an exchange-rate peg substitutes for: a. Capital controls. b. Speculative attacks. c. An export-oriented sector. d. Discretionary monetary policy.
d
Non-activists believe that: a. Policy interventions should take place less frequently than what Keynesians advocate. b. There is a very rapid self-correcting mechanism because wages and prices are very flexible. c. Lags to policy implementation are so long that even the "correct" policies may lead to undesirable consequences. d. All of the above. e. None of the above.
d
Nonconventional monetary policy attempts to reduce financial frictions by: a. Reducing the expected future short-term interest rate. b. Purchasing long-term assets which raises their price and reduces the credit spread. c. Correcting the shortage of liquidity that has made it costly for businesses to invest. d. All of the above. e. None of the above.
d
Prudential regulation: a. Is administered by a specific insurance company. b. Is an effective substitute for prudential supervision. c. Requires that banks maintain the confidentiality of loan applications. d. Is necessitated by the government's safety net for the banking system. e. None of the above.
d
Prudential supervision is, in essence, the monitoring of: a. Borrowers, to enforce restrictive covenants. b. Depositors, to discourage sudden withdrawal of funds. c. Intermediaries, to direct credit to preferred sectors of the economy. d. Holders of an insurance policy, to discourage excessively risky behaviors. e. All of the above.
d
The aggregate demand curves in the diagram above have a positively-sloped portion. The reason this can happen is: a. Sloppy editing. b. A sudden increase in potential output. c. Rising inflation causes financial frictions to increase. d. Changes in expected inflation cause the real interest rate to change in the opposite direction. e. The monetary policy response to declining inflation causes the real interest rate to fall, which causes output to rise.
d
The cost of the distortion created by taxes: a. Is inversely related to the tax rate. b. Depends on how the tax revenues are spent. c. Increases proportionately with tax revenues. d. Is lower when the tax rate is constant than when it fluctuates. e. Is higher when the tax rate is constant than when it fluctuates.
d
The effect of a price shock on inflation and output: a. Depends on the initial expected inflation. b. Depends on the level of potential output. c. Depends on the level of the natural rate of unemployment. d. Depends on the interest rate sensitivity of planned consumption and planned investment. e. None of the above.
d
The purchase of foreign currency by a central bank will tend to cause: a. A decrease in the domestic money supply. b. A decrease in the supply of domestic assets. c. An increase in the demand for domestic currency. d. A decrease in the relative expected return on domestic assets.
d
The quantity of U.S. dollars demanded in foreign exchange markets is primarily a function of: a. Foreign interest rates. b. The demand for U.S. goods and services. c. The demand for U.S. goods by foreigners. d. The expected return on U.S. dollar assets relative to foreign assets.
d
The real exchange rate is equal to the: a. Nominal rate of exchange plus the domestic level of prices. b. The nominal exchange rate minus the relevant foreign price level. c. Nominal exchange rate divided by the domestic plus foreign price levels. d. Nominal exchange rate times the domestic price level divided by the foreign price level.
d
The relative price of one currency in terms of another is known as the: a. Real interest rate. b. Real exchange rate. c. Domestic price level. d. Nominal exchange rate.
d
When property rights are well defined and inexpensive to enforce: a. Little or no collateral is needed to secure a loan. b. Banks become less dominant among intermediaries. c. Poor borrowers are at no disadvantage relative to wealthy borrowers. d. Collateral is an efficient solution to asymmetric information problems. e. None of the above.
d
Which of the following is a true statement about equilibrium in the foreign exchange market? a. Net exports are zero. b. Foreigners wish to purchase the entire supply of domestic assets. c. The relevant central banks meet regularly to choose the equilibrium exchange rate. d. The expected return on domestic assets is equal to the expected return on foreign assets.
d
With a favorable price shock, an extinguishing policy prevents ______ and allows ______. a. Output from rising; inflation to fall. b. Inflation from rising; output to fall. c. Output from falling; inflation to rise. d. Inflation from falling; output to rise. e. None of the above.
d
"In the 1980s, the cost that results from a larger government budget deficit was deferred, placed on future taxpayers because foreigners loaned money to the government to pay the debt." Under what circumstances might this "cost" be deferred forever? a. Fiscal policy is easier in the future. b. Fiscal policy is tighter in the future. c. Monetary policy is easier in the future. d. Monetary policy is tighter in the future. e. The government uses the borrowed funds to provide increased future benefits to taxpayers.
e
An accommodating policy response to an unfavorable price shock: a. Reduces the level of expected inflation. b. Maintains a fixed growth rate of nominal GDP. c. Eliminates any additional inflation caused by the price shock. d. All of the above. e. None of the above.
e
Suppose the economy is in general equilibrium when the central bank decides to increase its target inflation rate. The central bank would then conduct a discretionary monetary policy: a. Easing, increasing the real interest rate for any given inflation. b. Tightening, increasing the real interest rate for any given inflation. c. Easing, allowing the real interest rate to increase along with the increase in aggregate demand. d. Tightening, allowing the real interest rate to increase along with the increase in aggregate demand. e. None of the above
e
