ECON 3004 Final

Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy _____ percent of one year's GDP

20

Using the IS-LM/AD-AS model of Chapter 12 model, in the short run, a tac cut combined with tight money would lead to a:

Rise in the real interest rate and a fall in investment

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.

partly; cannot

Based on the sticky-price model, the short-run aggregate supply curve will be steeper, the greater the:

proportion of firms with flexible prices

Arguments in favor of passive economic policy include all of the following except:

recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary.

Policymakers may be better able to achieve their goals using a fixed policy rule rather than using discretion if they face the problem of:

time-inconsistent policy

Anything that shifts long-run aggregate supply curve to the left would shift the long-run Phillips curve:

to the right

The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to _____ spending on goods and services.

unexpected; reduce

An increase in government spending raises income:

In the short run, but leaves it unchanged in the long run, while lowering investment

An increase in the money supply:

Lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run

If the short-run aggregate supply curve is steep, the Phillips curve will be:

Steep

All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except:

The 25-percent reduction in the money supply between 1929 and 1933

Each of the following conditions will tend to reduce the sacrifice ratio except when:

The concept of hysteresis accurately describes the impact of history on the natural rate of unemployment

Based on the IS-LM/AD-AS model of Chapter 12, if the government wants to raise investment but keep output constant, it should:

adopt a loose monetary policy and a tight fiscal policy

Unlike a monetarist policy rule, an inflation target has the advantage of:

allowing the central bank unlimited discretion

Which of the following is an example of a fiscal policy that has no inside lag?

an ongoing unemployment insurance program

A time-inconsistency problem in macroeconomic policy can occur when the policymaker:

has direction to act as it seems best in each situation, based on his or her own knowledge and experience

Using the IS-LM/AD-AS model of Chapter 12, if Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the interest rate constant, then in the short run the two policies together would generally lead to ______ interest rate and a ______ income.

higher;lower

Fiscal policy has a relatively long ______ lag, and monetary policy has a relatively long ______ lag.

inside; outside

Using the IS-LM/AD-AS model of Chapter 12, if Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then in the short run the two policies together would generally lead to _____ interest rate and a _____ income.

lower;lower

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

much lower than

Assume the short-run Philips curve holds and that the central bank desires both low inflation and low unemployment and uses discretion in conducting monetary policy. Initially, households and firms expect high inflation. Following an announcement by the central bank of a low-inflation and low unemployment policy, households and firms will __________ the central bank's announcement and _________________ their expectations of inflation.

not believe; not change

Economic research finds that greater central-bank independence is ______ correlated with lower and more stable inflation as well as correlated with the average growth and variability of real GDP

strongly; not

All of the following are requirements for reducing inflation without causing a recession except

the government's budget must be balanced