1 of 15 12/1/2013 1:28 PM

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1 1 of 15 12/1/2013 1:28 PM Policy tools include Population growth, spending behavior, and invention. Wars, natural disasters, and trade disruptions. Tax policy, government spending, and the availability of money. External shocks and internal market forces. Policy tools to influence the macroeconomy include the tools of fiscal and monetary policy. Difficulty: 1 Easy Fiscal policy includes all of the following except Tax cuts. Tax increases. Interest rate increases. Discretionary spending by the government. Changes to interest rates falls into the realm of monetary policy. Income taxes are an automatic stabilizer because when income falls, ceteris paribus, tax receipts Fall as taxpayers experience bracket creep. Fall because income taxes are regressive. Rise because automatic stabilizers work against the cyclical movements of the GDP. Fall because taxes are computed on the basis of income. When the economy contracts, incomes fall, leading to lower revenues, thereby acting as an automatic stabilizer.

2 2 of 15 12/1/2013 1:28 PM Which of the following is not true about a structural deficit? It exists even if the economy is at full employment. It is influenced by discretionary fiscal spending. It definitely gets larger as unemployment increases. It is determined in part by the actions of Congress. The structural deficit is the federal revenues at full employment minus expenditures at full employment under prevailing fiscal policy. So changes in unemployment will not change the structural deficit. The structural deficit is The deficit that would exist if the economy were at full employment. Computed on the basis of the current value of automatic stabilizers. Determined by the president of the United States. Equivalent to the GDP gap. At full employment, the actual deficit will equal the structural deficit. Difficulty: 1 Easy Which of the following believes that the money supply is the critical policy lever? Marxists. Monetarists. Supply-siders. New classical economists. A focus on the amount of money in circulation, not the interest rate or inflation rate, is the most important policy tool to the monetarist school of thought.

3 3 of 15 12/1/2013 1:28 PM The natural rate of unemployment is the Rate that would occur if the structural deficit were zero. Rate that corresponds to 3 percent inflation on the Phillips curve. Long-term rate determined by structural forces in labor and product markets. Amount of cyclical unemployment minus the anticipated rate of unemployment. The structural forces in the economy will shape the natural rate of unemployment by influencing the labor and product markets. Difficulty: 1 Easy Which of the following is an accurate statement about supply-side policy? The aggregate supply curve should be shifted to the right during periods of inflation and to the left during a recession. The aggregate supply curve should be shifted to the left during periods of inflation and to the right during a recession. The aggregate supply curve should be shifted to the right during periods of both inflation and recession. The aggregate supply curve should be left alone. A steadily increasing aggregate supply curve, according to supply-siders, can be achieved in good and bad times through cutting taxes. The recessionary GDP gap is Equal to the spending multiplier. The amount by which equilibrium GDP falls short of full-employment GDP. Small unless the unemployment rate is very low. Reduced by shifting aggregate demand to the left. The recessionary GDP gap is the difference between what GDP currently is and what it could potentially be under conditions of full employment. Difficulty: 1 Easy

4 4 of 15 12/1/2013 1:28 PM During a severe recession, appropriate economic policy might include An open market purchase by the Fed, a decrease in the discount rate, or a decrease in government regulation. An open market sale by the Fed, a decrease in the discount rate, or an increase in the budget deficit. A decrease in government spending, a decrease in the discount rate, or a decrease in government regulation. An open market purchase by the Fed, a decrease in the tax rates, or a decrease in the budget deficit. Purchases of bonds by the Fed or a lower discount rate will increase the money supply, while less regulation, a supply-side policy, will lead to more production. The modern Keynesian approach to cure a recession might include Expanding the money supply or increasing government spending. Expanding the money supply or reducing government spending. Contracting the money supply or increasing government spending. Contracting the money supply or reducing government spending. An increase in the money supply or an increase in government expenditures will lead to a rightward shift of the AD curve, potentially eliminating a recessionary GDP gap. Which of the following is a monetary policy action to eliminate a recession? Increased investment in job training programs. The sale of securities in the open market by the Fed. A decrease in the marginal tax rate. A decrease in the discount rate. A lower discount rate will increase AD because there will be more lending and money creation.

5 5 of 15 12/1/2013 1:28 PM A supply-side policy to cure a recession might include A decrease in government spending. Elimination of the minimum wage. A tax increase. A decrease in the reserve requirement. The minimum wage is a type of regulation in the labor market, leading to inefficiency; if the regulation is removed, production will increase, possibly restoring full employment. An inflationary GDP gap is the amount by which exceeds. potential GDP; actual GDP equilibrium output; actual output full-employment GDP; potential GDP equilibrium GDP; full-employment GDP An inflationary GDP gap occurs when the economy's level of GDP exceeds the GDP possible under conditions of full employment. Supply-side policy to reduce inflation would focus on Decreasing the money supply. Decreasing the interest rates to encourage investment. Increasing the incentives to produce goods and services. Raising marginal tax rates to reduce aggregate demand. Actions such as tax cuts and deregulation will increase AS, thereby leading to a reduction in inflation.

6 6 of 15 12/1/2013 1:28 PM The simultaneous occurrence of high inflation and high unemployment is called Reflation. Stagflation. Deflation. Depression. Stagflation, affecting the U.S. economy in the 1970s, occurs when the price level rises during a recession. Difficulty: 1 Easy Which of the following is true about stagflation? It can be corrected by policies that increase aggregate supply. It results in a lower value of the misery index. It can be corrected by demand-side policies. The best policy to treat it is to do nothing. Supply-side policies can be used to remedy stagflation because an increase in AS results in lower unemployment and lower inflation, whereas most demand-side policies improve one or the other but not both. Which of the following is an accurate statement concerning the macroeconomy of the United States? The goals of full employment, price stability and vigorous economic growth are frequently met. The economy continues to experience the ups and downs of the business cycle. The ups and downs of the business cycle have been more severe since World War II. Politics never takes precedence over the country's economic problems. The business cycle tracks the ups and downs of the economy against time.

7 7 of 15 12/1/2013 1:28 PM If the data collected by policy makers overstate inflation, this is an example of A goal conflict. A measurement problem. A design problem. An implementation problem. If the CPI overstates inflation by 1 percent, our forecasts will be inaccurate, and this will undermine the effectiveness of any formulated policy. The idea that no one knows for certain the shape of the aggregate supply curve contributes to Design problems. Goal conflicts. Inventory problems. Measurement problems. When market participants fail to respond to policy in the manner forecast, the policy itself may be ineffective. The time it takes for Congress to deliberate over a specific fiscal policy action is an example of A multiplier conflict. A measurement problem. A design problem. An implementation problem. Constructing the correct response to an economic problem often gets slowed down in the legislative process.

8 8 of 15 12/1/2013 1:28 PM The fact that the president must ask Congress for the authority to cut taxes is an example of An implementation problem. A goal conflict. A rational expectations problem. A measurement problem. Constructing the correct response to an economic problem often gets slowed down in the legislative process. Which of the following is the appropriate order of policy responses? Response design, recognition, impact, and implementation. Recognition, response design, implementation, and impact. Response design, implementation, recognition, and impact. Recognition, response design, impact, and implementation. Decision makers must first agree there is an economic problem, then pass legislation and wait for the effects to filter through the economy. The potential conflict of economic policy with political objectives can be used to explain The ups and downs in overall business activity. The election of the Federal Reserve's Board of Governors. Why politicians stimulate the economy before an election and restrict it afterward. Illegal behavior on the part of politicians and economists. Focusing on getting reelected, rather than on true economic problems, may create a political cycle rather than a business cycle.

9 9 of 15 12/1/2013 1:28 PM Which of the following explains why Congress or the president might hesitate to use restrictive fiscal policy in an election year? Monetary policy is always more effective. Voters might become unemployed. Fiscal policy is too complex. Fiscal year appropriations are not under the authority of Congress. Politicians focusing on getting reelected, rather than on addressing true economic problems, may create a political cycle rather than a business cycle. Politicians might hesitate to increase income and in-kind transfers to the poor because this could cause A decrease in the budget deficit. Private sector spending to overpower public sector spending. Excessive demand for goods and services. An increase in unemployment. If transfer payments increase, the economy might experience an inflationary GDP gap. Which of the following groups believes that people will realize what the government is attempting to do and take action to offset government policy? Marxists. New classical economists. Supply-siders. Modern Keynesians. The new classical economists argue that rational expectations on the part of the private sector will lead individuals to respond in their own best interest to new policies.

10 10 of 15 12/1/2013 1:28 PM The hypothesis that people's spending decisions are based on all available information, including the anticipated effects of government intervention, is known as The velocity of money. Rational expectations. Fiscal expectations. Rational responses. Rational expectations theory holds that individuals act with the available information rationally in their own best interest, which could reduce the effectiveness of policy if anticipated properly. Difficulty: 1 Easy Modern Keynesians differ from traditional Keynesians because modern Keynesians Believe that monetary policy can be useful in managing the economy. Favor fixed rules and steady, predictable policies. Believe that failures of the economy are inherent in a capitalist economy. Believe that tax cuts and government spending should be used to increase aggregate demand and output. Modern Keynesians focus on both recession and inflation, arguing for changes in fiscal as well as monetary policies. Which of the following supports the argument for hands-on policy? Greater stability of the economy in the last 40 years. The existence of the four obstacles to policy success. The failure of discretionary policy. The theory of rational expectations. The last 40 years have seen more government involvement in the economy and a more stable, less variable business cycle.

11 11 of 15 12/1/2013 1:28 PM Refer to Figure Which of the following would most likely cause a shift from AD 3 to AD 2? An increase in transfer payments because of a recession. An increase in the reserve ratio. A decrease in the discount rate. An increase in taxes. Higher taxes reduce consumption spending by the private sector, thereby leading to a leftward shift of the AD curve.

12 12 of 15 12/1/2013 1:28 PM Refer to Figure A decrease in the discount rate would most likely result in A decrease in the money supply and a move from AD to AD. 2 1 An increase in the money supply and a move from AD to AD. 1 2 A decrease in the money supply and a move from AS to AS. 2 1 An increase in the money supply and a move from AS to AS. 1 2 A lower discount rate increases the money supply, which in turn causes the AD curve to shift to the right.

13 13 of 15 12/1/2013 1:28 PM According to Figure 18.2, a shift from AS 2 to AS 3 is most likely to result from An increase in government spending. An increase in government regulation. A decrease in the reserve requirement. A decrease in the marginal tax rate. A lower marginal tax rate, which is a supply-side policy, will cause a rightward shift of the AS curve.

14 14 of 15 12/1/2013 1:28 PM Refer to Figure A shift from AS 2 to AS 1 may result from A decrease in the money supply. An increase in the minimum wage. An increase in the reserve requirement. A decrease in government spending. More regulations, such as a higher minimum wage, will lead to a decrease in the AS, thereby shifting the curve to the left.

15 15 of 15 12/1/2013 1:28 PM The aggregate supply curves shown in the model in Figure 18.3 are most consistent with the views of Monetarists. Supply-siders. Keynesians. Modern Keynesians. The monetarist school believes output and employment stay close to their natural levels, meaning only the price level may be changed; this is consistent with a vertical LRAS curve.