Practice Problems 33-34-36 1. The inflation tax is: A. the higher tax paid by individuals whose incomes are indexed to inflation. B. the taxes paid during periods of inflation. C. the reduction in the value of money, due to inflation, that is held by the public. D. the higher prices consumers pay due to inflation. E. the higher nominal wages received by workers due to inflation. 2. The Fed monetizes the debt when it: A. buys newly issued government debt from the public. B. sells bonds. C. decreases the money supply. D. targets interest rates. E. increases taxes and reduces government spending. 3. Economists refer to the revenue generated by the government's right to print money as: A. the federal mint. B. monetary policy. C. fiscal policy. D. reserve policy. E. seigniorage. 4. When a central bank prints money to pay government debts, causing rising prices that erode the purchasing power of money held by the public, it is called: A. a payroll tax. B. an excise tax. C. a currency tax. D. a budget tax. E. an inflation tax. 5. If the real money supply is $500 billion, and the money supply grows by 2%, then real seignorage is: A. $25 trillion. B. $1 trillion. C. $10 billion. D. $1 billion. E. $20 billion. 6. When the output gap is negative, the actual unemployment rate is: A. above the natural rate. B. below the natural rate. C. equal to the natural rate. D. The actual and natural unemployment rates are not related to the output gap. E. equal to zero. 7. If an economy has just suffered a serious recession but real GDP is expanding once again, we can conclude the unemployment rate will: A. immediately fall. B. immediately rise. C. initially rise, if people who were previously discouraged enter the work force but do not find jobs right away. D. initially fall, if people who were previously discouraged enter the work force but do not find jobs right away. E. initially rise, if people who were previously unemployed, become discouraged and drop out of the labor force. 8. Assume an economy that is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract? A. a reduction in the number of discouraged workers B. an increase in the number of discouraged workers C. an increase in the level of employment D. a decrease in the level of employment E. a decrease in the population growth rate. 9. When a contract is written such that the terms of the contract are adjusted for changes in inflation, this is referred to as: A. indexation. B. the neutrality of money. C. debt deflation. D. seignorage. E. crowding out. 10. When inflation is high: A. people will increase their level of real money holdings. B. people will save more. C. lenders gain at the expense of borrowers. D. people will decrease their level of real money holdings. E. real wages will increase. 11. A negative output gap implies: A. an unemployment rate above the natural rate of B. an unemployment rate below the natural rate of C. an unemployment rate equal to the natural rate of D. an unemployment rate which equals the frictional and structural amounts of
E. an inflation rate above the natural rate of inflation. 12. If the natural rate of unemployment is 5%, and the actual rate of unemployment is 4%: A. disinflation is likely to occur. B. there will be no effect on prices. C. inflation will increase. D. the short-run Phillips curve will shift down. E. deflation is likely to occur. 13. The short-run Phillips curve shows: A. a direct relationship between unemployment and inflation. B. an inverse relationship between unemployment and inflation. C. consequences of the misperceptions theory. D. the optimum level of employment. E. an inverse relationship between unemployment and the real interest rate. 14. A supply shock: A. Only moves us along the short-run aggregate supply curve. B. Only moves us along the short-run Phillips curve. C. shifts the short-run Phillips curve and the short-run aggregate supply curve.. D. shifts the short-run aggregate supply curve, but not the short-run Phillips curve. E. Shifts the short-run Phillips curve, but not the short-run aggregate supply curve. 15. The short-run Phillips curve: A. is upward rising because inflation and unemployment rates have a positive relationship in the short B. is vertical because there is no trade-off between inflation and unemployment rates in the short C. is downward sloping because there is a trade-off between inflation and unemployment rates in the short D. is horizontal because there is no trade-off between inflation and unemployment rates in the short E. is downward sloping because there is a trade-off between interest rates and investment in the short Figure 34-2: Short-Run Phillips Curve 17. Use the Short-Run Phillips Curve Figure 34-2. Which of the following could have caused SRPC 1 to shift to SRPC 2? A. The AD curve shifted to the left. B. The SRAS curve shifted to the left. C. The AD curve shifted to the right. D. The central bank decreased interest rates. E. The SRAS curve shifted to the right. 16. Use the Short-Run Phillips Curve Figure 34-2. SRPC 2 is based on an expected inflation rate of: A. 0%. B. 1%. C. 2%. D. 5%. E. 7%. 18. An increase in the expected rate of inflation: A. shifts the short-run Phillips curve down. B. shifts the short-run Phillips curve up. C. moves us along the short-run Phillips curve to higher rates of inflation. D. moves us along the short-run Phillips curve to higher rates on E. shifts the long-run Phillips curve to the left.
19.Which of the following accurately portrays the shape of the long-run Phillips curve? A. horizontal B. vertical C. upward sloping D. downward sloping E. backward bending 20. The long-run Phillips curve is vertical at the NAIRU because A. any unemployment rate below the NAIRU will Combination Unemployment rate Inflation rate V 7% 4% W 5% 3% X 4% 5% Y 5% 5% Z 6% 3% Table 34-1: Combinations of Unemployment and Inflation 21. Use Table 34-1. Which of the following combinations of unemployment and inflation could lie on the same short-run Phillips curve? A. W and Z B. W and Y C. V and Z D. X and Y E. W and X 22. If the Fed reduces the inflation rate from 5% to 3%, it is: A. following a policy rule. B. engaging in disinflation. C. increasing employment. D. raising economic growth. E. decreasing the unemployment rate. 23. The cost of disinflation is the: A. leftward shift in aggregate supply. B. decrease in prices. C. loss of real GDP in the process. D. loss of international markets when prices change. E. loss of investment spending when interest rates fall. 24. If the economy is in a liquidity trap: A. both monetary and fiscal policies are effective. B. neither monetary nor fiscal policy can be effective. C. monetary policy can be effective, but fiscal policy is not. D. fiscal policy can be effective, but monetary policy is not. E. expansionary monetary policy can be effective, while contractionary monetary policy is not. lead to ever-accelerating inflation. B. an unemployment rate equal to NAIRU will always lead to zero inflation. C. any unemployment rate above the NAIRU will lead to ever-accelerating inflation. D. any unemployment rate below the NAIRU will lead to ever-decelerating inflation. E. any unemployment rate equal to the NAIRU will lead to ever-decelerating inflation. 25. Expecting the inflation rate to be 3%, Adrianna decides to put her savings in bonds yielding a fixed 5% interest rate over a year. If the actual inflation rate is, it can be argued that is (are) better off. A. below 3%; Adrianna B. exactly 5%; both the corporation issuing the bonds and Adrianna C. above 3%; Adrianna D. below 3%; the corporation issuing the bonds E. below 3%; both Adrianna and the corporation issuing the bonds 26. A liquidity trap is a situation in which: A. using expansionary monetary policy is not effective, because the real interest rate is negative. B. aggregate demand falls, because consumers do not have enough liquidity to consume. C. using expansionary monetary policy is not effective because, the nominal interest rate is almost zero. D. lenders are trapped by large loans with declining rates of return. E. using expansionary fiscal policy is not effective because, the budget is in a deficit. 27. Disinflation: A. involves eliminating inflation in an economy. B. policy often results in throwing an economy into a recession. C. occurs as a result of a policy makers' attempts to correct a recession. D. results in a fall in the unemployment rate. E. policy results in a zero unemployment rate.
28. If an economy finds itself in a liquidity trap, this means that: A. consumers are trapped by an abundance of liquidity, and are spending abundantly. B. the economy is trapped by the inability of monetary policy to reduce nominal interest rates further. C. money markets are 'trapped' in a state of continuous disequilibria. D. monetary authorities cannot stop nominal interest rates from rising. E. the government cannot reduce taxes any lower. Combination Unemployment rate Inflation rate V 7% 4% W 5% 3% X 4% 5% Y 5% 5% Z 6% 3% Table 34-2: Combinations of Unemployment and Inflation 29.Refer to Table 34-2. The economy is currently in long-run equilibrium at point V. What might cause a movement to point X? A. A rightward shift of the AD curve. B. A rightward shift of the SRAS curve. C. A leftward shift of the LRAS curve. D. A leftward shift of the SRAS curve. E. A lefttward shift of the AD curve. 30. Refer to Table 34-2. The economy is currently in long-run equilibrium at point W. What might cause a movement to point X? A. A rightward shift of the AD curve. B. A rightward shift of the SRAS curve. C. A leftward shift of the LRAS curve. D. A leftward shift of the SRAS curve. E. A lefttward shift of the AD curve. 31. Refer to Table 34-2. The economy is currently in long-run equilibrium at point W. What might cause a movement to point V? A. A rightward shift of the AD curve. B. A rightward shift of the SRAS curve. C. A rightward shift of the LRAS curve. D. A leftward shift of the SRAS curve. E. A leftward shift of the AD curve. 32. Which of the following statements is broadly agreed upon by modern macroeconomists? A. A monetary rule can effectively increase real GDP. B. Discretionary fiscal policy is typically more effective than monetary policy in fighting recessions. C. A nation's central bank should be managed by elected officials. D. Discretionary monetary and fiscal policy cannot affect the long-run level of E. There is no such thing as a political business cycle. 33. Nearly all economists agree that increases in government spending can aggregate. A. increase; supply B. decrease; supply C. decrease; demand D. increase; demand E. have no impact on; demand 34. The belief that expansionary monetary policy is NOT at all helpful to the economy in fighting recessions is attributed to: A. classical macroeconomics. B. Keynesian macroeconomics. C. monetarism. D. the modern consensus. E. real business cycle 35. Which of the following represents the consensus among most economists today with respect to the management of unemployment? A. Government can't do anything about it. B. Expansionary policy can be used to achieve permanently low C. Unemployment cannot be kept below the natural rate. D. Unemployment cannot be kept anywhere near the natural rate. E. Unemployment can be eliminated with the right combination of fiscal and monetary policies. 36. The modern consensus regarding the use of monetary policy to fight recessions is that expansionary monetary policy: A. is ineffective because the public expects it. B. is harmful because it only increases the aggregate price level. C. has little impact on aggregate demand due to the existence of liquidity traps. D. can be used to increase aggregate demand but at the cost of higher aggregate prices. E. should only be used when fiscal policy has already been tried.
37. The broad consensus among macroeconomists is that fiscal policy should be used sparingly because: A. it cannot be effective. B. of policy lags. C. it always destabilizes the economy. D. of the risk of government waste. E. consumers and firms do not understand it. 38. To close an inflationary gap, the modern consensus on macroeconomics suggests that: A. a close coordination of fiscal and monetary policy is crucial. B. the automatic fiscal stabilizers are powerful enough to bring the economy back to equilibrium. C. policy-makers should wait until a negative productivity shock brings the economy back to equilibrium. D. monetary policy should take the leading role in economic stabilization. E. supply-side fiscal policies should take the leading role in economic stabilization. 39. According to the broad macroeconomic consensus today, an unemployment rate of 6% when the natural rate is 4.5%, should be countered by: A. decreases in government spending. B. increases in tax rates. C. increases in the rate of growth of the money supply. D. decreases in the rate of growth of the money supply. E. the central bank increasing the discount rate. 40. The following recommendation is consistent with which view of the macroeconomy? Since the long-run growth of real GDP is 3%, the money supply should grow at 3%. A. classical B. Keynesian C. monetarist D. the modern consensus E. rational expectations. 41. The following recommendation is consistent with which view of the macroeconomy? A decrease in the money supply will reduce inflationary pressure and real GDP. A. classical B. Keynesian C. monetarist D. rational expectations E. real business cycle 42. The following recommendation is consistent with which view of the macroeconomy? Use monetary policy to stabilize the economy and use fiscal policy only when monetary policy is ineffective. A. classical B. Keynesian C. monetarist D. modern consensus E. rational expectations 43. The modern consensus about macroeconomic policy is that: A. only monetary policy works against recessions but fiscal policy is effective only in the long B. both expansionary monetary and fiscal policies can reduce unemployment in the long C. both expansionary monetary and fiscal policies are effective in the short run but not in the long D. discretionary monetary and fiscal policies are effective in the short run and in the long E. discretionary monetary and fiscal policies are effective in the long run, but not in the short 44. A very low rate of inflation during a recession can lead to: A. a liquidity trap, which makes monetary policy ineffective. B. a liquidity trap, which makes monetary policy effective. C. government budget deficits. D. government budget surpluses. E. a liquidity trap which makes fiscal policy more effective. 45. Many economists believe: A. fiscal policy can be used effectively to reduce unemployment below its natural rate. B. monetary policy can be used effectively to reduce unemployment below its natural rate. C. fiscal policy should be used sparingly due to the political influence which may impact its implementation and use. D. monetary rules are best. E. the economy can self-correct without activist monetary or fiscal policies.