Chapter 16 Flashcards
Which of the following correctly distinguishes an active versus passive policy approach? a. An active policy approach is restricted to open-market operations by the Fed, while a passive policy approach includes changes in the required reserve ratio, and fiscal stimulus in the form of government spending. b. An active policy approach is used to close a contractionary gap, while a passive policy approach is used to close an expansionary gap. c. An active policy approach is based on monetary aggregate targets, while a passive policy approach is addressed to interest rate stability. d. An active policy approach is based on the notion that discretionary fiscal or monetary policy can reduce the costs imposed by an unstable private sector. A passive approach is based on the idea that discretionary policy contributes to the instability of the economy and thus is part of the problem.
An active policy approach is based on the notion that discretionary fiscal or monetary policy can reduce the costs imposed by an unstable private sector. A passive approach is based on the idea that discretionary policy contributes to the instability of the economy and thus is part of the problem.
Consider an economy that is in short-run equilibrium with unemployment below the natural rate. According to the passive approach, low unemployment will eventually cause wages to fall, lowering the firms’ cost of doing business.True False
FALSE
The passive approach to resolve a contractionary gap results in a decrease in the price level, and the active approach to resolve a contractionary gap results in an increase in the price level.True False
TRUE
Advocates of the active approach argue that even when there is a large contractionary gap, a. the downward renegotiation of wages necessary to increase the short-run aggregate supply curve and real output may take a long time, and during this period of adjustment the public bears a high cost in terms of foregone economic output. b. the upward renegotiation of wages necessary to decrease the short-run aggregate supply curve and real output may take a long time, and during this period of adjustment the public bears a high cost in terms of foregone economic output. c. the upward renegotiation of wages necessary to decrease the short-run aggregate supply curve and real output may take a long time, and during this period of adjustment the public bears a high cost in terms of foregone economic output. d. the downward renegotiation of wages necessary to decrease the short-run aggregate supply curve and real output may take a long time, and during this period of adjustment the public bears a high cost in terms of foregone economic output.
the downward renegotiation of wages necessary to increase the short-run aggregate supply curve and real output may take a long time, and during this period of adjustment the public bears a high cost in terms of foregone economic output.
Advocates of an active policy associate a low cost with the passive approach so, they favor an active stabilization policy to stimulate aggregate demand.True False
FALSE
The ________ approach relies on the right discretionary policy to close the gap through a ________ of the aggregate demand curve. a. passive; decrease b. active; increase c. passive; increase d. active; decrease
active; decrease
One of the shortcomings of the activist approach is the difficulty in correctly identifying the economy’s potential output level and the natural rate of unemployment.True False
TRUE
________ refers to the time needed to identify a macroeconomic problem and assess its seriousness. a. Decision-making lag b. Implementation lag c. Recognition lag d. Effectiveness lag
Recognition lag
Which of the following describes the decision-making lag associated with activist policy? a. The time needed to identify a macroeconomic problem and assess its seriousness b. The time needed to decide what to do once a macroeconomic problem has been identified c. The time needed to introduce a change in monetary or fiscal policy d. The time necessary for changes in monetary or fiscal policy to have an effect on the economy
The time needed to decide what to do once a macroeconomic problem has been identified
Passive policy advocates believe that uncertain lags and ignorance about how the economy works prevent policy makers from accurately determining and effectively implementing the appropriate active policy.True False
TRUE
Which of the following is true regarding the policy positions of George H.W. Bush and Bill Clinton in the 1992 election? a. Bush’s approach was relatively more active, while Clinton’s was relatively more passive. b. Both Bush and Clinton were advocates of a passive approach. c. Bush’s approach was relatively more passive, while Clinton’s was relatively more active. d. Both Bush and Clinton were advocates of an active approach.
Bush’s approach was relatively more passive, while Clinton’s was relatively more active.
The rational expectations school of thought argues that people form expectations based on: a. all available information. b. only on information they believe to be “insider” information. c. their own instincts. d. only past information and experience
all available information.
Rational expectations represents a school of thought which claims that people form expectations solely based on all past information.True False
FALSE
On the basis of the rational expectations theory we can say that, the aggregate supply in an economy depends on what sort of macroeconomic course policy makers are expected to pursue.True False
TRUE
According to rational expectations, if policy makers consistently stimulate aggregate demand when real output falls below the economy’s potential output, then people will not be able to anticipate the effects of this policy on the price level, unemployment, and the real output level.True False
FALSE
As long as wage increases do not exceed labor productivity growth rates, a stable price level should be the result.True False
TRUE
Which of the following correctly describes the time-inconsistency problem? a. The problem that arises when policy makers have an incentive to announce one policy to influence expectations, but then pursue different policy once those expectations have been formed and acted on. b. The problem that arises when the president and Congress have an incentive to pursue policies that are different from those of the Fed. c. The problem that arises when consumer preferences change frequently over time such that a product considered highly desirable at one point would be considered undesirable after sometime. d. The problem that arises when firms increase supply of a product in anticipation of future increase in demand for the product, but suffers a heavy loss because of a steep fall in demand.
The problem that arises when policy makers have an incentive to announce one policy to influence expectations, but then pursue different policy once those expectations have been formed and acted on.
Economists of the rational expectations school believe that if the economy is already producing its potential output, an expansionary monetary policy, if fully and correctly anticipated, will have no effect on output or employment.True False
TRUE
Expected expansionary monetary policy will raise real output beyond the economy’s potential level in the short run.True False
FALSE
Cold turkey refers to the announcement and execution of tough measures to reduce high inflation.True False
FALSE
Which of the following central banks does not have an explicit inflation target? a. The Bank of England b. The Federal Reserve c. Swiss National Bank d. European Central Bank
The Federal Reserve
Inflation target refers to the commitment of central bankers to keep inflation below a certain rate for the next year or two.True False
TRUE
If monetary policy is fully anticipated by workers and firms, then it has no effect on the level of output; it affects only the price level.True False
TRUE
The Phillips curve shows the possible combinations of ________ and ________ . a. potential output; the interest rate b. the interest rate; the unemployment rate c. the price level; real output demanded d. the inflation rate; the unemployment rate
the inflation rate; the unemployment rate
The adverse supply shocks experienced during the 1970s strengthened the Philips Curve relationship between inflation and unemployment.True False
FALSE
The long-run Phillips Curve indicates that macroeconomic policies are effective in increasing output and keeping prices stable in the economy.True False
FALSE
While the short-run Phillips curve is upward-sloping, the long-run Phillips curve is downward-sloping.True False
FALSE
The short-run Phillips curve is based on expected interest rate.True False
FALSE
Long-run Phillips curve is a vertical line drawn at the economy’s natural rate of ________ . a. output level b. unemployment c. inflation d. profit
unemployment
According to the natural rate hypothesis, the natural rate of unemployment is largely dependent on the stimulus provided by monetary or fiscal policy.True False
FALSE
A decrease in inflationary expectations shifts the short-run Phillips curve away from the origin.True False
FALSE
The clearest trade-off between unemployment and inflation occurred between 1960 and 1969.True False
TRUE
Those who have more faith in self-correcting forces of the economy subscribe to the passive approach of economy.True False
TRUE
The passive approach depends on the forces of what automatic stabilizers to close a recessionary gap? a. Aggregate Demand b. Interest Rates c. Short Run Aggregate Supply d. Passive Approach depends on nothing to close recessionary gaps
Short Run Aggregate Supply
Monetary policy uses timely government actions to impact interest rates and the supply of money.True False
TRUE
Which of the following is considered a problem with active policy? a. Estimating the potential output b. Forecasting aggregate demand c. Tools must already be in place to achieve results relatively quickly. d. All of the above are problems with the implementation of active policy
All of the above are problems with the implementation of active policy
Which type of lag is based on the time needed to identify a macroeconomic problem and assess its seriousness? a. Recognition Lag b. Decision-Making Lag c. Implementation Lag d. Effectiveness Lag
Recognition Lag
The time needed to decide what to do once a macroeconomic problem has been identified is called a ________ ________ . a. Recognition Lag b. Decision-Making Lag c. Implementation Lag d. Effectiveness Lag
Decision-Making Lag
The time needed to introduce a change in monetary or fiscal policy is called an ________ ________ . a. Recognition Lag b. Decision-Making Lag c. Implementation Lag d. Effectiveness Lag
Implementation Lag
Fiscal policy has shorter implementation lag times than monetary policy.True False
FALSE
The time needed for changes in monetary of fiscal policy to affect the economy is called the ________ ________ . a. Recognition Lag b. Decision-Making Lag c. Implementation Lag d. Effectiveness Lag
Effectiveness Lag
Advocates of a passive policy approach argue that an active stabilization policy imposes troubling fluctuations in the price level and real GDP because it often takes a hold only after market forces have already returned the economy to its potential output level.True False
TRUE
The announcement and execution of tough measures to reduce high inflation
cold turkey
The time needed to decide what to do once a macroeconomic problem has been identified
decision-making lag
The time needed for changes in monetary or fiscal policy to affect the economy
effectiveness lag
The time needed to introduce a change in monetary or fiscal policy
implementation lag
Commitment of central bankers to keep inflation below a certain rate for the next year or two
inflation target
A vertical line drawn at the economy’s natural rate of unemployment that traces equilibrium points that can occur when workers and employers have the time to adjust fully to any unexpected change in aggregate demand
long-run Phillips curve
The natural rate of unemployment is largely independent of the stimulus provided by monetary or fiscal policy
natural rate hypothesis
A curve showing possible combinations of the inflation rate and the unemployment rate
phillips curve
A school of thought that argues people form expectations based on all available information, including the likely future actions of government policy makers
rational expectations
The time needed to identify a macroeconomic problem and assess its seriousness
recognition lag
Based on an expected inflation rate, a curve that reflects an inverse relationship between the inflation rate and the unemployment rate
short-run Phillips curve
When policy makers have an incentive to announce one policy to influence expectations but then pursue a different policy once those expectations have been formed and acted on
time-inconsistency problem
