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
