Exam Thirteen

Question 1

According to the Keynesian view of macroeconomics, what should be the role of the government as far as economic policy?

Answer 1

The government should try to stabilize the ADE curve.

Question 2

As discussed in the text, what is the Fed Reaction Rule?

Answer 2

As inflation rises the Fed will tend to raise interest rates, and vice versa.

Question 3

Suppose an economy is currently at the full employment level of output. Assume the government then undertakes expansionary fiscal policy. Based on the ADE/ASR model, what would we expect to be the most likely outcome?

Answer 3

An increase in inflation but little change in output.

Question 4

Suppose an economy is currently in a recession. Assume the government then undertakes expansionary fiscal policy, but not enough to move the economy to the full employment level of output. What would we expect to be the most likely outcome?

Answer 4

An increase in output but little change in inflation

Question 5

Suppose people’s expectation of inflation goes down over time. Holding everything else constant, how would this change the position of the aggregate supply response (ASR) curve?

Answer 5

The curve will shift down, but not to the right or left

Question 6

Suppose that people lower their expectations about inflation in an economy in a recession. At the same time, the government undertakes expansionary fiscal policy. Based on the ADE/ASR model, what would we expect to be the most likely outcome?

Answer 6

Output will increase but inflation could go up or down

Question 7

Suppose that people lower their expectations about inflation in an economy in a recession. Based on the ADE/ASR model, what would we expect to be the most likely effect of this change in expectations.

Answer 7

An increase in output and a decrease in inflation

Question 8

Suppose the ADE curve remains stable but technology increases the productive capacity of an economy at full employment. Based on the ADE/ASR model, what would we expect to be the most likely outcome?

Answer 8

An increase in output and a decrease in inflation

Question 9

Suppose the Fed changes its target rate of inflation. Holding everything else constant, how would this, immediately, change the position of the aggregate supply response (ASR) curve?

Answer 9

The ASR curve would not shift immediately

Question 10

Under what conditions is a wage-price spiral most likely to occur?

Answer 10

When the economy is near the maximum capacity output

Question 11

T/F: A supply shock can increase or decrease the maximum capacity output in an economy.

Answer 11

True

Question 12

T/F: A wage-price spiral is most likely to occur when an economy moves into a recession.

Answer 12

False

Question 13

T/F: All economists believe that sustainability goals conflict with macroeconomic goals.

Answer 13

False

Question 14

T/F: Based on the Classical ASR curve, we would expect that the economy will normally be at the full employment level of output.

Answer 14

True

Question 15

T/F: Based on the Classical ASR curve, we would expect that expansionary fiscal policy would lead to an increase in inflation but no change in output.

Answer 15

True

Question 16

T/F: During the 1990s unemployment and inflation both generally fell.

Answer 16

True

Question 17

T/F: Stagflation is a situation of both increasing prices and increasing unemployment.

Answer 17

True

Question 18

T/F: The aggregate demand equilibrium (ADE) curve plots the relationship between interest rates and aggregate demand.

Answer 18

False

Question 19

T/F: The ASR curve is vertical in the full-employment range.

Answer 19

False

Question 20

T/F: The stagflation of the 1970s most likely occurred because of contractionary fiscal policy combined with increasing expectations about inflation.

Answer 20

True