ECON 330D1 Chapter 8: ECON 330D1 : Output in the Short Run: The Role of Expectations and Adjustment Costs

Classical or Keynesian? Put a “C” for Classical or a “K” for Keynesian in the space provided.

_____A. Believed the total money supply in an economy was fixed and controlled by the central bank. _____B. Believed in fiscal policy as a tool to manipulate the performance of the economy.

_____C. Stressed the self-adjusting tendencies of the economy.

_____D. Believed in the flexibility of wages and prices.

_____E. Believed the aggregate supply curve for output was completely fixed.

_____F. Believed output was solely determined by supply factors.

_____G. Viewed the economy as unstable as a result of the instability of aggregate demand.

_____H. Believed that if economy was left alone to operate full employment would be reached.

_____I. Would argue for wage-price controls as a governmental policy for manipulating the economy. _____J. Believed governmental policy could bring about equilibrium in the money and output markets. _____K. Believed money wages would adjust quickly to equate supply and demand.

_____L. Believed consumer and laborer has complete knowledge on real price levels and can make rational decisions.

_____M. Believed supply factors more important controlling factors in the economy than demand factors. _____N. Believed that “in the long-run we are all dead!”

_____O. Aggregate demand affects output and employment.

_____ P. Believed that workers know the price level , the money wage, and therefore know the real wage. _____Q. Believed that interest rates would adjust to keep shocks from affecting aggregate demand. _____R. Believed that changes in desired business investment expenditures were one of the major factors responsible for changes in income.

_____S. Believed that consumption was dependent on the level of income plotted graphically on a consumption function.

_____T. Stressed business expectations as a factor in determining the level of investment.

Which of the following statements has been proposed as a benefit of passive policy making?

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QUESTION 6

The idea of policy making taking place in response to a predetermined set of rules is referred to as

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QUESTION 7

What types of unemployment will still exist when the economy is at the natural rate of unemployment?

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QUESTION 8

The natural rate of unemployment is

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QUESTION 9

According to the text, minimum-wage laws cause increases in

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QUESTION 10

During a recession, the overall unemployment rate

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QUESTION 11

Cyclical unemployment is

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QUESTION 12

Which of the following unemployment rates can be negative?

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QUESTION 13

An unexpected increase in aggregate demand typically causes

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QUESTION 14

The rate of unemployment below which the rate of inflation tends to rise and above which the rate of inflation tends to fall is known as the

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QUESTION 15

Based on the work of economist A.W. Phillips, economists concluded that

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QUESTION 16

What happens to the Phillips curve when the expected rate of inflation rises?

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QUESTION 17

The short-run Phillips curve suggests what policy making implications?

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QUESTION 18

We observe the duration of unemployment falling and wage rates rising. It is likely that

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QUESTION 19

Policymakers' attempts to use the Phillips curve to reduce the unemployment rate below the natural rate

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QUESTION 20

Which one of the following would likely reduce the level of structural unemployment?

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QUESTION 21

An unexpected decrease in aggregate demand

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QUESTION 22

When a person bases her future expectations for the economy on all available current data and her own judgment about future policy effects, this is known as

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QUESTION 23

According to the rational expectations hypothesis, monetary policy can have real effects on such variables as real Gross Domestic Product (GDP) in the short run

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QUESTION 24

Rational expectations theory suggests that short-run stabilization policy

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QUESTION 25

Proponents of the policy irrelevance proposition believe that, under the assumption of rational expectations, the unemployment rate will

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QUESTION 26

For the policy irrelevance theorem to hold, people must

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QUESTION 27

According to the policy irrelevance proposition, the impact of an anticipated expansionary monetary policy will be to

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QUESTION 28

One key assumption lying behind the policy irrelevance proposition is that

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QUESTION 29

According to the real business cycle theory, an increase in an input price, such as oil, will

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QUESTION 30

When "stagflation" occurs,

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QUESTION 31

When a supply shock is permanent

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QUESTION 32

According to economists who promote sticky-price theories,

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QUESTION 33

Some economists suggest that because of the costs of negotiating contracts, printing price lists, etc., it is costly for firms to change prices in response to demand changes. This hypothesis is known as the

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QUESTION 34

The menu cost theory suggests that

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QUESTION 35

In new Keynesian theory, the pattern of inflation exhibited by an economy with growing aggregate demand known as inflation dynamics is

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QUESTION 36

Menu costs are a possible reason for

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QUESTION 37

New Keynesians hypothesize that

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QUESTION 38

Economists Milton Friedman and E.S. Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policy makers, because

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QUESTION 39

When it comes to active policy making most economists agree that

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QUESTION 40

If population growth occurs while jobs are difficult to obtain or labor force participation does not increase,

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QUESTION 41

If the level of aggregate real Gross Domestic Product (GDP) remains constant, a reduction in the population

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QUESTION 42

Suppose a nation's real Gross Domestic Product (GDP) grows at a constant rate of 5 percent per year while its population grows 2 percent annually. Given this information, this nation's annual rate of per capita real GDP growth is approximately equal to

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QUESTION 43

In the determination of economic growth, political freedom

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QUESTION 44

Political freedom can sometimes moderately reduce economic growth because

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QUESTION 45

Economic freedom is

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QUESTION 46

The right to openly support and democratically select national leaders is

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QUESTION 47

Economic growth is measured by

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QUESTION 48

Laws that make it difficult to start a new business lead to a

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QUESTION 49

Dead capital is

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QUESTION 50

The significance of dead capital is that

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QUESTION 51

Developing countries are damaged by dead capital because

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QUESTION 52

The role that dead capital plays in a country's economic growth is that

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QUESTION 53

When government inefficiencies exist,

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QUESTION 54

The acquisition of more than 10 percent of the shares of ownership in a company in another nation is called

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QUESTION 55

Most international investment finance today comes from

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QUESTION 56

Portfolio investment means buying

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QUESTION 57

The primary motivation for private foreign investment in developing nations is

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QUESTION 58

An international financial crisis is most often caused by

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QUESTION 59

Adverse selection is a barrier to financing global growth because

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QUESTION 60

Moral hazard is a barrier to financing global growth because

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QUESTION 61

Two types of asymmetric information that create problems for international investment are

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QUESTION 62

The multinational agency that specializes in making loans to developing nations in an effort to promote long-term development and growth is the

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QUESTION 63

The multinational organization that aims to promote world economic growth by fostering financial stability is the

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QUESTION 64

A nation's account with the IMF is called its

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QUESTION 65

The international unit of accounting used by the International Monetary Fund (IMF) is called

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QUESTION 66

The International Monetary Fund (IMF) was created to achieve each of the following goals EXCEPT

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QUESTION 67

The World Bank specializes in making loans to promote

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QUESTION 68

The International Monetary Fund

Question 32

1. Tim, a citizen of the United States living in Virginia, buys a computer that was made in South Korea by a Japanese firm. This transaction would affect the GDP of the United States in which way?

   		Net exports would decrease and GDP would decrease.
   		Net exports would decrease and GDP would be unaffected.
   		Net exports would increase and GDP would increase.
   		Net exports would increase and consumption would increase.

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Question 33

1. An increase in U.S. government spending tends to

   		increase U.S. interest rates and increase the U.S. capital account surplus.
   		increase U.S. interest rates and decrease the U.S. capital account surplus.
   		decrease U.S. interest rates and increase the U.S. capital account surplus.
   		decrease U.S. interest rates and decrease the U.S. capital account surplus.

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Question 34

1. A _______ is a system in which the government intervenes extensively in the foreign exchange market to keep the exchange rate within certain bounds.

   		dirty float
   		floating exchange rate
   		fixed exchange rate
   		dollarization

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Question 35

1. Suppose the exchange rate between the euro and the dollar is E0.5 to $1. If a Big Mac costs $3 in the United States and E1.5 in Germany, then the real exchange rate is

   		1:1.
   		2:1.
   		1:2.
   		It cannot be determined from this information.

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Question 36

1. Which of the following prevent the purchasing power parity theorem from holding perfectly?

   		transportation costs
   		goods that cannot be shipped
   		tariffs and quotas
   		Each of these answers is correct.

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Question 37

1. Fiscal policy is more effective in affecting economic activity if

   		many resources are unemployed.
   		there is a real shock instead of an aggregate demand shock.
   		the economy returns to the long-run condition almost immediately.
   		there is a long implementation lag.

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Question 38

1. In a typical year, changes in government spending compared to overall spending are relatively

   		small.
   		large.
   		unpredictable.
   		well-timed.

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Question 39

1. Which statement is TRUE about the difference between monetary and fiscal policy?

   		Fiscal policy can quickly adjust to changes in aggregate demand.
   		Fiscal policy can have a more direct impact.
   		Monetary policy is subject to many long lags.
   		Monetary policy can affect the economy regardless of the actions banks take.

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Question 40

1. Fiscal policies that help an economy in a recession without additional actions by policy makers are called

   		consumption smoothers.
   		Ricardian equalizers.
   		automatic stabilizers.
   		Each of these answers is correct.

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Question 41

1. The U.S. individual income tax system can best be described as a

   		regressive tax system.
   		flat tax system.
   		zero tax system.
   		progressive tax system.

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Question 42

1. What demographic change in the United States will cause government spending to increase in the next 50 years?

   		The population over 65 will grow.
   		The population will be younger.
   		Women will have fewer children.
   		Immigration will increase.

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Question 43

1. What kind of rising costs will mostly cause U.S. government spending to skyrocket in the future?

   		defense
   		environmental protection
   		education
   		health care

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Question 47

1. The Fed could have popped the bubble of the housing boom in the 2000s by

   		lending directly to homeowners.
   		regulating the stock markets more.
   		reducing the growth rate of the money supply.
   		doing nothing.

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Question 48

1. Which of the following would be an example of running monetary policy by rules?

   		A 5 percent increase in money supply automatically leads to a 2 percent increase in real GDP.
   		An increase in money supply automatically leads to an increase in inflation.
   		The Fed will increase money growth to different levels, depending on the severity of the recession.
   		A 1 percent drop in real GDP will automatically elicit a 2 percent increase in money supply. Question 50 Moral hazard occurs when the failure of one financial institution can bring down other institutions as well. financial institutions take on too much risk because they are insured. financial institutions become insolvent because they issued too many loans. there are more short-term liabilities than short-term assets. Which of the following is NOT a transmission mechanism? reductions in the money supply intertemporal substitution uncertainty sticky wages and prices Question 56 For a given increase in government spending growth, intertemporal substitution is more widespread when the impact of AD growth on both inflation and real GDP growth is stronger. the impact of AD growth on both inflation and real GDP growth is weaker. the impact of AD growth on inflation is stronger and the impact of the AD growth on real GDP growth is weaker. the impact of AD growth on inflation is weaker and the impact of AD growth on real GDP growth is stronger. Stalin: instituted democratic reforms, leading to widespread prosperity. took government control of the farms in Ukraine, leading to the starvation of millions of people. increased the provision of public goods, which had a positive effect on lowering the unemployment rate. tried unsuccessfully to expand voting rights in 1924 Russia. 1 points Question 60 1 points Question 59 If voters care about two issues such as taxes and war, then politicians: will form a stable policy on these issues. can pose a policy that will never lose against another policy. must assume that there is no median voter. may never converge on a stable outcome. 1 points Question 58 Policy A adversely affects 50 million people at a cost of $1 per person. But Policy A also benefits 1,000 people at $30,000 per person. Which of the following statements is true? Policy A will not become law because it hurts more people than it helps. Policy A concentrates all the costs among a small group of people and all the benefits among a large group of people. Policy A is likely to be supported by politicians even though it makes society worse off. Since Policy A negatively affects many people, and so rational ignorance will not be a problem. 1 points Question 57 Data for the United States show that the incumbent party tends to win the election if: I. personal disposable income is growing. II. the inflation rate is low. III. the political party has not been in power for too many continuous terms. I only I and II only I and III only I, II, and III 1 points Question 53 1 points Question 52 What is the purpose of the Fed's structure? to give the President of the United States as many tools as possible to regulate the economy to make sure all states are given equal access to monetary policy decisions to keep the private sector out of the monetary policy making arena to keep the power of the Fed dispersed 1 points Question 51 An increase in money growth will cause inflation to increase in the short run only. the long run only. both the short run and the long run. neither the short run nor the long run.