Beginning at point B, an economy such as the one depicted in Figure 15.

1, can be returned to full employment by Answer discretionary increases in government spending. discretionary increases in income tax rates. discretionary increases in interest rates. none of the above policy changes. Experiences like those of Yahoo, described in the dot-com bubble Economy Insight, have the Fed worried about Answer wealth effect spending. inflation. macroeconomic instability. All of the above. Only a and b. Fiscal policy is defined as Answer policy enacted in a fiscal rather than a calendar year. changes in the money supply. changes in the interest rate or the money supply. changes in government spending or income taxes. policy designed to maintain financial responsibility. Consider the U.S. economy at the end of the 1960s following tax cuts, the Vietnam War, and the War on Poverty. Using Figure 15.1, its state of affairs would be best described by point _____. If the Fed adjusts its monetary policy rule accordingly, we would expect a level of long-run inflation corresponding to point _____. Answer B; A C; A B; E C; D E; A

 In recent years, macroeconomists have focused primarily on the trade-off between Answer inflation and unemployment. inflation and employment. inflation fluctuations and output fluctuations. inflation fluctuations and unemployment. inflation fluctuations and output. Which of the following is the tool used most frequently by monetary authorities? Answer open market operations the discount rate credit controls The slope of the monetary policy curve is important because Answer it helps to determine the slope of the ADI curve. it represents how aggressively monetary authorities respond to changes in inflation. it determines how much output falls when the economy experiences an inflation shock. All of the above. Both b and c. The presence of deflation means that Answer the value of the dollar is falling. borrowers repay cheaper dollars. the cost of a loan exceeds even the nominal interest rate. real interest rates could be negative. When setting the federal funds rate target, the Fed Answer attempts to influence the level of economic activity. raises its target rate by the amount inflation rises. raises its target rate by more than the amount inflation rises. Both a and c.

The economy depicted in Figure 15.5 has experienced a _____ aggregate demand disturbance. If the Fed does not adjust its policy rule, the outcome will result in a long-run inflation rate corresponding to point _____. Answer positive; A positive; B positive; C negative; A negative; C Which of the following would not cause the monetary policy rule linking real interest rates and inflation to each other to shift? Answer an expansionary fiscal policy increased autonomous consumption an increase in income tax rates an increase in inflation a decrease in investment demand According to Figure 15.4 and the monetary policy rule depicted by curve B, what does the Fed believe is the full-employment real interest rate for this economy? Answer 1 percent 3 percent The Fed has difficulty estimating equilibrium real interest rate changes caused by expansionary fiscal policy because Answer equilibrium real interest rates themselves are difficult to estimate. tax revenues are subject to change depending on economic activity. potential GDP is unobservable and difficult to estimate. All of the above. Both b and c. In the absence of discretionary fiscal policy, an economy such as the one depicted in Figure 15.1, beginning at point C, will eventually return to full employment at point Answer a. c.

d. The slope of the monetary policy curve tells us Answer whether monetary policy is accommodative or nonaccommodative. how aggressively monetary authorities react to additional inflation. In an economy with automatic stabilizers, shifts in aggregate demand will lead to _____ changes in inflation and _____ changes in output. Answer larger; larger larger; smaller smaller; smaller smaller; larger no; smaller When setting interest rates, the Fed follows a monetary policy rule where real interest rates are _____ related to inflation but they respond by _____ change in inflation. Answer positively; less than the negatively; less than the negatively; the same Which of the following statements about monetary policy is untrue? Answer Monetary policy regularly behaves like an automatic stabilizer. Discretionary monetary policy is used to achieve macroeconomic goals. The Fed chair is likely the second most powerful person in Washington, D.C. The Fed meets every six weeks to set the prime interest rate. Fed policy affects the slope of the aggregate demand inflation curve.

In an economy lacking automatic stabilizers, inflation shocks will lead to _____ interest rates and _____ changes in output. Answer higher; larger higher; smaller no change in; smaller

 Economists initially thought they could take advantage of a trade-off between inflation and unemployment, even in the long run. By the end of the _____, experience had convinced most policymakers that no trade-off existed between average inflation rates and average unemployment rates. Answer 1950s 1960s 1970s In Figure 15.2, the curve best describing the relationship between nominal interest rates and inflation is curve Answer a. b. d. e. In an economy with automatic stabilizers, the _____ will be steeper. Answer monetary policy rule inflation adjustment curve ADI curve Okun relationship Some economists argue against the use of discretionary fiscal policy because Answer recent recessions do not last long enough to accomplish the necessary legislation. it is viewed as very inflexible in meeting the economic needs of a downturn. public perceptions of such policies hold them to be very temporary in nature. All of the above. Only parts a and b. With the use of immediate discretionary fiscal policy, an economy such as the one depicted in Figure 15.1, beginning at point B, can be returned to full employment at point Answer a. b. c. Which of the following interest rates moves in tandem with the federal funds rate? Answer

the prime rate mortgage rates auto rates All of the above. Only b and c. Which of the following would not cause the monetary policy rule linking nominal interest rates and inflation to each other to shift? Answer a contractionary fiscal policy an increase in inflation an increase in income tax rates a decrease in investment demand Using Figure 15.6, what will the new nominal interest rate target be if the Fed lowers its inflation target from 3 to 2 percent? Answer 8 percent 7 percent 6 percent 5 percent 4 percent

The principle behind automatic stabilizers is to Answer smooth out consumption and overall expenditures. accommodate the inadequacies of discretionary fiscal policy. In its conduct of monetary policy, the Fed has traditionally shown concern primarily over the level of Answer inflation. employment. unemployment.

both inflation and unemployment. profits in the banking sector. Which of the following is not a consequence of the Fed increasing the federal funds rate target? Answer reserves in the banking system decrease economic activity slows down investment increases Assuming no income effects, under which of the following situations would workers voluntarily supply more labor? Answer wages rise by 10 percent; prices rise by 15 percent wages rise by 10 percent; prices rise by 10 percent wages remain unchanged; prices rise by 5 percent wages fall by 5 percent; prices remain unchanged wages rise by 10 percent; prices rise by 5 percent A full-employment deficit is most likely to occur during Answer a contraction. an expansion. a trough. a peak

Suppose an economy finds itself in the conditions represented by point C in Figure 15.1. If no policy actions are taken it will eventually return to full employment at Answer point A. point D. some point between A and E. some point between A and D. Which of the following is generally treated as the main tool of monetary policy? Answer open market operations the discount rate the federal funds rate

reserve requirements credit controls Suppose an economy finds itself in the conditions represented by point B in Figure 15.1. If no policy actions are taken it will eventually return to full employment at Answer point A. point E. some point between A and E. some point between A and D. The economy depicted in Figure 15.5 has experienced a _____ aggregate demand disturbance. If the Fed adjusts its policy rule accordingly, the outcome will result in a long-run inflation rate corresponding to point _____. Answer positive; A positive; B The Fed is able to target interest rates successfully by _____ the banking system. Answer publicly announcing its targets to altering the demand for reserves in using open market operations to change reserves in Which of the following statements is untrue? Answer Inflation stability depends on an unchanging monetary policy rule. Fiscal and monetary policy both affect aggregate demand and output. The full-employment surplus refers to Answer those people still seeking work once the economy is fully employed. the unused unemployment benefits accruing during an expansion. the excess in tax revenues over government expenditures in a fully employed economy. the amount by which tax revenues exceed government expenditures. In Figure 15.3, the curve best describing the relationship between real interest rates and inflation is curve Answer a. c.

d. e. In an economy lacking automatic stabilizers, shifts in aggregate demand will lead to _____ changes in inflation and _____ changes in output. Answer larger; larger larger; smaller smaller; smaller smaller; larger no; smaller Suppose someone borrows $1,000. In order for the lender to earn a 4 percent real rate of return on this loan, the borrower would have to pay the lender a nominal interest rate of _____ percent. Assume an inflation rate of 3.5 percent. Answer 7.00 7.12 7.50 8.00 Which point in Figure 15.1 best describes the state of the economy as President Clinton began his term in office in 1993? Answer a. b. c. d. e. Which point in Figure 15.1 best describes the state of the economy as President George W. Bush began his term in office in 2001? Answer b. e. In the normal conduct of monetary policy, the Fed sets a target for Answer mortgage interest rates. the commercial paper rate.

the federal funds rate. Each of the following presidents used tax cuts to stimulate the economy except President Answer Lyndon B. Johnson. Ronald Reagan. William J. Clinton. George W. Bush. None of the above. With the use of immediate discretionary fiscal policy, an economy such as the one depicted in Figure 15.1, beginning at point C, can be returned to full employment at point Answer a. e. Each of the following presidents used tax cuts to stimulate the economy except President Answer John F. Kennedy. Lyndon B. Johnson. Ronald Reagan. George W. Bush. None of the above. Which of the following statements is untrue? Answer A monetary expansion raises the real interest rate. A higher full-employment real interest rate causes nominal interest rates to increase. The slope of the monetary policy rule affects the slope of the ADI curve. Tax revenues provide an important automatic stabilizer. In order to prevent deflation from occurring from a decrease in aggregate demand, the Fed must _____ interest rates in order to offset the negative GDP gap. A difficult task in this process is _____. Answer raise; raising nominal interest rates during an expansion lower; lowering nominal interest rates during an expansion not change; convincing Congress this is the correct action to take lower; estimating the equilibrium real rate of interest The presence of inflation means all of the following except that

Answer the value of the dollar is falling. borrowers repay cheaper dollars. nominal interest rates are higher than real interest rates. real interest rates are falling. real interest rates could be negative. Beginning at point C, an economy such as the one depicted in Figure 15.1 can be returned to full employment by Answer discretionary increases in government spending. discretionary increases in income tax rates. discretionary decreases in interest rates. none of the above policy changes. Suppose someone borrows $1,000. In order for the lender to earn a 4 percent real rate of return on this loan, the borrower would have to pay the lender _____ at the end of the loan period. Assume an inflation rate of 3.5 percent. Answer $1,070.00 $1,075.00 $1,076.40 An economy faced with an inflation shock will experience a _____ impact on output and a _____ long-run impact on inflation if the slope of the ADI curve is flat. Answer larger; smaller smaller; smaller larger; larger smaller; larger negligent; negligent Using Figure 15.6, if the Fed shifts its monetary policy rule from curve B to curve A in an attempt to _____ aggregate demand, it simultaneously _____ the real interest rate by _____ percentage point(s). Answer decrease; raises; two decrease; raises; one decrease; lowers; one

increase; raises; one increase; lowers; two The real rate of interest Answer takes into account the effects of inflation. represents the change in real purchasing power the lender receives. influences decisions regarding investment purchases. All of the above. Only a and c.

The field of macroeconomics began as an attempt to understand the causes of Answer the Great Depression. the financial panics of the late nineteenth century. Income taxes in the United States work as an automatic stabilizer by Answer taxing all income at a higher rate during expansions. taxing higher marginal incomes at higher tax rates. being withdrawn automatically from payroll checks. suspending some tax liability during recessions. The presence of inflation means all of the following except that Answer the value of the dollar is falling. borrowers repay cheaper dollars. nominal interest rates are higher than real interest rates. nominal interest rates reflect rates of return on financial assets. Which of the following statements is true? Answer A monetary expansion raises the real interest rate. Inflation stability depends on an unchanging monetary policy rule. A change in inflation targeting shifts the aggregate demand curve.

Only fiscal policy can shift the aggregate demand curve. The ADI (Aggregate Demand Inflation) curve in an economy _____ automatic stabilizers will be _____. Answer with; steeper with; vertical In recent years, macroeconomists have focused primarily on the trade-off between Answer inflation and unemployment. output stability and inflation. inflation stability and output stability. inflation stability and unemployment. inflation stability and output. In the absence of discretionary fiscal policy, an economy such as the one depicted in Figure 15.1, beginning at point B, will eventually return to full employment at point Answer d. e. According to the text, the most famous use of fiscal policy to promote macroeconomic goals is the Answer Kennedy tax cuts. Reagan tax cuts. Clinton tax cuts. The presence of deflation means that Answer the value of the dollar is falling. borrowers repay cheaper dollars. nominal interest rates are higher than real interest rates. nominal interest rates understate the rates of return on financial assets. real interest rates could be negative. Suppose someone borrows $1,000. In order for the lender to earn a 4 percent real rate of return on this loan, the borrower would have to pay the lender approximately _____ at the end of the loan period. Assume an inflation rate of 3 percent. Answer $1,030

$1,040 $1,070 $1,100 There is insufficient information to determine the amount. The real rate of interest does all of the following except Answer reflect the borrowers foregone future consumption. represent the change in real purchasing power the lender receives. account for the loss in purchasing power over the life of a loan. The Fed is able to target the federal funds rate successfully by _____ the banking system. Answer changing the discount rate it charges to publicly announcing its targets to altering the demand for reserves in using open market operations to change reserves in changing the reserve requirements for In order to prevent deflation occurring from a decrease in aggregate demand, the Fed must _____ interest rates in order to offset _____ GDP gap. Answer raise; a positive lower; a negative not change; no lower; a positive raise; a negative A steeply sloped monetary policy rule represents a central bank that Answer runs an aggressive accommodative monetary policy. responds aggressively to changes in inflation. favors an expansionary monetary policy. In order to prevent inflation from rising from an increase in aggregate demand, the Fed must _____ interest rates in order to offset the positive GDP gap. A difficult task in this process is _____. Answer raise; raising nominal interest rates during an expansion

not change; convincing Congress this is the correct action to take raise; estimating the equilibrium real rate of interest The policy debate among economists over the Phillips curve stems from Answer disagreement over the relative costs of inflation and unemployment. the belief in a trade-off between average inflation and average unemployment. the costs of implementing inflation to fight monetary policy. Both a and b. Using Figure 15.6, what will the new nominal interest rate target consistent with full employment be if the Fed lowers its inflation target from 3 to 2 percent? Answer 7 percent 5 percent Which point in Figure 15.1 best describes the state of the economy as President George W. Bush began his term in office in 2001? Answer a. b. d. e. The European Monetary Union does not have the tool of fiscal policy at its disposal because Answer the founding members did not think fiscal policy had shown any evidence of working. the European Union elected to use only the tool of monetary policy. there is no system of European Union taxation and transfer payments. a policy that works well for three or four countries might well be detrimental for other countries. All of the above except a. Suppose someone borrows $1,000. If the lender charges a nominal interest rate of approximately 7.5 percent, s/he expects to earn a real rate of return on this loan of approximately _____ percent. Assume an inflation rate of 3.5 percent. Answer 3.50 4.00 6.50

When setting interest rates, the Fed follows a monetary policy rule where nominal interest rates are _____ related to inflation but they respond by _____ change in inflation. Answer positively; less than the positively; the same positively; more than the negatively; less than the negatively; the same Suppose someone borrows $1,000. If the lender charges a nominal interest rate of approximately 7.5 percent, s/he expects to earn a real rate of return on this loan of _____ percent. Assume an inflation rate of 3.5 percent. Answer 3.50 3.86 4.00 7.50 The failure of the Johnson tax surcharge to produce the expected results was that Answer it was too small. it came too late. it targeted only upper-income people. it was viewed as only temporary. it was passed, but never enforced. An economy faced with an inflation shock will experience a _____ impact on output and a _____ long-run impact on inflation if the slope of the ADI curve is steep. Answer larger; smaller smaller; smaller smaller; larger negligent; negligent In order to prevent inflation from rising from an increase in aggregate demand, the Fed must _____ interest rates in order to offset _____ GDP gap. Answer raise; the positive not change; no

raise; the negative When conducting fiscal policy, the inside lag is Answer shorter than when conducting monetary policy. the amount of time it takes to design a policy package. the amount of time it takes to design and implement a policy package. not an issue; it is only relevant for monetary policy. Which of the following statements is not true? Answer Increased government spending leads to larger deficits. Larger budget deficits occur as income taxes go up. Requiring balanced budgets can contribute to larger deficits. A relatively flat monetary policy rule represents a central bank that Answer runs an aggressive nonaccommodative monetary policy. responds only mildly to changes in inflation. favors an contractionary monetary policy. Since the mid-1980s, the Feds monetary policy rule has Answer increased real interest rates as inflation rose. stimulated the economy when inflation was low and stable. worked to offset disturbances on the real side of the economy. All of the above. Only a and c. Changes in government spending or income taxes are referred to in general terms as changes in Answer monetary policy. government policy. intrusion into private affairs. legislative policy. fiscal policy. The initials ECB stand for Answer European Credit Bureau.

European Capital Bureau. European Central Bank. European Credit Bank. European Capital Bank. Using Figure 15.6, if the Fed shifts its monetary policy rule from curve A to curve B in an attempt to _____ aggregate demand, it simultaneously _____ the real interest rate by _____ percentage point(s). Answer decrease; raises; two Fed policy behavior during the years 2000 and 2001 suggests that the Fed Answer cares only about inflation. cares about unemployment, but only after inflation goals are accomplished. cares only about unemployment. cares about both inflation and unemployment. Which of the following would not cause the monetary policy rule linking nominal interest rates and inflation to each other to shift? Answer an expansionary fiscal policy a decrease in inflation a decrease in expected inflation increased autonomous consumption an increase in investment demand Examples of automatic stabilizers include most of the following items. Which one is not? Answer income taxes unemployment benefits child tax credits housing assistance Consider the U.S. economy at the end of the 1960s following tax cuts, the Vietnam War, and the War on Poverty. Using Figure 15.1, its state of affairs would be best described by point _____. Left on its own to adjust, we would expect a level of long-run inflation corresponding to point _____. Answer B; A

C; A B; E C; D E; A Economists often argue against the use of fiscal policy as an economic stimulus in times of recession because Answer of the time it takes to recognize the need for fiscal action. of the amount of time it takes to design and implement a policy package. postwar recessions are generally over by the time a fiscal policy package is implemented. All of the above. Only a and b. Discretionary fiscal policy is used Answer when its important politically to be discreet. to enact deliberate policy changes by government. when cyclical downturns warrant automatic income supplements. for quick responses to unpredictable economic disturbances. According to Figure 15.4, if the Fed shifts its policy rule from curve B to curve A, by how much does the Fed believe the full-employment real interest rate for this economy has changed? Answer 2 percent 3 percent According to Figure 15.4, if the Fed shifts its policy rule from curve B to curve A, by how much has the Fed changed its target for inflation? Answer 0 percent 2 percent 5 percent 7 percent Under which of the following scenarios would an individual be most likely, ceteris paribus, to borrow money to finance a long-term investment? Answer nominal interest rates of 4 percent; expected inflation of 5 percent nominal interest rates of 6 percent; expected inflation of 2 percent nominal interest rates of 5 percent; expected inflation of 2 percent

nominal interest rates of 7 percent; expected inflation of 5 percent