Lesson 8
Policies, Tradeoffs, and Final Thoughts
1. What do Friedman and Phelps believe will result from the
government’s attempt to use monetary policy to expand
aggregrate demand?
A. A short-run increase in both inflation and unemployment
B. A short-run decrease in both inflation and unemployment
C. An increase in employment for the short-run only, with
lasting inflation
D. Long-run increases in both employment and inflation
2. The liquidity of an asset refers to the
A. variability in the price of an asset.
B. ease with which an asset is converted into the medium
of exchange.
C. predictability of the price of an asset.
D. ease with which an asset is converted into something solid
3. The Phillips curve was originally noticed by examining data on unemployment and inflation in which country?
A. United States
B. United Kingdom
C. Germany
D. Japan
4. In recent years, the Fed has chosen to target interest rates rather than money supply because
A. Congress passed the appropriate legislation.
B. the president issued an executive order.
C. the money supply has ceased to be a meaningful variable in the economy.
D. the money supply is hard to measure with sufficient precision.
5. The Volcker disinflation demonstrated that when Fed chairman Volcker announced his intention to reduce inflation quickly,
A. everyone believed him.
B. the public believed him, but Congress didn’t.
C. much of the public didn’t believe him.
D. no one believed him.
6. Which of the following statements is correct?
A. An increase in government taxes will increase household take-home pay.
B. An increase in government taxes won’t affect household take-home pay.
C. A decrease in government taxes will increase household take-home pay.
D. A decrease in government taxes will decrease household take-home pay.
7. If the long-run Phillips curve shifts to the left, the economy will have ______for any given rate of money growth and inflation.
A. lower unemployment and lower output
B. lower unemployment and higher output
C. higher unemployment and lower output
D. higher unemployment and higher output
8. Which of the following statements correctly describes the economic policy of the Kennedy administration in the early 1960s?
A. The administration used fiscal policy to stimulate the economy.
B. The administration used fiscal policy to slow down the economy.
C. The administration used monetary policy to stimulate the economy.
D. The administration used monetary policy to slow down the economy.
9. Why did believers in the theory of rational expectations criticize attempts to estimate the sacrifice ratio?
A. Because it’s irrational for people make sacrifices.
B. Because the estimates left out the effect of people’s rational expectations about policy.
C. Because there’s no rational relationship between reducing output and controlling inflation.
D. Because it’s irrational to sacrifice output to controlling inflation.
10. In John Maynard Keynes’s influential book on economics, The General Theory, he argues that
A. aggregate demand is unstable because of arbitrary changes in consumer and
investment spending.
B. aggregate demand is unstable because of unexpected changes in government
purchases.
C. government shouldn’t use fiscal policy to offset private changes in aggregate demand.
D. aggregate demand isn’t influenced by waves of pessimism and optimism.
11. Samuelson and Solow believed that the Phillips curve
A. would shift to the right if the Fed used expansionary monetary policy to reduce
unemployment.
B. offered policymakers a menu of possible economic outcomes from which to choose.
C. implied that low unemployment was associated with low inflation.
D. verified that there was no relationship between inflation and unemployment.
12. Which of the following is an accurate description of the sacrifice ratio?
A. The amount of annual output dollars lost in the process of reducing inflation by
1 percentage point
B. The number of percentage points of annual output lost in the process of reducing
inflation by 1 percentage point
C. The number of percentage points of annual output lost in the process of reducing
inflation by 100 percentage points
D. The number of percentage points of annual output lost by reducing unemployment
by 1 percentage point
13. Which of the following statements is correct?
A. For a given, fixed price level, an increase in the money supply will lead to a higher
interest rate, which in turn decreases the quantity of goods and services demanded
.
B. For a given, fixed price level, an increase in the money supply will lead to a lower
interest rate, which in turn increases the quantity of goods and services demanded.
C. For a given, fixed price level, a decrease in the money supply will lead to a lower
interest rate, which in turn increases the quantity of goods and services demanded.
D. For a given, fixed price level, a decrease in the money supply will lead to a higher
interest rate, which in turn increases the quantity of goods and services demanded.
14. Which of the following statements is correct?
A. An adverse supply shock will cause the short-run Phillips curve to shift right and
the inflation rate to fall.
B. An adverse supply shock will cause the short-run Phillips curve to shift left and
the inflation rate to fall.
C. An adverse supply shock will cause the short-run Phillips curve to shift left and the
inflation rate to rise.
D. An adverse supply shock will cause the short-run Phillips curve to shift right and
the inflation rate to rise.
16. The quantity of money demanded is ______the interest rate.
A. inversely related to
B. positively related to
C. independent of
D. the opportunity cost of
17. Which of the following statements is correct?
A. In the long run, a decrease in the rate of growth of the money supply will increase
expected inflation and shift the short-run Phillips curve to the right
B. In the long run, a decrease in the rate of growth of the money supply will increase
expected inflation and shift the short-run Phillips curve to the left.
C. In the long run, a decrease in the rate of growth of the money supply will decrease
expected inflation and shift the short-run Phillips curve to the left.
D. In the long run, a decrease in the rate of growth of the money supply will decrease
expected inflation and shift the short-run Phillips curve to the right.
18. Changes in government purchases directly affect
A. only aggregate demand.
B. only aggregate supply.
C. both aggregate demand and aggregate supply.
D. neither aggregate demand nor aggregate supply
NOTE: This one is debatable, and my choice hinges on the words “directly affect.” In theory, a change in government purchases could also impact aggregate supply; if the government spent more on roads, it could increase business productivity, which could increase aggregate supply. So C is a possibility, but it depends on how you interpret the question.
19. The purpose of President Kennedy’s tax cuts of 1964 was to
A. decrease the tax burden of the poor.
B. follow the advice of John Maynard Kaynes.
C. increase aggregate demand.
D. reduce inflation.
20. Most of the lag problems associated with the use of monetary and fiscal policy
A. have been solved in recent years due to better economic forecasting.
B. could be solved if recessions and inflationary cycles could be accurately forecast.
C. are caused by the phenomenon of sticky wages.
D. are caused by the phenomenon of sticky prices.