Q&A Hero

Q: According to Tobin's q theory, ________ policy can affect ________ spending through its effect on the prices of common stock. A) fiscal; consumption B) fiscal; investment C) monetary; consumption D) monetary; investment

Q: During the Great Depression, Tobin's q A) rose dramatically, as did real interest rates. B) fell to unprecedentedly low levels. C) stayed fairly constant, in contrast to most other economic measures. D) rose only slightly, in spite of Hoover's attempts to prop it up.

Q: In the late 1990s, the stock market bubble ________ the value of Tobin's q, and caused ________ in business equipment. A) increased; underinvestment B) increased; overinvestment C) decreased; underinvestment D) decreased; overinvestment

Q: Tobin's q theory suggests that monetary policy may affect investment spending through its impact on A) stock prices. B) interest rates. C) bond prices. D) cash flow.

Q: Tobin's q is defined as the market value of firms ________ the replacement cost of capital. A) times B) minus C) plus D) divided by

Q: A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar. A) lowering real; decreasing B) lowering real; increasing C) raising nominal; increasing D) raising real; increasing

Q: A contractionary monetary policy raises the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A) appreciate; raising B) appreciate; lowering C) depreciate; raising D) depreciate; lowering

Q: An expansionary monetary policy increases net exports by ________ interest rates and ________ the value of the dollar. A) lowering nominal; decreasing B) lowering real; decreasing C) raising nominal; increasing D) raising real; increasing

Q: An expansionary monetary policy lowers the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A) appreciate; raising B) appreciate; lowering C) depreciate; raising D) depreciate; lowering

Q: If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel. A) asset; labor B) asset; credit C) commodity; labor D) commodity; credit

Q: If the aggregate price level adjusts slowly over time, then an expansionary monetary policy lowers A) only the short-term nominal interest rate. B) only the short-term real interest rate. C) both the short-term nominal and real interest rates. D) the short-term nominal, the short-term real, and the long-term real interest rates.

Q: The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the A) traditional interest-rate channel. B) Tobins' q theory. C) wealth effects. D) cash flow channel.

Q: According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure on A) business fixed investment. B) government expenditure. C) consumer nondurables. D) net exports.

Q: Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behavior. A) nominal; more; real B) real; less; nominal C) real; more; nominal D) market; more; real

Q: 25.1 Transmission Mechanism of Monetary Policy

Q: If aggregate output is below the natural rate level, activists of policies would recommend that the government A) do nothing. B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right. C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right. D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Q: Activists of the policies believe that A) the self-correcting mechanism through wage and price adjustment is very slow. B) wages and prices are sticky. C) the government needs to pursue active policy to eliminate high unemployment when it develops. D) all of the above.

Q: Nonactivists of the policies believe that A) wages and prices are very flexible. B) the self-correcting mechanism is very rapid. C) government action is unnecessary. D) all of the above.

Q: Which of the following statements is correct? A) If most shocks to the economy are aggregate demand shocks or permanent aggregate supply shocks, then policy that stabilizes inflation will also stabilize economic activity, even in the short run. B) If temporary supply shocks are more common, then a central bank must choose between stabilizing inflation and stabilizing output in the short run. C) In the long run, there is no conflict between stabilizing inflation and economic activity in response to shocks. D) all of the above.

Q: When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run, then A) aggregate demand curve shifts rightward. B) output will be at its potential. C) inflation rate will be higher. D) all of the above. E) both A and B.

Q: When the economy suffers a temporary negative supply shock, the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to A) more stable economic activities. B) a large deviation of output from its potential. C) divine coincidence. D) both B and C.

Q: When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A) aggregate output drops in the short run. B) output will return to potential output over time. C) aggregate output is stabilized. D) all of the above. E) both A and B.

Q: When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will be unchanged. E) both B and D.

Q: When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A) aggregate demand curve shifts leftward. B) output will be unchanged. C) output will be at its potential. D) all of the above. E) both A and C.

Q: When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A) aggregate demand curve shifts leftward. B) aggregate demand curve shifts rightward. C) output will be unchanged. D) both A and C.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be higher. B) output will be at its potential. C) output will be unchanged. D) inflation will be unchanged. E) both A and B.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be unchanged. D) inflation will be unchanged.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will not change. E) both B and C.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will not change. E) both A and B.

Q: If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then A) potential output falls. B) the long-run aggregate supply curve shifts leftward. C) the short-run aggregate supply curve shifts upward. D) all of the above.

Q: When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will be unchanged. E) both B and D.

Q: When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will not change. E) both A and B.

Q: The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall A) shifted the aggregate demand curve to the right. B) shifted the aggregate demand curve to the left. C) shifted the aggregate supply curve to the right. D) shifted the aggregate supply curve to the left.

Q: Policy makers cannot achieve both price stability and economic activity stability when facing A) temporary supply shocks. B) permanent supply shocks. C) demand shocks. D) all of the above.

Q: 24.1 Response of Monetary Policy to Shocks

Q: In the period 1965 through the 1970s, policymakers pursued ________ policies in order to achieve ________. A) expansionary; high employment B) expansionary; low inflation C) contractionary; high employment D) contractionary; low inflation

Q: Because policies in the United States were too expansionary from 1965 through 1973, the U.S. suffered A) demand-pull inflation. B) cost-push inflation, as workers sought higher wages in order to keep up with inflation. C) both demand-pull and cost-push inflation. D) neither demand-pull nor cost-push inflation.

Q: Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from A) an employment target that was set too high. B) the government's inability to sell bonds to the Fed. C) an expansion in the money supply to finance federal government expenditures. D) the excessive sale of government bonds to the public.

Q: Which of the following is most likely to lead to inflationary monetary policy? A) Declining oil prices B) Resolution of conflict in the Middle East C) The enactment of a free-trade agreement with Mexico D) Rising government budget deficits

Q: Which of the following is most likely to lead to inflationary monetary policy? A) Declining oil prices B) Resolution of conflict in the Middle East C) The enactment of a free-trade agreement with Mexico D) Rising unemployment

Q: Which of the following is least likely to lead to inflationary monetary policy? A) Rising unemployment B) Expanding federal budget deficits C) Declining oil prices D) Conflict in the Middle East

Q: Demand-pull inflation can result when A) policymakers set an unemployment target that is too high. B) a persistent budget deficit is financed by selling bonds to the public. C) a persistent budget deficit is financed by selling bonds to the central bank. D) workers get numerous wage increases.

Q: Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation by comparing A) how fast prices rise relative to wages. B) the unemployment rate with its natural rate level. C) when prices rise relative to wages. D) government debt to real GDP.

Q: If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment, this can set the stage for a higher rate of money growth and A) cost-push inflation. B) demand-pull inflation. C) cost-pull inflation. D) demand-push inflation.

Q: If workers believe that government policymakers will increase aggregate demand to avoid a politically unpopular increase in unemployment when workers demand higher wages, then workers will not fear higher unemployment and their wage demands will result in A) demand-pull inflation. B) hyperinflation. C) deflation. D) cost-push inflation.

Q: If workers do not believe that policymakers are serious about fighting inflation, they are most likely to push for higher wages, which will ________ aggregate ________ and lead to unemployment or inflation or both, everything else held constant. A) decrease; demand B) increase; demand C) decrease; supply D) increase; supply

Q: The combination of a successful wage push by workers and the government's commitment to high employment leads to A) demand-pull inflation. B) supply-side inflation. C) supply-shock inflation. D) cost-push inflation.

Q: To say that inflation is a monetary phenomenon seems to beg the question: A) Why does inflationary monetary policy occur? B) Why do politicians seek reelection? C) Why is the Fed independent? D) Why does the U.S. Treasury print so much money?

Q: Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon." A) monetary B) political C) policy D) budgetary

Q: The economist who proposed that, "Inflation is always and everywhere a monetary phenomenon" was A) John Maynard Keynes. B) John R. Hicks. C) Milton Friedman. D) Franco Modigliani.

Q: The nonactivists who opposed the recent fiscal stimulus package argue that A) fiscal stimulus would take too long to work because of long implementation lags. B) fiscal stimulus might kick in after the economy had already recovered. C) fiscal stimulus could lead to increased volatility in inflation and economic activity. D) all of the above. E) none of the above.

Q: The time it takes for the policy actually to have an impact on the economy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The time it takes for policy makers to change policy instruments once they have decided on the new policy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The time it takes to pass legislation to implement a particular policy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The time it takes for policy makers to be sure of what the data are signaling about the future course of the economy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The time it takes for policy makers to obtain data indicating what is happening in the economy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag.

Q: The effectiveness lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.

Q: The implementation lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.

Q: The legislative lag represents A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.

Q: The recognition lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.

Q: The data lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.

Q: The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for A) supply-side policy. B) nonactivists. C) activists. D) demand-management policy.

Q: Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output. A) supply; less B) supply; more C) demand; less D) demand; more

Q: If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government A) do nothing. B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right. C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right. D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Q: The expectations-augmented Phillips curve implies that as expected inflation increases, nominal wages ________ to prevent real wages from ________. A) fall; rising B) fall; falling C) rise; falling D) rise; rising

Q: The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply decreases. A) easy; rise B) easy; fall C) tight; fall D) tight; rise

Q: The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply increases. A) easy; rise B) easy; fall C) tight; fall D) tight; rise

Q: As of 2009, China's economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy.

Q: In the long run, following a combination of a negative demand shock and a temporary negative supply shock, A) both inflation and output return to the original long-run equilibrium values. B) inflation is permanently increased, while output returns to potential output. C) output returns to potential output, while inflation may be higher or lower than its initial value. D) inflation is permanently reduced, while output returns to potential output. E) None of the above.

Q: The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is true of the Chinese experience? A) The worldwide decline in demand led to a collapse of Chinese exports. B) Instead of relying solely on the economy's self-correcting mechanism, much more aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary easing) served to shift the AD curve back to general equilibrium relatively quickly. C) The Chinese economy was better able than the U.S. economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S. D) All of the above. E) None of the above.

Q: The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is true of the United Kingdom's experience? A) The increase in the price of oil immediately shifted the AS curve to the left. B) The financial crisis did not take hold right away so the AD curve did not immediately shift. C) Eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a further fall in output and an increase in the unemployment rate. D) All of the above. E) None of the above.

Q: The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is an appropriate description of the mechanism that would have ensued? A) The increase in the price of oil would have immediately shifted the AS curve to the right. B) The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right. C) Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run. D) All of the above. E) None of the above.

Q: Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.

Q: According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Q: According to aggregate demand and supply analysis, the favorable supply shock of 1995-1999 had the effect of A) increasing aggregate output, lowering unemployment, and raising inflation. B) decreasing aggregate output, raising unemployment, and raising inflation. C) increasing aggregate output, lowering unemployment, and lowering inflation. D) decreasing aggregate output, raising unemployment, and lowering inflation.

Q: According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975 and 1978-1980 had the effect of A) increasing aggregate output, lowering unemployment, and raising the inflation. B) decreasing aggregate output, raising unemployment, and raising the inflation. C) increasing aggregate output, raising unemployment, and raising the inflation. D) decreasing aggregate output, raising unemployment, and lowering the inflation.

Q: According to aggregate demand and supply analysis, America's involvement in the Vietnam War had the effect of A) increasing aggregate output, lowering unemployment, and raising the inflation. B) decreasing aggregate output, lowering unemployment, and lowering the inflation. C) increasing aggregate output, raising unemployment, and raising the inflation. D) decreasing aggregate output, raising unemployment, and lowering the inflation.

Q: Because shifts in aggregate demand are not viewed as being particularly important to aggregate output fluctuations, they do not see much need for activist policy to eliminate high unemployment. "They" refers to proponents of A) the natural rate hypothesis. B) monetarism. C) the Phillips curve model. D) real business cycle theory.

Q: This theory views shocks to tastes (workers' willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output. A) The natural rate hypothesis B) Hysteresis C) Real business cycle theory D) The Phillips curve model

Q: A theory of aggregate economic fluctuations called real business cycle theory holds that A) changes in the real money supply are the only demand shocks that affect the natural rate of output. B) aggregate demand shocks do affect the natural rate of output. C) aggregate supply shocks do affect the natural rate of output. D) changes in net exports are the only demand shocks that affect the natural rate of output.