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Exam 14: Macroeconomic Policy: Challenges in a Global Economy

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Question 51

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Briefly explain the two major models of expectations formation. What are the implications for macroeconomic policy of assuming one model or the other?

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For example, if the rate of inflation in...

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Question 52

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The American Recovery and Reinvestment Act, signed into law in February 2009, was designed to shift aggregate

A) demand rightward.
B) demand leftward.
C) supply rightward.
D) supply leftward.

E) None of the above
F) All of the above

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Question 53

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Adjustable-rate mortgages usually have interest rates lower than market rates during the first year.

Both _____ on credit by households and _____ interest rates set in motion the events that led to the 2007-2009 financial crisis.

(Figure: Determining Long-Run and Short-Run Economic Shifts) Starting at point r, the economy will move to point _____ in the long run if policymakers successfully increase aggregate demand.

(Figure: Understanding Phillips Curves Shifts 2) Which statement BEST describes a decision by Congress to move the economy from Phillips curve PC₀ to Phillips curve PC₁?

Adjustable-rate mortgages are attractive to many homebuyers because these mortgages start out with a _____ interest rate that _____ in later years.

Economic expectations formed after individuals make the best possible use of all publicly available information are known as _____ expectations.

When the expected rate of inflation increases, the Phillips curve

(Figure: Understanding Phillips Curves) What is the expected inflation rate associated with Phillips curve PC_b?

One of the trigger points for the financial crisis of 2007-2009 was when

_____ expectations measure the rate of inflation expected by workers for any given period.

Describe how inflationary expectations can take on a life of their own and thwart policymakers. Use a graph to support your response (begin with full employment and inflation with inflationary expectations equal to zero).

In a jobless recovery, neither output nor employment growth occurs.

Which of these is an appropriate policy to address a jobless recovery?

Which of these was a change in banks' lending practices that contributed to a housing bubble?

By paying an efficiency wage, employers give employees an incentive to shirk their duties.

The unemployment rate during the 2007-2009 recession was _____ the unemployment rate in the previous two recessions.

As the economy recovers, the Federal Reserve will wind down its bond purchases, causing interest rates to fall.

Which statement(s) is/are TRUE? I. People on fixed incomes will not be hurt if the United States monetizes its debt. II) If the cost of Medicare changes as health care costs increase, it would enhance the government's ability to keep deficits and the national debt under control over the long term. III) If the United States monetizes its debt, it will result in a weaker dollar if foreigners hold fewer U.S. dollars.