Macroeconomic Policy, Economic Stability, and the Federal Debt

Macroeconomic policy refers to the actions and decisions taken by governments and central banks to influence the overall performance of an economy. This can include monetary policy, such as setting interest rates, and fiscal policy, such as managing government spending and taxation. The goal of macroeconomic policy is to promote economic stability, which includes low inflation, low unemployment, and steady economic growth.

Economic stability is important because it creates an environment that is conducive to business and investment, and enables households and businesses to make economic decisions with more confidence.

Federal debt refers to the total amount of money that the government owes to its creditors, such as bondholders. The debt can be financed through the issuance of government bonds, which are bought by investors and traded in financial markets.

The relationship between macroeconomic policy, economic stability, and the federal debt is complex. In the short term, expansionary monetary and fiscal policy can be used to stimulate economic growth, but these policies can also lead to higher levels of inflation and an increase in the federal debt. In the long term, the government must balance the need to promote economic growth with the need to manage the federal debt. This can involve implementing policies to reduce the debt, such as cutting government spending and increasing taxes, but doing so can slow economic growth. Overall, balancing these competing goals is a key challenge for policymakers.

1.Computer forecasting models are most accurate at predicting the growth rate of real gross domestic product in an economy when:

economic conditions are relatively stable in the economy

inflation is accelerating in the economy

there is a downturn in the business cycle

there is a negative supply shock in the economy

2.Identify the correct statement about the adaptive-expectations and rational-expectations hypotheses.

Forecasts about inflation are always correct under adaptive expectations but not under rational expectations

Random errors occur under adaptive expectations but not under rational expectations

Systematic errors occur under adaptive expectations but not under rational expectations

Forecasts about inflation are always correct under rational expectations but not under adaptive expectations

3.Identify the correct statement with regard to the share of the national debt held by private investors.

This is the portion of the national debt owed to domestic and foreign investors

This portion of the national debt includes only bonds held by domestic investors

This portion of the national debt does not impose a net interest obligation on the federal government

This portion of the national debt includes the bonds held by agencies of the federal government and the Federal Reserve

4.Which of the following is true under the rational-expectations hypothesis?

The use of expansionary macroeconomic policies as stabilization tools will be effective in the short run but ineffective in the long run

The use of expansionary macroeconomic policies as stabilization tools will be ineffective when the upward shift of the aggregate demand curve of an economy is followed by a downward shift of the short-run aggregate supply curve

The use of expansionary macroeconomic policies as stabilization tools will be effective as long as the upward shifts of the short-run aggregate supply and aggregate demand curves of an economy are equal in proportion

The use of expansionary macroeconomic policies as stabilization tools will be ineffective even in the short run

5.Identify the correct statement about the U.S. economy during the 1970s.

The period was characterized by high rates of both inflation and unemployment

The U.S. government adopted contractionary monetary policies but not expansionary fiscal policies during the period

The period was characterized by high rates of inflation, but low levels of unemployment

The U.S. government adopted both contractionary monetary policies and contractionary fiscal policies during the period

6.Suppose the prices in an economy had increased at an annual rate of 5 percent during each of the past five years and people believe that there is a relationship between the growth rate of the money supply and rising prices. They note that the money supply has expanded at a rate of 10 percent annually in the last ten months, up from 5 percent during the prior five years. According to the rational-expectations hypothesis, the anticipated inflation rate in the economy will:

range between 1 and 4 percent

be 5 percent

be greater than 5 percent

be zero

7.Which of the following is true of the government debt held by private investors?

This outstanding debt imposes a net interest burden on the federal government

It represents the national debt held by the agencies of the federal government

The interest on these bonds is returned to the Treasury after the Fed has covered its costs of operation

The federal government both pays and receives almost all of the interest on the bonds held by private investors

8.The financing of the federal debt by borrowing from foreigners will lead to a(n):

increase in U.S. exports

outflow of domestic financial capital and depreciation of the dollar in the foreign exchange market

inflow of financial capital from abroad and appreciation of the dollar in the foreign exchange market

decline in U.S. imports

9.Identify the correct statement about the adaptive-expectations hypothesis.

An expansionary monetary policy will cause no immediate change in people’s expectations

People will alter their expectations immediately after a change in monetary policy is instituted

Discretionary changes in macro-policy will fail to smooth the ups and downs of the business cycle

An increase in the size of the budget deficit will cause people to anticipate an acceleration in the inflation rate

10.Measured as a share of GDP, the national debt of the United States:

declined steadily during the economic expansion of 2010-2019, but increased substantially during the COVID-19 crisis of 2020

soared to 80 percent of GDP in 2020

soared to 120 percent of GDP in 2020, higher than at any time in American history

was nearly the same in 2020 as in 2000

11.According to the adaptive-expectations hypothesis, people will alter their expectations regarding the future rate of inflation if they observe:

a significant change in the rate of inflation during the past several quarters

the government expanding the supply of money rapidly

the government borrowing money from abroad to finance government spending

that the marginal tax rates have been changing in the current period

12.If decision makers adjust fully to demand stimulus policies, persistent expansionary macro-policy will lead to

lower interest rates

inflation with no lasting reductions in the rate of unemployment

a permanent reduction in the rate of unemployment

more rapid economic growth

13.In order to make effective policy changes, policy makers need to know

Keynesian economics

where the economy is going to be six to twelve months from now

the magnitude of past recessions

the size of the budget deficit as a share of GDP

14.According to the modern view of the Phillips curve, which of the following is likely to happen when the actual rate of inflation in an economy is greater than the anticipated rate?

The real gross domestic product of the economy is likely to decrease below its potential rate

The real wage rates and real resource prices will be high

The unemployment rate of the economy is likely to fall below its natural rate

The profit margins of business firms will decline

15.In the 1960s, macroeconomists generally believed that:

decision-makers included information concerning the effects of current and future economic policies when they formed their expectations about future economic events

there was a direct trade-off between inflation and unemployment

expansionary macroeconomic policies were ineffective in the short run as well as in the long run

an increase in government expenditure would lead to a less than proportional increase in aggregate demand

16.Which of the following was a contributing factor underlying the adoption of expansionary macroeconomic policies in the United States during the 1970s?

The non-Keynesian macroeconomic view

The administrative lags associated with contractionary macroeconomic policies

The inflation unemployment trade-off

The rational-expectations hypothesis

17.The time period after the need for a policy change is recognized but before the policy is actually implemented is called the:

policy lag

recognition lag

impact lag

administrative lag

18.The time period between a change in economic conditions and the identification of that change by policy-makers is known as the:

administrative lag

legislative lag

recognition lag

impact lag

19.Which of the following is true when federal expenditures exceed tax revenues?

The Federal Reserve will sell some of its bonds in order to increase interest rates

The federal government will lower marginal tax rates in order to stimulate aggregate demand

The U.S. Treasury will issue bonds in order to finance the budget deficit

The federal government will increase its purchases of goods and services in order to increase aggregate demand

20.In contrast with the Phillips curve view of the 1960s, the modern view indicates that if policy-makers want to keep the unemployment rate in an economy low, they should follow:

expansionary macroeconomic policies in order to take advantage of the long run trade-off between inflation and the rate of unemployment

expansionary fiscal policies as they are more potent than expansionary monetary policies

policies that will consistently balance the budget regardless of business cycle conditions

policies consistent with a low and steady rate of inflation that people will be able to forecast accurately

21.Which of the following is true according to the adaptive-expectations hypothesis?

Economic decision-makers base their future expectations on actual outcomes observed during recent periods

Consumers determine the level of potential output to be produced in an economy in the current period

The government determines the supply of and demand for labor in an economy

Economic decision-makers base their future expectations on the expected effects of changes in government policies

22.Which of the following is true of the Phillips curve?

Both the adaptive- and the rational-expectations hypotheses strengthen the Phillips curve analysis of the 1960s

It shifts when there is a change in the rate of inflation, but is unaffected by changes in the expectations of inflation

When the inflation rate increases, people will come to anticipate the higher rate of inflation, shifting the Phillips curve to the right

It indicates there is a positive relationship between the rate of inflation and the rate of unemployment

23.Which of the following is true of the Treasury bonds purchased and held by the Fed?

The interest on these bonds will be returned to the Treasury after the Fed has covered its costs of operation

The Fed purchase of the Treasury bonds will decrease the supply of money

The Fed purchase of these bonds will create a net interest liability for the U.S. Treasury

The federal government will have to impose higher future taxes to meet the future interest payments on these bonds

24.Under the adaptive-expectations hypothesis, a shift to a more expansionary monetary policy will likely cause the real gross domestic product of the economy to:

increase in the short run, but remain unchanged in the long run

increase in the short run, but fall below the economy’s potential output in the long run

remain unchanged in the short run as well as in the long run

increase in both the short run and the long run

25.As measured by the amount of time spent in recession, the 1983-2019 period was

the most stable era in American history, as recession was present during only 7.7 percent of the time during these 37 years

characterized by 5 downturns and 95 months of recession

characterized by 5 downturns and the economy was in recession 33 percent of the time

the second most unstable 37-year period in American history, as the economy was in recession 22.8 percent of the time

26.Identify the correct statement about the U.S. economy.

The budget deficits as a percentage of U.S. gross domestic product reached historically high levels during the 1950s and 1960s

The federal government has run large budget surpluses since 2000

The World War II defense efforts were financed largely with taxes, not debt

The national debt as a share of the U.S. economy has risen to a historically high level since 2000

27.Which of the following is true with regard to the various time lags accompanying changes in macroeconomic policy?

The administrative lag accompanying a change in monetary policy is generally quite short

The impact lag is generally longer for a change in tax rates than for a change in government spending

The impact lag for a change in monetary policy is generally quite short, no more than 3 or 4 months

The administrative lag accompanying a major change in government expenditures is generally quite short

28.Which of the following would make it more difficult for the United States to deal with its current high national debt to GDP ratio?

A reduction in interest rates

A high rate of growth in real GDP in the future

An increase in interest rates

A reduction in the cost of medical care

29.The Fed would be most likely to adopt a restrictive policy if there is a(n):

decrease in aggregate demand

increase in a broad index of commodity prices

increase in the exchange rate of the U.S. dollar relative to other currencies

decrease in real gross domestic product below its potential level

30.Which of the following is true according to the modern view of the Phillips curve?

A higher rate of inflation will lead to a lower rate of unemployment

There is an inverse relationship between the size of the budget deficit and the unemployment rate

When the actual output is less than the potential output, the rate of unemployment will be low

If the actual inflation rate is high relative to the expected rate, the unemployment rate will be low relative to the natural rate

31.The Phillips curve shows the relationship between:

the marginal rate of taxation and the revenue generated by the tax

the rate of inflation and the aggregate demand for goods and services

the interest rate and the level of real income present at the equilibrium output

the rate of inflation and the rate of unemployment

32.Activists are economists who believe that:

neither monetary nor fiscal policy can exert an impact on the real level of output in an economy

the self-corrective mechanism of a market economy works better than discretionary policy changes

discretionary changes in monetary and fiscal policy can reduce the degree of instability in output and employment

monetary or fiscal policy is always driven by the interests of special interest groups and likely results in an inefficient allocation of resources

33.The rational-expectations hypothesis implies that:

decision-makers fail to anticipate the inflationary side effects of an expansionary policy, resulting in an increase in the long-run potential output of an economy

decision-makers quickly anticipate the inflationary side effects of an expansionary policy, resulting in little or no systematic change in the price level of an economy

decision-makers quickly anticipate the inflationary side effects of an expansionary policy, resulting in little or no systematic change in real output even in the short run

decision-makers fail to anticipate the inflationary side effects of an expansionary policy, resulting in a decrease in the short-run real gross domestic product of an economy

34.During the period 1950–1970, the national debt held by the U.S. government as a share of the gross domestic product of the economy fell because:

the U.S. government decreased the purchase of goods and services during the period

the economy experienced huge budget surpluses during the period

the growth rate of the economy was larger than the deficits as a share of gross domestic product

the loans extended by various parties to the general fund of the U.S. Treasury decreased substantially during the period

35.Which of the following correctly describes the difference between the adaptive-expectations and rational-expectations hypotheses?

Random errors occur under adaptive expectations but not under rational expectations

The time lag between a shift in policy and a change in expectations is longer under rational expectations than under adaptive expectations

Systematic errors occur under rational expectations but not under adaptive expectations

The time lag between a shift in policy and a change in expectations is shorter under rational expectations than under adaptive expectations

36.Identify the correct statement about the Phillips curve within the expectations framework.

When decision-makers overestimate the rate of inflation, unemployment will rise above its natural rate

When decision-makers overestimate the rate of inflation, the producers will earn abnormally high profits

When decision-makers underestimate the actual rate of inflation, the real wage rates of the economy will be abnormally high

When decision-makers underestimate the actual rate of inflation, the rate of unemployment will be abnormally high

37.According to the proponents of the adaptive-expectations hypothesis, expansionary macroeconomic policy is likely to result in a:

rightward shift of the aggregate demand curve of the economy

leftward shift of the short-run aggregate supply curve of the economy

rightward shift of the long-run aggregate supply curve of the economy

rightward shift of the short-run aggregate supply curve of the economy

38.Since 1950, fluctuations in real GDP in the United States have been:

more severe than they were during 1930-1945

less extreme than they were before World War II

virtually eliminated as a result of the countercyclical policies pursued by the U.S. government

primarily the result of a fiscal policy that has consistently balanced the federal budget

39.The time period between the implementation of a macroeconomic policy change and when the policy change exerts its primary impact on an economy is called the:

administrative lag

data lag

recognition lag

impact lag

40.Reducing the economic fluctuations in business cycles can be accomplished by policies designed to:

inject stimulus during economic slowdowns and apply restraint during inflationary booms

balance the government budget

achieve zero inflation in an economy

increase the supply of money at a steady rate and bring down the unemployment rate in an economy to zero

41.If a country with a large government debt uses money creation to service and repay the debt, this will lead to

inflation, higher nominal interest rates, and possibly a financial crisis

lower interest rates

an appreciation of the nation’s currency in the foreign exchange market

rapid economic growth, as the expansionary monetary policy stimulates the economy and generates the additional tax revenue to service the larger debt

42.Which of the following is a similarity between the adaptive-expectations and rational-expectations hypotheses?

Both imply that the long-run effects of a more expansionary macro policy will be inflation rather than sustainable increases in output

Both imply that the long-run effects of a more expansionary macro policy will be an increase in the long-run potential output of an economy as well as inflation

Both imply that the short-run effects of a more expansionary macro policy will be an increase in the rate of unemployment in an economy

Both imply that the short-run effects of a more expansionary macro policy will be an increase in the real output of an economy as well as inflation

43.The index of leading indicators is:

used to determine the growth rate of per capita gross domestic product based on constant prices

the single most widely used forecasting tool, and it tends to fall prior to the beginning of a recession and rise prior to the beginning of a business expansion

commonly used to determine the number of years it will take to double the gross domestic product of an economy

the single most widely used tool for measuring the price level of a market basket of consumer goods and services purchased by the households in an economy

44.According to the proponents of the rational-expectations hypothesis, when decision-makers anticipate fully and adjust rapidly to changes in the demand–stimulus policies in an economy, there will be a(n):

increase in the rate of unemployment

increase in the real interest rate

decrease in the nominal interest rate

increase in the general level of prices

45.According to the rational-expectations hypothesis, any errors in predicting inflation will:

tend to be underestimated when inflation is rising and overestimated when inflation is falling

be systematic

be random

tend to increase the unemployment rate in an economy

46.Which of the following is most likely to occur when the inflation rate has been low and steady in recent years?

An actual GDP that is substantially less than potential GDP

An abnormally high rate of unemployment

An abnormally low rate of unemployment

Actual rate of unemployment that is approximately equal to the natural rate of unemployment

47.After an extended period of low and steady inflation,

actual unemployment will be less than the natural rate of unemployment

people will not pay attention to inflation

actual unemployment will be greater than the natural rate of unemployment

people will anticipate the low and steady rate of inflation accurately and the actual unemployment will approximate the natural rate of unemployment

48.Which of the following is most likely to be true when a large share of the federal debt is financed by borrowing from foreigners?

The U.S. dollar will depreciate with respect to other currencies

Future generations of Americans will be harmed even if the funds were channeled into productive investments that generated sufficient income to cover the interest cost on the borrowed funds

The current generation of Americans will benefit to the degree they are able to enjoy a higher level of consumption while passing the tax burden for the interest payments on to future generations of Americans

U.S. net exports will increase

49.Under adaptive expectations, an unanticipated shift to a more expansionary macroeconomic policy will result in a(n):

decrease in the price level in an economy, at least in the short run

increase in the actual rate of unemployment in the short run

increase in the real gross domestic product of an economy in the short run

decrease in the aggregate demand of goods and services in an economy in the short run

50.Nonactivists are economists who argue that:

financing government spending with debt rather than tax changes are likely to offset the expansionary effects of a deficit

increases in government spending financed by borrowing will increase aggregate demand and help promote recovery from recessions

lower tax rates increase the incentive of people to work and use resources more efficiently and increase the aggregate supply in an economy

discretionary macro policy adjustments in response to cyclical conditions are likely to increase instability in an economy

Macroeconomic Policy, Economic Stability, and the Federal Debt

Macroeconomic Policy, Economic Stability, and the Federal Debt

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