What are policy lags? Explain the three policy lags faced by the Fed when implementing monetary policy.
What will be an ideal response?
Question 2When countries converge,
A) they all grow at the same rate.
B) poorer ones grow faster.
C) richer ones grow faster.
D) richer ones do not grow.
Question 3Adverse selection exists because ________.
A) moral hazard exists
B) asymmetric information exists
C) of government regulation
D) financial innovation continually occurs
Question 4In the period 1950-2011, the inflation rate in the U.S. CPI has
A) varied very little.
B) been less variable than the inflation rate in the GDP price deflator.
C) been more variable than the inflation rate in the GDP price deflator.
D) been substantially equal to the inflation rate in the GDP price deflator every year.
Question 5A machine cost 15,000 to install, and has a resale value one year later of 12,000. If the real interest rate is 10, then the user cost of capital is ________.
A) 4,500
B) 1,500
C) 3,000
D) 1,200
Question 6In the real business cycle model, fluctuations in employment are explained by ________.
A) changes in the composition of household assets
B) intertemporal substitution as real wages and real interest rates changes
C) changes in the marginal propensity to consume
D) the impact of a change in price on quantity demand and quantity supplied in goods markets
Question 7To support the argument for an active role for government in stabilizing the economy, it must be true that
A) consumers are not rational and that not all wages and prices are flexible.
B) not all wages and prices are flexible and that government must be able to react quickly enough.
C) government must be able to react quickly enough and that shocks to the economy be primarily due to aggregate supply shocks.
D) shocks to the economy be primarily due to aggregate supply shocks and that consumers are not rational.
Question 8The Solow growth model tells us that the standard living in country A can be higher than in country B for all the following reasons, except
A) country A has lower population growth than country B.
B) country A has a higher savings rate than country B.
C) country A has a higher depreciation rate than country B.
D) country A has higher total factor productivity than country B.
Question 9Stabilization policy is to be applied if all of the following applies except
A) authorities have good information about the state of the economy.
B) policies can be applied quickly.
C) markets are out of equilibrium.
D) there is no output gap.
Question 10The GDP deflator is a broader measure of the price level than the CPI because
A) it covers sales tax.
B) it covers rents.
C) it covers investment.
D) it factors out fluctuations in seasonal items.
Question 11By rescuing large, troubled institutions, as happened during the 2007-2009 financial crisis and recession with institutions like AIG and General Motors, policymakers attempted to achieve financial and economic stability in the short run, but their
actions may encourage even riskier behavior on the part of these large institutions in the future if these institutions believe that they, too, will be bailed out if they get in trouble. This risk faced by policymakers is known as A) asymmetric information.
B) quantitative easing.
C) too-big-to-fail policy.
D) moral hazard.
Question 12During business contractions, the growth rate of Solow residuals is ________.
A) near or below zero
B) well above zero
C) approaching infinity
D) impossible to calculate
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