Use answer sheet; mark best response fully in pencil. Also be sure to mark in circles corresponding to NAME and SS# on answer sheet, or the computer will not know who you are.
 
 

Suppose in the US unemployment was 4% but the inflation rate was 12% per annum. Suppose a changed macropolicy was put in place with the intention of reducing inflation. Then [questions 1 through 6]

1. Nominal interest rates would be likely to :

a. increase b. decrease c. remain unchanged d. increase at first, but then fall as inflation falls

2. The Federal Reserve would likely be :

a. buying bonds from the public b. selling bonds to the public c. buying bonds from the Government d. selling bonds to the Government

3. The prices of bonds in the bond market would likely be :

a. falling b. staying steady c. rising d. falling at first, then increasing as inflation falls

4. If expectations are adaptive, the unemployment rate would :

a. not change b. increase, and remain above the natural rate until inflation stopped slowing c. immediately shift to the natural rate d. fall

5. If expectations were rational, compared to if they were adaptive, the unemployment rate would :

a. also not change b. increase faster and for longer c. increase, but only to the natural rate

d. increase, but how far and for how long would depend on how credible the new policy was

6. Such a macropolicy would be called

a. expansionary b. restrictive c. non-activist d. non-discretionary
 
 

7. Compared to the "non-activists," "activists" on macropolicy believe, among other things,

a. non-discretionary rules would make it difficult or impossible to respond to unexpected macro shocks, like changes in the velocity of money or the price of oil;

b. it is impossible to forecast the future well enough to improve macro performance by discretionary policy;

c. rules are needed to prevent manipulation of the economy for political reasons;

d. time lags before policy changes are felt in the economy are so changeable and uncertain that discretionary policy is more likely to make things worse than better.

8. If people expect the inflation rate to increase, the short run Phillips Curve will

a. shift up (to the right) b. not change c. shift down (to the left) d. become vertical

9. "Rational expectations" assumes

a. people take all relevant information into account in forming their expectations b. expectations are always correct c. forecast errors are random, not systematic d. a. and c.

10. "Adaptive expectations" assumes

a. people base their expectations on the recent past b. expectations are always wrong c. forecast errors can be sytematic, not random d. a. and c.

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