TRUE OR FALSE
If the statement is true, skip it. If the statement is false, write a sentence that explains why the statement is false.
PART I : TRUE OR FALSE
_____ 1. A fixed rule of stabilization policy would determine how stabilization policies should respond to changes in economic activity.
_____ 2. Milton Friedman advocates that the money supply be regularly adjusted to maintain a constant level of unemployment.
_____ 3. If aggregate demand falls, the economy will spend more time below full employment under a fixed stabilization rule, than under a feedback rule.
_____ 4. Most governments know how large is the full employment level of real GDP.
_____ 5. The lags involved in economic policy tend to be very short and of the same length.
_____ 6. Policies are more predictable under fixed rules than under feedback rules.
_____ 7. People need to forecast inflation rate when negotiating interest rates and wage contracts.
_____ 8. Cost-push inflation results when the short run aggregate supply curve shifts to the right.
_____ 9. Under fixed rules, wages and prices would fall in response to a decrease in aggregate supply.
_____ 10. Under feedback rules, wages and prices would rise in response to a decrease in aggregate supply.
_____ 11. Real business cycle theorists argue that badly timed fiscal and monetary policies are the primary cause of fluctuations in economic activity.
_____ 12. Real business cycle theory is based on the assumption that wages and prices are sticky and change only very slowly.
_____ 13. If real business cycle theorists are correct, the application of a feedback stabilization rule will result in smaller declines in real GDP than the application of a fixed rule.
_____ 14. The growth of nominal GDP is equal to the growth rate of real GDP plus the inflation rate.
______ 15. Unusually slow growth of nominal GDP is usually caused by unusually slow growth of real GDP.
______ 16. Unusually rapid growth of nominal GDP is usually caused by unusually rapid growth of the price level.
____ 17. If people are surprised by a government program to reduce inflation, the result will be a movement to the left along the short-run Phillips curve.
____ 18. If people believe the Central Bank's announcement that it will reduce the inflation rate, the result will be a movement to a higher level on the long run Phillips curve.
_____ 19. In practice, most attempts by central banks to reduce inflation result in increasing the level of unemployment.
_____ 20. Inflation tends to reduce the real value of the government's debt.
_____ 21. If inflation is expected the nominal interest on the government debt will tend to increase.
_____ 22. Government deficits tend to be inflationary if the government sells its bonds to the central bank.
_____ 23. If people think that financing the government deficit by selling bonds to the public will eventually lead to inflation, the result may be immediate inflation even though there has been no increase in the money supply.
______ 24. International evidence indicates that there is no relationship between the size of government deficits and the rate of inflation.
_____ 25. Current government deficits tend to put a burden on future generations because they must pay the interest on the resulting government debt.
_____ 26. Ricardian equivalence suggests that deficits do not crowd out investment any more than tax financing of government spending.
_____ 27. According to the theory of Ricardian equivalence, an increase in the government deficits will result in an increase in private savings rates.
_____ 28. According to the multiplier-accelerator model, investment will increase only if output grows by an increasing amount.
______29. Gradualist monetarists tend to favor active demand management by governments in order to speed the return to full employment and price stability.
______ 30. New Keynesians try to provide a macroeconomic foundation for microeconomic theory.
PART II: FILL IN THE BLANKS
1. The _________________ path of output is the smooth path that real GDP follows in the long run once short run fluctuations are averaged out.
2. The ___________________ is the short run fluctuation of total output around its trend path.
3. The ___________________ model of investment assumes that firms will invest in new plant and equipment if they expect an increase in output.
4. One of the key assumptions of the New __________________ School of economics is that all markets clear almost instantaneously.
5. The __________________ Business Cycle theorists assume that fluctuations in output are fluctuations in potential output.