1. Suppose Congress raises taxes and the monetary authorities slow the annual money supply growth from 10 percent to 5 percent. If decision makers accurately anticipate the impact of these policy changes on prices,
a. unemployment will rise.
b. unemployment will fall.
c. there will be no effect on unemployment.
d. unemployment will fall if the change in monetary policy dominates, but unemployment will rise if the change in fiscal policy dominates.

2. Which one of the following accurately states the view of activists who favor discretionary stabilization policy?
a. The index of leading indicators and other forecasting tools provide policy makers with valuable information that permits them to institute stabilizing changes in macroeconomic policy.
b. Since we have only limited ability to forecast the economy, the best policy is to do nothing.
c. In recent years, our ability to forecast the economy has improved to the extent that discretionary macroeconomic policy is capable of fine-tuning if policy makers would follow the advice of leading economists.
d. The index of leading indicators is unreliable at revealing when an economy is about to enter a recession.

3. Which of the following is an argument against a monetary rule (money supply growth at a constant rate such as 4 percent)?
a. Since the lag between when a monetary policy is instituted and when it takes effect is unpredictable, changes in monetary policy are difficult to time.
b. The inability to forecast the economy makes it difficult to time monetary policy.
c. A monetary rule would prevent the monetary authorities from taking action to offset abrupt changes in the money velocity.
d. Since the index of leading indicators has sometimes provided conflicting information on the economy, it would be difficult to institute a monetary rule.

4. The activists' view that the best policy is one of discretionary intervention into the macroeconomy is most consistent with which of the following views?
a. The self-correcting properties of a market economy would work well if they were not disrupted by errors in macropolicy.
b. A market economy is unstable because politicians force incorrect policies on the people.
c. A market economy is inherently stable.
d. The self-correcting properties of a market economy work very slowly.

5. Compared to discretionary monetary policy, which of the following strengthen(s) the case for a monetary rule, such as the expansion of the money supply at a constant rate (perhaps 4 percent)?
a. Since the lag between when a monetary policy is instituted and when it exerts its major effect is unpredictable, changes in monetary policy are difficult to time.
b. The inability to forecast the economy makes it difficult to time discretionary monetary policy.
c. A monetary rule would reduce the likelihood that monetary planners could stimulate an economic boom just prior to a major election.
d. All of the above are correct.

6. (I)  Since forecasting is an imprecise science, policy makers should not respond to minor economic ups and downs, which may be misleading indicators. Precise fine-tuning is beyond our knowledge and capabilities.
(II) Demand stimulus can reduce the rate of unemployment below the natural level for a long time.
a. Most economists would agree with I; most economists would agree with II.
b. Most economists would disagree with I; most economists would agree with II.
c. Most economists would agree with I; most economists would disagree with II.
d. Most economists would disagree with I; most economists would disagree with II.

7. Which of the following is a good example of an activist stabilization policy designed to head off a recession?
a. Congress cuts government expenditures to reduce the budget deficit.
b. The Fed reduces money supply growth to increase the value of the dollar in the foreign exchange market.
c. Congress reduces tax rates as the result of the index of leading indicators declining for four months in a row.
d. All of the above are correct.

8. If restrictive macroeconomic policy will reduce inflation emanating from excess demand, ideally the policy should be undertaken
a. when inflation is at its highest.
b. when inflation begins to increase.
c. before inflation begins to increase.
d. about six months after inflation peaks.

9. The index of leading indicators is a(n)
a. alphabetical listing of the most popular indicators in the economy for a given month.
b. composite index of indicators that provides information on the future direction of the economy.
c. measure of the level of aggregate output.
d. composite index designed to measure inflation.

10. Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?
a. higher prices and no change in real output
b. higher prices and real output
c. no change in prices and lower real output
d. no change in prices or real output