CBE Macroeconomics 4

Question 1

The Taylor Rule for monetary policy suggests the Fed should raise the federal funds rate when:

Accepted Answer

Inflation exceeds target or the output gap is positive

Answer

The Taylor Rule prescribes raising rates when inflation is above target or when actual output exceeds potential output (positive output gap).

Question 2

Which automatic stabilizer automatically increases government spending during a recession without new legislation?

Accepted Answer

Unemployment insurance payments

Answer

Unemployment insurance automatically pays out more during recessions as layoffs rise, stimulating demand without requiring new legislation.

Question 3

In the long run, the Phillips Curve is generally considered to be:

Accepted Answer

Vertical at the natural rate of unemployment

Answer

Friedman and Phelps demonstrated that the long-run Phillips Curve is vertical at the natural rate, as workers adjust expectations and real wages return to equilibrium.

Question 4

Purchasing Power Parity (PPP) theory states that in the long run, exchange rates adjust so that:

Accepted Answer

A basket of goods costs the same in all countries when measured in a common currency

Answer

PPP holds that exchange rates move to equalize the price of identical goods across countries when converted to a common currency.

Question 5

An economy is at full employment. The government increases spending financed by borrowing. In the short run, this is most likely to cause:

Accepted Answer

Higher output and higher prices

Answer

Expansionary fiscal policy at full employment shifts AD right; with limited spare capacity, the result is primarily inflationary with some short-run output increase.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Macroeconomics 4