1. As the economy recovers, the Fed will wind down its bond purchases, causing interest rates to fall.

A) True

B) False

2. In a jobless recovery neither output nor employment growth occurs.

A) True

B) False

3. Social Security payments rise according to the rate of inflation.

A) True

B) False

4. Unemployment often keeps increasing after the economy begins to recover.

A) True

B) False

5. The willingness of people around the world to use and hold dollars allows the U.S. government to increase the money supply without the immediate risk of inflation.

A) True

B) False

6. The cost of financing U.S. government debt would be lower if foreigners decided to hold fewer U.S. dollars.

A) True

B) False

7. Medicare payments rise with the rate of inflation.

A) True

B) False

8. The possible consequences of using fiscal and monetary policies to reduce unemployment are higher debt and the risk of inflation.

A) True

B) False

9. Rational expectations theory suggests that the Fed and other policymakers must fool the public if their policies are to have short-term effects.

A) True

B) False

10. One criticism of the rational expectations model is that its assumption of highly competitive labor and product markets, with wages and prices adjusting quickly, does not always occur.

A) True

B) False

11. Robert Lucas argued that the theory of rational expectations suggests that tax cuts will work if used temporarily.

A) True

B) False

12. Predictions based on rational expectations are always correct.

A) True

B) False

13. Rational expectations are forward looking, since they assume that people will make use of all available information.

A) True

B) False

14. Stagflation is the simultaneous occurrence of both inflation and unemployment.

A) True

B) False

15. An important implication of the long-run Phillips curve is that monetary and demand-side fiscal policies work well in reducing the natural rate of unemployment.

A) True

B) False

16. The long-run Phillips curve is vertical.

A) True

B) False

17. If policymakers attempt to keep unemployment below its natural level, it will drift back up again.

A) True

B) False

18. If policymakers want to keep unemployment below the natural rate, they must continually increase aggregate demand so that inflation is always greater than anticipated, thereby setting up an inflationary spiral.

A) True

B) False

19. The natural rate of unemployment is the rate at which inflation equals expected inflation, resulting in zero price pressures in the economy.

A) True

B) False

20. Real wages show how much goods and services our wages can buy.

A) True

B) False