CLEP Macroeconomics chapter practice4 questions

17 Policy Mix, Transmission, Rules, and Lags

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 4

Stabilization policy runs into several distinct delays. The time needed to establish that a recession has already started is the

Diagnosis comes first: data have to accumulate and be revised before anyone can say a downturn began. B and C name the stages that follow the diagnosis, D names the delay in the economy's own response, and E names the statistical revision process that causes the recognition lag rather than the lag itself.
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A. recognition lag

Diagnosis comes first: data have to accumulate and be revised before anyone can say a downturn began. B and C name the stages that follow the diagnosis, D names the delay in the economy's own response, and E names the statistical revision process that causes the recognition lag rather than the lag itself.

Question 2

Question 2 of 4

Which of the following policy actions faces the clearest legislative decision lag?

Changing government purchases takes a vote, and waiting for that authorization is what a decision lag measures. A, C, and D are central-bank actions, taken by a committee that meets on its own schedule. E moves without any new decision, under rules enacted years earlier.
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B. A discretionary increase in government purchases

Changing government purchases takes a vote, and waiting for that authorization is what a decision lag measures. A, C, and D are central-bank actions, taken by a committee that meets on its own schedule. E moves without any new decision, under rules enacted years earlier.

Question 3

Question 3 of 4

Through what channel does expansionary monetary policy raise net exports?

Lower domestic rates send financial capital abroad, the currency weakens, and domestic goods become cheaper to foreign buyers. A and B reverse both the rate movement and the currency movement that easing sets off. D names a foreign development the central bank does not cause, and one that would cut exports rather than raise them; E is trade policy, not a monetary channel.
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C. Depreciation of the domestic currency

Lower domestic rates send financial capital abroad, the currency weakens, and domestic goods become cheaper to foreign buyers. A and B reverse both the rate movement and the currency movement that easing sets off. D names a foreign development the central bank does not cause, and one that would cut exports rather than raise them; E is trade policy, not a monetary channel.

Question 4

Question 4 of 4

In a liquidity trap, why does additional central-bank liquidity produce so little additional spending?

Extra liquidity matters only if someone borrows it and spends it, and in a trap that response is close to nothing. A reverses what low rates do to present values, B reverses the opportunity cost of holding money, C misdescribes bank lending, which creates deposits rather than handing reserves to customers, and E reverses the direction of deposit adjustment.
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D. Borrowing and investment barely respond to further easing.

Extra liquidity matters only if someone borrows it and spends it, and in a trap that response is close to nothing. A reverses what low rates do to present values, B reverses the opportunity cost of holding money, C misdescribes bank lending, which creates deposits rather than handing reserves to customers, and E reverses the direction of deposit adjustment.

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