Question 1

According to rational expectations theory, discretionary monetary and fiscal policy will be ineffective primarily because of the:

Accepted Answer

A)   Successes of macroeconomic policy makers
B)   Inability of policy makers to time decisions properly
C)   Reaction of the public to the expected effects of policy changes
D)   Slow impact of policy to stimulate changes in real output and employmentE) B) and D)
F) A) and C)

Question 2

According to real-business-cycle theory, recessions are caused by:

Accepted Answer

A)   Deviations of aggregate supply from long-term growth trends
B)   Monetary factors affecting aggregate demand
C)   People choosing leisure rather than work
D)   A decline in the supply of moneyE) A) and D)
F) A) and B)

Question 3

Within the aggregate demand-aggregate supply framework, monetarists argue that a change in aggregate:

Accepted Answer

A)   Demand will have a large effect on the price level, but a temporary effect on output
B)   Demand will have a small effect on the price level, but a permanent effect on output
C)   Demand will have a large effect on the price level and a large effect on output
D)   Supply will have a large effect on the price level, but a temporary effect on outputE) A) and B)
F) A) and C)

Question 4

If households and firms cut back on spending because they expect other households and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of:

Accepted Answer

A)   Insider-outsider relationships
B)   Efficiency wage theory
C)   A coordination failure
D)   A price-level surpriseE) A) and B)
F) A) and C)

Question 5

Most economists today would agree with the view that "money doesn't matter" in macroeconomic theory.

Accepted Answer

A) True 
 B)False

Question 6

In recent years, calls for monetary rules by the Federal Reserve have been replaced with calls for:

Accepted Answer

A)   A reduction in coordination failures
B)   Using an equation of exchange
C)   Price-level surprises
D)   Inflation targetingE) A) and B)
F) B) and D)

Question 7

Mainstream economists have adopted some ideas from RET and some rational expectations assumptions are being incorporated into current macroeconomic models.

Accepted Answer

A) True 
 B)False

Question 8

Mainstream economics views monetary policy as a:

Accepted Answer

A)   Source of instability, similar to the view of monetarism
B)   Stabilizing factor, similar to the view of monetarism
C)   Source of instability, while monetarism views it as a stabilizing factor
D)   Stabilizing factor, while monetarism views it as a source of instabilityE) A) and D)
F) A) and C)

Question 9

In the mainstream view, one major source of instability in the macro economy is the volatility of:

Accepted Answer

A)   Product prices
B)   Investment spending
C)   Consumer spending
D)   Labor wagesE) A) and D)
F) All of the above

Question 10

In the mainstream view, the crowding-out effect from the use of fiscal policy is:

Accepted Answer

A)   Small, especially during a recession
B)   Large, especially during a recession
C)   Large because the velocity of money is high
D)   Small because the velocity of money is lowE) All of the above
F) B) and C)

Question 11

1 intersects AS1. If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices are flexible and wages are not, this will result in an equilibrium at point: A)  B B)  C C)  D D)  E" class="answers-bank-image d-inline" rel="preload" > Refer to the graph above. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices are flexible and wages are not, this will result in an equilibrium at point:

Accepted Answer

A)   B
B)   C
C)   D
D)   EE) A) and B)
F) A) and C)

Question 12

If the economy diverges from its full-employment output, new classical economics would suggest that:

Accepted Answer

A)   A change in the velocity of money would be all that is needed to return it to its full-employment output
B)   An improvement in insider-outsider relationships is all that is needed to return it to its full-employment output
C)   An efficiency wage in the economy would return it to its full-employment output
D)   Internal mechanisms within the economy would automatically return it to its full-employment outputE) A) and B)
F) None of the above

Question 13

According to the Taylor rule, if inflation rises by 1 percent above its target of 2 percent, the Fed should:

Accepted Answer

A)   Lower the real Federal funds rate by 0.5 percent
B)   Raise the real Federal funds rate by 0.5 percent
C)   Lower the money supply by 5 percent
D)   Raise the money supply by 5 percentE) B) and C)
F) All of the above

Question 14

Crowding-out results from:

Accepted Answer

A)   An increase in the supply of money and a decrease in the velocity of money
B)   A decrease in the supply of money and an increase in the velocity of money
C)   The inverse relationship between the supply of money and nominal GDP
D)   Deficit financing which increases interest rates and reduces investmentE) None of the above
F) B) and D)

Question 15

Monetarists argue that the amount of money the public will want to hold depends primarily on the level of:

Accepted Answer

A)   Nominal GDP
B)   Investment
C)   Consumption
D)   PricesE) C) and D)
F) B) and D)

Question 16

Monetarists argue that government policy interference in the economy is the primary cause of macroeconomic instability.

Accepted Answer

A) True 
 B)False

Question 17

The equation of exchange indicates that an increase in money supply will always lead only to inflation.

Accepted Answer

A) True 
 B)False

Question 18

1 and AS1. Suppose that there is economic growth which shifts AS1 to AS2. If the application of a monetary rule is designed to shift AD1 to AD3, but because of pessimistic business expectations AD1 only shifts to AD2, then mainstream economists would suggest that the actions to be taken to avoid deflation would be to implement a(n) : A)  Expansionary fiscal policy and a tight money policy B)  Contractionary fiscal policy and a tight money policy C)  Expansionary fiscal policy and an easy money policy D)  Contractionary fiscal policy and an easy money policy" class="answers-bank-image d-inline" rel="preload" > Refer to the graph above. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Suppose that there is economic growth which shifts AS1 to AS2. If the application of a monetary rule is designed to shift AD1 to AD3, but because of pessimistic business expectations AD1 only shifts to AD2, then mainstream economists would suggest that the actions to be taken to avoid deflation would be to implement a(n) :

Accepted Answer

A)   Expansionary fiscal policy and a tight money policy
B)   Contractionary fiscal policy and a tight money policy
C)   Expansionary fiscal policy and an easy money policy
D)   Contractionary fiscal policy and an easy money policyE) C) and D)
F) All of the above

Question 19

Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick?

Accepted Answer

A)   Monetarism
B)   Mainstream economics
C)   Supply-side economics
D)   Rational expectations theoryE) C) and D)
F) A) and D)

Question 20

If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a(n) :

Accepted Answer

A)   Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rises
B)   Decrease in short-run aggregate supply, so output increases and the price level rises
C)   Decrease in short-run aggregate supply, so output returns to its initial level and the price level falls
D)   Increase in short-run aggregate supply, so output increases and the price level risesE) All of the above
F) None of the above

Exam 19: Current Issues in Macro Theory and Policy

According to real-business-cycle theory, recessions are caused by:

Correct Answer
verified

According to the Taylor rule, if inflation rises by 1 percent above its target of 2 percent, the Fed should:

Correct Answer
verified

In the mainstream view, the crowding-out effect from the use of fiscal policy is:

Correct Answer
verified

Crowding-out results from:

Correct Answer
verified

The equation of exchange indicates that an increase in money supply will always lead only to inflation.

Correct Answer
verified

If households and firms cut back on spending because they expect other households and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of:

Correct Answer
verified

Within the aggregate demand-aggregate supply framework, monetarists argue that a change in aggregate:

Correct Answer
verified

Correct Answer
verified

If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a(n) :

Correct Answer
verified

Most economists today would agree with the view that "money doesn't matter" in macroeconomic theory.

Correct Answer
verified

Monetarists argue that the amount of money the public will want to hold depends primarily on the level of:

Correct Answer
verified

In recent years, calls for monetary rules by the Federal Reserve have been replaced with calls for:

Correct Answer
verified

Monetarists argue that government policy interference in the economy is the primary cause of macroeconomic instability.

Correct Answer
verified

Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick?

Correct Answer
verified

Mainstream economics views monetary policy as a:

Correct Answer
verified

Mainstream economists have adopted some ideas from RET and some rational expectations assumptions are being incorporated into current macroeconomic models.

Correct Answer
verified

If the economy diverges from its full-employment output, new classical economics would suggest that:

Correct Answer
verified

According to rational expectations theory, discretionary monetary and fiscal policy will be ineffective primarily because of the:

Correct Answer
verified

In the mainstream view, one major source of instability in the macro economy is the volatility of:

Correct Answer
verified

Refer to the graph above. Assume that the economy is in initial equilibrium where AD₁ intersects AS₁. If there is a decrease in aggregate demand to AD₂, then according to mainstream economists, if prices are flexible and wages are not, this will result in an equilibrium at point:

Correct Answer
verified

Exam 19: Current Issues in Macro Theory and Policy

According to real-business-cycle theory, recessions are caused by:

Correct AnswerverifiedShow Answer

According to the Taylor rule, if inflation rises by 1 percent above its target of 2 percent, the Fed should:

Correct AnswerverifiedShow Answer

In the mainstream view, the crowding-out effect from the use of fiscal policy is:

Correct AnswerverifiedShow Answer

Crowding-out results from:

Correct AnswerverifiedShow Answer

The equation of exchange indicates that an increase in money supply will always lead only to inflation.

Correct AnswerverifiedShow Answer

If households and firms cut back on spending because they expect other households and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of:

Correct AnswerverifiedShow Answer

Within the aggregate demand-aggregate supply framework, monetarists argue that a change in aggregate:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a(n) :

Correct AnswerverifiedShow Answer

Most economists today would agree with the view that "money doesn't matter" in macroeconomic theory.

Correct AnswerverifiedShow Answer

Monetarists argue that the amount of money the public will want to hold depends primarily on the level of:

Correct AnswerverifiedShow Answer

In recent years, calls for monetary rules by the Federal Reserve have been replaced with calls for:

Correct AnswerverifiedShow Answer

Monetarists argue that government policy interference in the economy is the primary cause of macroeconomic instability.

Correct AnswerverifiedShow Answer

Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick?

Correct AnswerverifiedShow Answer

Mainstream economics views monetary policy as a:

Correct AnswerverifiedShow Answer

Mainstream economists have adopted some ideas from RET and some rational expectations assumptions are being incorporated into current macroeconomic models.

Correct AnswerverifiedShow Answer

If the economy diverges from its full-employment output, new classical economics would suggest that:

Correct AnswerverifiedShow Answer

According to rational expectations theory, discretionary monetary and fiscal policy will be ineffective primarily because of the:

Correct AnswerverifiedShow Answer

In the mainstream view, one major source of instability in the macro economy is the volatility of:

Correct AnswerverifiedShow Answer

Refer to the graph above. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices are flexible and wages are not, this will result in an equilibrium at point:

Correct AnswerverifiedShow Answer

Correct Answer
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Refer to the graph above. Assume that the economy is in initial equilibrium where AD₁ intersects AS₁. If there is a decrease in aggregate demand to AD₂, then according to mainstream economists, if prices are flexible and wages are not, this will result in an equilibrium at point:

Correct Answer
verified