Exam 17: A Brief History of Macroeconomic Thought and Policy

Writing in 1752, David Hume's essay, "Of Money,"

In the early 1990s, although the U.S. economy was in a recession, Congress rejected the idea of using an expansionary fiscal policy to close the recessionary gap. What was the reason?

The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

Supply-side economics is the belief that fiscal policy can be used to stimulate long-run Jeconomic growth.

Compare and contrast the classical and Keynesian views of aggregate demand and Jaggregate supply.

Prior to the Great Depression of the 1930s, macroeconomics was dominated by

Monetarists contend that a consistent relationship exists between changes in the money Jsupply and changes in nominal GDP.

Classical economics is based primarily on the works of John Maynard Keynes.

Classical economists believed I. there could be temporary periods of unemployment. II. emphasis should be placed on the long run, and in the long run all would be set right because of the smooth functioning of the price system. III. the Great Depression would be a short-run aberration.

In the 1970s the U.S. economy experienced a novel set of macroeconomic outcomes: rising Jprice level and falling output. This experience led policymakers to

According to new classical economics, individuals will respond to expansionary monetary Jpolicy by

In the 1970s, the U.S. economy experienced both inflation and unemployment. This led economists to recognize that I. stabilization was a much more difficult task than many economists anticipated. II. the Keynesian doctrine correctly asserts that reducing inflation and unemployment can be addressed by fiscal policies. III. shifts in aggregate demand could frustrate policymaking efforts whereas shifts in the short-run aggregate supply were more easily addressed.

The experience of the Great Depression led to the widespread acceptance of classical Jeconomics.

Suppose the economy is initially in long-run equilibrium. Now suppose oil prices rise sharply and at the same time, policymakers pursue expansionary monetary and fiscal policies. Which of the following will occur as a result of these two events, given that supply-side effects dominate demand-side effects?

Figure 17-1 -Refer to Figure 17-1. During the Great Depression, aggregate demand declined sharply, thrusting the economy into a recessionary gap. Nominal wages plunged roughly 20% between 1929 and 1933. How did the economy respond to the falling wages?

In developing his macroeconomic theory, Keynes

In the initial stages of the Great Depression, fiscal authorities responded to the decline in Joutput by

If the economy's short-run aggregate supply curve is upward sloping, a decrease in aggregate demand will cause

The monetarists school of economics believes that changes in

What are the main arguments in favor of stabilization policy? What are the main arguments against stabilization policy?