Question 1

Which component of aggregate demand plunged sharply at the start of the Great Depression?

Accepted Answer

A)  investment 
B)  consumption 
C)  government purchases 
D)  transfer payments 
A)  investment 
B)  consumption 
C)  government purchases 
D)  transfer payments

Question 2

According to Milton Friedman, any divergence in unemployment from its natural rate is Jtemporary because

Accepted Answer

A)  anticipated price changes affect nominal wages in the short run but workers will rectify this over time. 
B)  unanticipated price changes affect real wages in the short run but workers will rectify this over time. 
C)  anticipated price changes affect real wages in the short run but workers will rectify this over time. 
D)  unanticipated price changes create inflation which is addressed by policymakers over time. 
A)  anticipated price changes affect nominal wages in the short run but workers will rectify this over time. 
B)  unanticipated price changes affect real wages in the short run but workers will rectify this over time. 
C)  anticipated price changes affect real wages in the short run but workers will rectify this over time. 
D)  unanticipated price changes create inflation which is addressed by policymakers over time.

Question 3

During the 1960s, Keynesian economic policies led to lower unemployment rates and
Jhigher prices.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is true about Keynesians and monetarists with regards to policy intervention?

Accepted Answer

A)  Keynesians favor the use of fiscal policy to bring the economy back to its potential output while monetarists favor the use of monetary policy to bring the economy back to its potential output. 
B)  Keynesians favor active policy intervention to bring the economy back to its potential output while monetarists argue that the uncertain nature of lags renders policy intervention
Destabilizing. 
C)  Keynesians argue that with its shorter and more predictable policy lags, fiscal policy is more effective that monetary policy in bringing the economy back to its potential output, while
Monetarists argue that monetary policy lags are much shorter and more predictable than fiscal policy lags and therefore more effective in bringing the economy back to its potential
Output. 
D)  While both schools favor the use of intervention policies, Keynesians argue that such policies are more effective at eliminating recessionary gaps while Monetarists contend that they are
More effective at eliminating inflationary gaps. 
A)  Keynesians favor the use of fiscal policy to bring the economy back to its potential output while monetarists favor the use of monetary policy to bring the economy back to its potential output. 
B)  Keynesians favor active policy intervention to bring the economy back to its potential output while monetarists argue that the uncertain nature of lags renders policy intervention
Destabilizing. 
C)  Keynesians argue that with its shorter and more predictable policy lags, fiscal policy is more effective that monetary policy in bringing the economy back to its potential output, while
Monetarists argue that monetary policy lags are much shorter and more predictable than fiscal policy lags and therefore more effective in bringing the economy back to its potential
Output. 
D)  While both schools favor the use of intervention policies, Keynesians argue that such policies are more effective at eliminating recessionary gaps while Monetarists contend that they are
More effective at eliminating inflationary gaps.

Question 5

Monetarists conclude that the primary determinant of changes in nominal GDP is

Accepted Answer

A)  money growth. 
B)  growth in aggregate demand. 
C)  growth in aggregate supply. 
D)  the inflation rate. 
A)  money growth. 
B)  growth in aggregate demand. 
C)  growth in aggregate supply. 
D)  the inflation rate.

Question 6

The Case in Point titled "Tough Medicine" stated that the Keynesian prescription for an inflationary gap was to

Accepted Answer

A)  apply contractionary fiscal or monetary policy, or both. 
B)  combine contractionary fiscal policy with expansionary monetary policy. 
C)  combine expansionary fiscal policy with contractionary monetary policy. 
D)  decrease the money supply in order to shift the SRAS curve to the left. 
A)  apply contractionary fiscal or monetary policy, or both. 
B)  combine contractionary fiscal policy with expansionary monetary policy. 
C)  combine expansionary fiscal policy with contractionary monetary policy. 
D)  decrease the money supply in order to shift the SRAS curve to the left.

Question 7

In the late 1970s, oil prices rose sharply and at the same time, U.S. policymakers pursued expansionary fiscal and monetary policies. As a result, real GDP stayed at potential output, while the implicit price deflator jumped 8.1%. If the Fed's goal was to reduce inflation, which of the following would also occur?

Accepted Answer

A)  An increase in unemployment and a decrease in interest rates 
B)  A decrease in unemployment and an increase in interest rates 
C)  An increase in unemployment and an increase in interest rates 
D)  A decrease in unemployment and a decrease in interest rates 
A)  An increase in unemployment and a decrease in interest rates 
B)  A decrease in unemployment and an increase in interest rates 
C)  An increase in unemployment and an increase in interest rates 
D)  A decrease in unemployment and a decrease in interest rates

Question 8

According to Keynesian theory,

Accepted Answer

A)  sticky prices and wages do not have an effect on aggregate expenditures. 
B)  because of sticky prices and wages, changes in total spending have the biggest impact on output and employment. 
C)  wage and price stickiness cause output and employment to remain close to their full employment levels, even when total spending changes. 
D)  wages and prices fall in the early stages of a recession even when total spending is declining. 
A)  sticky prices and wages do not have an effect on aggregate expenditures. 
B)  because of sticky prices and wages, changes in total spending have the biggest impact on output and employment. 
C)  wage and price stickiness cause output and employment to remain close to their full employment levels, even when total spending changes. 
D)  wages and prices fall in the early stages of a recession even when total spending is declining.

Question 9

The General Theory of Employment, Interest, and Money was written by

Accepted Answer

A)  Robert Lucas. 
B)  David Ricardo. 
C)  John Maynard Keynes. 
D)  Thomas Malthus. 
A)  Robert Lucas. 
B)  David Ricardo. 
C)  John Maynard Keynes. 
D)  Thomas Malthus.

Question 10

The Smoot-Hawley Tariff Act of 1930

Accepted Answer

A)  was passed to protect domestic jobs by imposing fines on firms that imported raw materials from abroad. 
B)  mandated the federal budget be balanced. 
C)  dramatically raised tariffs on products imported into the U.S. and led to retaliatory trade- restricting legislation around the world. 
D)  subsidized domestic firms which produced products for export. 
A)  was passed to protect domestic jobs by imposing fines on firms that imported raw materials from abroad. 
B)  mandated the federal budget be balanced. 
C)  dramatically raised tariffs on products imported into the U.S. and led to retaliatory trade- restricting legislation around the world. 
D)  subsidized domestic firms which produced products for export.

Question 11

The theory that dominated macroeconomic thinking in the 1960s was

Accepted Answer

A)  monetarism. 
B)  classical economics. 
C)  Keynesian economics. 
D)  rational expectations theory. 
A)  monetarism. 
B)  classical economics. 
C)  Keynesian economics. 
D)  rational expectations theory.

Question 12

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?

Accepted Answer

A)  The price level will necessarily rise but the effect on output is indeterminate. 
B)  Real GDP must necessarily fall but the effect on the price level is indeterminate. 
C)  The price level and real GDP must rise. 
D)  The price level must rise and real GDP must fall. 
A)  The price level will necessarily rise but the effect on output is indeterminate. 
B)  Real GDP must necessarily fall but the effect on the price level is indeterminate. 
C)  The price level and real GDP must rise. 
D)  The price level must rise and real GDP must fall.

Question 13

According to Keynes, the remedy for a recessionary gap is

Accepted Answer

A)  to subsidize big business. 
B)  to increase aggregate supply. 
C)  to boost aggregate demand. 
D)  to lower business taxes. 
A)  to subsidize big business. 
B)  to increase aggregate supply. 
C)  to boost aggregate demand. 
D)  to lower business taxes.

Question 14

The rational expectations hypothesis suggests that monetary policy, even though it will
Jaffect the aggregate demand curve, might have no effect on real GDP.

Accepted Answer

A) True 
 B)False

Question 15

According to new classical economics, short-run stabilization policy works only if it
Jsurprises people.

Accepted Answer

A) True 
 B)False

Question 16

The hypothesis that assumes that individuals form expectations about the future based on Javailable information and that individuals act on that information is called the

Accepted Answer

A)  random expectations theory. 
B)  rational information hypothesis. 
C)  rational expectations hypothesis. 
D)  adaptive expectations hypothesis. 
A)  random expectations theory. 
B)  rational information hypothesis. 
C)  rational expectations hypothesis. 
D)  adaptive expectations hypothesis.

Question 17

In 1979, the CPI rose 13.5%, the highest inflation rate recorded in the twentieth century in the U.S. Public opinion polls in 1979 consistently showed that most people regarded inflation as the leading problem facing the U.S. How did the Fed respond to this situation?

Accepted Answer

A)  It continued to pursue expansionary policies to avert a potential recession caused by rising oil prices. 
B)  It switched from discretionary monetary policy to a fixed money growth rate rule where the growth rate was under 3%. 
C)  It pursued contractionary policies with the primary goal of lowering inflation. 
D)  It adopted a hands-off approach, relying on the economy's self correcting mechanism to lower inflation. 
A)  It continued to pursue expansionary policies to avert a potential recession caused by rising oil prices. 
B)  It switched from discretionary monetary policy to a fixed money growth rate rule where the growth rate was under 3%. 
C)  It pursued contractionary policies with the primary goal of lowering inflation. 
D)  It adopted a hands-off approach, relying on the economy's self correcting mechanism to lower inflation.

Question 18

Which of the following is true about the Great Depression?

Accepted Answer

A)  Following the Great Depression of 1929, the economy did not regain its potential output until the early 1940s when the pressures of WWII sharply increased aggregate demand. 
B)  Expansionary monetary and fiscal policies successfully moved the economy from the Great Depression of 1929 within three to five years. 
C)  The Great Depression of 1929 was considered to be a normal stage of business cycles. 
D)  The Great Depression could be explained by classical economic theory. 
A)  Following the Great Depression of 1929, the economy did not regain its potential output until the early 1940s when the pressures of WWII sharply increased aggregate demand. 
B)  Expansionary monetary and fiscal policies successfully moved the economy from the Great Depression of 1929 within three to five years. 
C)  The Great Depression of 1929 was considered to be a normal stage of business cycles. 
D)  The Great Depression could be explained by classical economic theory.

Question 19

Early classical macroeconomics was based largely on the foundation of

Accepted Answer

A)  flexible wages and prices. 
B)  persistent unemployment. 
C)  government intervention in the market. 
D)  Adam Smith's model of imperfectly competitive markets. 
A)  flexible wages and prices. 
B)  persistent unemployment. 
C)  government intervention in the market. 
D)  Adam Smith's model of imperfectly competitive markets.

Question 20

In the 1960s, despite the successful application of expansionary fiscal policy in the United States, Milton Friedman argued that

Accepted Answer

A)  Keynesian supply-side policies were more effective at stimulating aggregate demand than expansionary fiscal policies. 
B)  aggregate demand is affected by money and not by fiscal policy, and therefore only monetary policy should not be used to move the economy back to its potential output. 
C)  aggregate demand is affected by money and not by fiscal policy, which is why policymakers should institute a policy of steady money growth and allow the economy to reach full employment through a process of self-correction. 
D)  fiscal policy must be combined with monetary policy to move the economy back to its potential output, without increasing inflationary pressure. 
A)  Keynesian supply-side policies were more effective at stimulating aggregate demand than expansionary fiscal policies. 
B)  aggregate demand is affected by money and not by fiscal policy, and therefore only monetary policy should not be used to move the economy back to its potential output. 
C)  aggregate demand is affected by money and not by fiscal policy, which is why policymakers should institute a policy of steady money growth and allow the economy to reach full employment through a process of self-correction. 
D)  fiscal policy must be combined with monetary policy to move the economy back to its potential output, without increasing inflationary pressure.

Which component of aggregate demand plunged sharply at the start of the Great Depression?

According to Milton Friedman, any divergence in unemployment from its natural rate is Jtemporary because

During the 1960s, Keynesian economic policies led to lower unemployment rates and Jhigher prices.

Which of the following is true about Keynesians and monetarists with regards to policy intervention?

Monetarists conclude that the primary determinant of changes in nominal GDP is

The Case in Point titled "Tough Medicine" stated that the Keynesian prescription for an inflationary gap was to

According to Keynesian theory,

The General Theory of Employment, Interest, and Money was written by

The Smoot-Hawley Tariff Act of 1930

The theory that dominated macroeconomic thinking in the 1960s was

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?

According to Keynes, the remedy for a recessionary gap is

The rational expectations hypothesis suggests that monetary policy, even though it will Jaffect the aggregate demand curve, might have no effect on real GDP.

According to new classical economics, short-run stabilization policy works only if it Jsurprises people.

The hypothesis that assumes that individuals form expectations about the future based on Javailable information and that individuals act on that information is called the

In 1979, the CPI rose 13.5%, the highest inflation rate recorded in the twentieth century in the U.S. Public opinion polls in 1979 consistently showed that most people regarded inflation as the leading problem facing the U.S. How did the Fed respond to this situation?

Which of the following is true about the Great Depression?

Early classical macroeconomics was based largely on the foundation of

In the 1960s, despite the successful application of expansionary fiscal policy in the United States, Milton Friedman argued that

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

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Exam 17: A Brief History of Macroeconomic Thought and Policy

Which component of aggregate demand plunged sharply at the start of the Great Depression?

According to Milton Friedman, any divergence in unemployment from its natural rate is Jtemporary because

During the 1960s, Keynesian economic policies led to lower unemployment rates and Jhigher prices.

Which of the following is true about Keynesians and monetarists with regards to policy intervention?

Monetarists conclude that the primary determinant of changes in nominal GDP is

The Case in Point titled "Tough Medicine" stated that the Keynesian prescription for an inflationary gap was to

According to Keynesian theory,

The General Theory of Employment, Interest, and Money was written by

The Smoot-Hawley Tariff Act of 1930

The theory that dominated macroeconomic thinking in the 1960s was

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?

According to Keynes, the remedy for a recessionary gap is

The rational expectations hypothesis suggests that monetary policy, even though it will Jaffect the aggregate demand curve, might have no effect on real GDP.

According to new classical economics, short-run stabilization policy works only if it Jsurprises people.

The hypothesis that assumes that individuals form expectations about the future based on Javailable information and that individuals act on that information is called the

In 1979, the CPI rose 13.5%, the highest inflation rate recorded in the twentieth century in the U.S. Public opinion polls in 1979 consistently showed that most people regarded inflation as the leading problem facing the U.S. How did the Fed respond to this situation?

Which of the following is true about the Great Depression?

Early classical macroeconomics was based largely on the foundation of

In the 1960s, despite the successful application of expansionary fiscal policy in the United States, Milton Friedman argued that

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters