Question 1

Monetarists argue that

Accepted Answer

A)  the impact lag for monetary policy is short and predictable. 
B)  stabilization policies may actually be destabilizing. 
C)  the Federal Reserve System should use active monetary policy. 
D)  active monetary policy should be used to reinforce active fiscal policy. 
A)  the impact lag for monetary policy is short and predictable. 
B)  stabilization policies may actually be destabilizing. 
C)  the Federal Reserve System should use active monetary policy. 
D)  active monetary policy should be used to reinforce active fiscal policy.

Question 2

An important distinction between the classical and Keynesian view of the economy is that

Accepted Answer

A)  Keynes stressed the supply side of an economy while classical economists stressed the demand side of the economy. 
B)  classical economists argued that output gaps were caused by shifts in the long-run aggregate supply while Keynes' maintained that output gaps were created by shifts in aggregate demand. 
C)  Keynes stressed the demand side of an economy while classical economists stressed the supply side of the economy. 
D)  classical economists argued that output gaps were caused by shifts in the long-run aggregate supply while Keynes' maintained that output gaps were created by wage and price rigidities. 
A)  Keynes stressed the supply side of an economy while classical economists stressed the demand side of the economy. 
B)  classical economists argued that output gaps were caused by shifts in the long-run aggregate supply while Keynes' maintained that output gaps were created by shifts in aggregate demand. 
C)  Keynes stressed the demand side of an economy while classical economists stressed the supply side of the economy. 
D)  classical economists argued that output gaps were caused by shifts in the long-run aggregate supply while Keynes' maintained that output gaps were created by wage and price rigidities.

Question 3

Figure 17-3  
-Refer to Figure 17-3. Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from

Accepted Answer

A)  point a to point d whereas new Keynesian economics suggests that it will move point a to point b. 
B)  point a to point d whereas new Keynesian economics suggests that it will move point a to point c. 
C)  point a to point b whereas new Keynesian economics suggests that it will move point a to point d. 
D)  point a to point c whereas new Keynesian economics suggests that it will move point a to point d. 
A)  point a to point d whereas new Keynesian economics suggests that it will move point a to point b. 
B)  point a to point d whereas new Keynesian economics suggests that it will move point a to point c. 
C)  point a to point b whereas new Keynesian economics suggests that it will move point a to point d. 
D)  point a to point c whereas new Keynesian economics suggests that it will move point a to point d.

Question 4

Monetarists argue that impact lags associated with changes in the money supply are long and variable.

Accepted Answer

A) True 
 B)False

Question 5

The theory that argues most strongly for countercyclical policy activism is

Accepted Answer

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

Question 6

Figure 17-2  
-Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD2. The below potential output level of Y2 will exist as long as

Accepted Answer

A)  policymakers refrain from using discretionary policies. 
B)  workers fail to recognize that their real wages have increased and that they need to accept lower nominal wages. 
C)  economic agents do not respond to falling prices by increasing aggregate demand back to AD1. 
D)  producers do not increase the price of their output. 
A)  policymakers refrain from using discretionary policies. 
B)  workers fail to recognize that their real wages have increased and that they need to accept lower nominal wages. 
C)  economic agents do not respond to falling prices by increasing aggregate demand back to AD1. 
D)  producers do not increase the price of their output.

Question 7

Suppose the U.S. economy experiences stagflation. An expansionary fiscal policy

Accepted Answer

A)  increases real GDP and lowers inflation. 
B)  has no effect on real GDP but raises inflation. 
C)  increases real GDP and aggravates inflation. 
D)  increases real GDP and has no effect on inflation. 
A)  increases real GDP and lowers inflation. 
B)  has no effect on real GDP but raises inflation. 
C)  increases real GDP and aggravates inflation. 
D)  increases real GDP and has no effect on inflation.

Question 8

Who was the economist who laid the foundations for classical economics?

Accepted Answer

A)  John Locke 
B)  David Ricardo 
C)  Adam Smith 
D)  John Maynard Keynes 
A)  John Locke 
B)  David Ricardo 
C)  Adam Smith 
D)  John Maynard Keynes

Question 9

In 1965 during the Johnson administration, the U.S. economy was headed toward an inflationary gap. Which of the following policies would an economist recommend?

Accepted Answer

A)  An open market purchase 
B)  A tax increase 
C)  A tax cut 
D)  Increase defense spending 
A)  An open market purchase 
B)  A tax increase 
C)  A tax cut 
D)  Increase defense spending

Question 10

Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the Jaggregate demand curve would cause

Accepted Answer

A)  a decrease in the level of income. 
B)  an increase in the unemployment level. 
C)  a change in the long-run aggregate supply curve. 
D)  an increase in employment, production, and income. 
A)  a decrease in the level of income. 
B)  an increase in the unemployment level. 
C)  a change in the long-run aggregate supply curve. 
D)  an increase in employment, production, and income.

Question 11

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Accepted Answer

A) True 
 B)False

Question 12

Figure 17-3  
-Refer to Figure 17-3. Suppose the economy is at point a. Assume that (1) the public's expectations are completely rational; (2) markets allocate resources instantaneously; and (3) the economy is at its natural level of employment. The theoretical adjustment path resulting from an increase in aggregate demand according to the rational expectations hypothesis is

Accepted Answer

A)  a to c to d. 
B)  a to b to d. 
C)  a to d. 
D)  a to b and back to a. 
A)  a to c to d. 
B)  a to b to d. 
C)  a to d. 
D)  a to b and back to a.

Question 13

Keynesian economics was mostly concerned with the short run.

Accepted Answer

A) True 
 B)False

Question 14

Figure 17-1  
-Refer to Figure 17-1. The Great Depression began with a shift of

Accepted Answer

A)  AD2 to AD1.  
B)  AD1 to AD2 . 
C)  SRAS2 to SRAS1.  
D)  YP to Yk. 
A)  AD2 to AD1.  
B)  AD1 to AD2 . 
C)  SRAS2 to SRAS1.  
D)  YP to Yk.

Question 15

Which of the following is true about the classical theory and the monetarist theory with Jregards to the impact of changes in the money supply on the economy?

Accepted Answer

A)  Both the classical theory and monetarism conclude that changes in money supply affect real GDP in the short run and in the long run. 
B)  Both the classical theory and monetarism conclude that changes in money supply do not affect real GDP in the short run but will affect real GDP in the long run. 
C)  Both the classical theory and monetarism conclude that changes in money supply affect nominal GDP in the long run. 
D)  Both the classical theory and monetarism conclude that changes in money supply affect nominal GDP in the short run and real GDP in the long run. 
A)  Both the classical theory and monetarism conclude that changes in money supply affect real GDP in the short run and in the long run. 
B)  Both the classical theory and monetarism conclude that changes in money supply do not affect real GDP in the short run but will affect real GDP in the long run. 
C)  Both the classical theory and monetarism conclude that changes in money supply affect nominal GDP in the long run. 
D)  Both the classical theory and monetarism conclude that changes in money supply affect nominal GDP in the short run and real GDP in the long run.

Question 16

New classical theory asserts that, because people have rational expectations, if a policy of reducing the money supply is used

Accepted Answer

A)  it might affect both aggregate demand and potential real GDP. 
B)  consumers and firms observe that the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly. 
C)  market participants react in such a way that shifts in aggregate supply will reinforce shifts in aggregate demand and real GDP will shift inevitably into inflationary or recessionary gaps. 
D)  All of the above are true. 
A)  it might affect both aggregate demand and potential real GDP. 
B)  consumers and firms observe that the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly. 
C)  market participants react in such a way that shifts in aggregate supply will reinforce shifts in aggregate demand and real GDP will shift inevitably into inflationary or recessionary gaps. 
D)  All of the above are true.

Question 17

Figure 17-2  
-Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD2. Which of the following explains the new classical view regarding economic agents' response to the decrease in money supply?

Accepted Answer

A)  Consumers and firms observe that the money supply has fallen and that the price level has fallen to P2. Consumers respond by increasing their demand for output and firms in turn increase their supply to meet the rising demand. The economy moves back to point (1). 
B)  Consumers and firms observe that the money supply has fallen and that the price level has fallen to P2. To prevent further reductions in the price level, firms increase output at the same time as consumers increase aggregate demand. The economy moves to point (4), bypassing point (3). 
C)  Consumers and firms observe that the money supply has fallen and anticipate the eventual reduction in the price level to P3. They adjust their expectations accordingly. Workers agree to lower nominal wages, and the short-run aggregate supply curve shifts to SRAS2 at the same time as aggregate demand falls, bypassing point (2). 
D)  Consumers and firms observe that the money supply has fallen and anticipate the eventual reduction in the price level to P4. They adjust their expectations accordingly. Workers agree to lower nominal wages, and the short-run aggregate supply curve shifts to SRAS2 at the same time as aggregate demand rises, moving the economy to point (4). 
A)  Consumers and firms observe that the money supply has fallen and that the price level has fallen to P2. Consumers respond by increasing their demand for output and firms in turn increase their supply to meet the rising demand. The economy moves back to point (1). 
B)  Consumers and firms observe that the money supply has fallen and that the price level has fallen to P2. To prevent further reductions in the price level, firms increase output at the same time as consumers increase aggregate demand. The economy moves to point (4), bypassing point (3). 
C)  Consumers and firms observe that the money supply has fallen and anticipate the eventual reduction in the price level to P3. They adjust their expectations accordingly. Workers agree to lower nominal wages, and the short-run aggregate supply curve shifts to SRAS2 at the same time as aggregate demand falls, bypassing point (2). 
D)  Consumers and firms observe that the money supply has fallen and anticipate the eventual reduction in the price level to P4. They adjust their expectations accordingly. Workers agree to lower nominal wages, and the short-run aggregate supply curve shifts to SRAS2 at the same time as aggregate demand rises, moving the economy to point (4).

Question 18

Suppose the economy experiences a recessionary gap. How does the new classical
Japproach to macroeconomic policy (to eliminate the gap) differ from the new Keynesian
Japproach? Illustrate your answer with an aggregate demand-aggregate supply graph.

Accepted Answer

The new classical approach to macroecono

Question 19

When consumers and producers operate under rational expectations,

Accepted Answer

A)  stabilization policy affects only the short-run aggregate supply curve. 
B)  stabilization policy affects only the long-run aggregate supply curve. 
C)  shifts in aggregate demand are perfectly anticipated by market participants, negating any attempt by policymakers to shift aggregate demand. 
D)  stabilization policy does not affect the short-run aggregate supply curve. 
A)  stabilization policy affects only the short-run aggregate supply curve. 
B)  stabilization policy affects only the long-run aggregate supply curve. 
C)  shifts in aggregate demand are perfectly anticipated by market participants, negating any attempt by policymakers to shift aggregate demand. 
D)  stabilization policy does not affect the short-run aggregate supply curve.

Question 20

Monetarists argue that

Accepted Answer

A)  the Federal Reserve System should institute a prescribed rate of growth in the money supply. 
B)  since velocity is unstable, a fixed annual increase in the money supply will exacerbate inflation in the long run. 
C)  self-correction is less effective than activist monetary policy. 
D)  policymakers should use monetary policy rather than fiscal policy to stabilize the economy. 
A)  the Federal Reserve System should institute a prescribed rate of growth in the money supply. 
B)  since velocity is unstable, a fixed annual increase in the money supply will exacerbate inflation in the long run. 
C)  self-correction is less effective than activist monetary policy. 
D)  policymakers should use monetary policy rather than fiscal policy to stabilize the economy.

Monetarists argue that

An important distinction between the classical and Keynesian view of the economy is that

Figure 17-3 -Refer to Figure 17-3. Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from

Monetarists argue that impact lags associated with changes in the money supply are long and variable.

The theory that argues most strongly for countercyclical policy activism is

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. The below potential output level of Y₂ will exist as long as

Suppose the U.S. economy experiences stagflation. An expansionary fiscal policy

Who was the economist who laid the foundations for classical economics?

In 1965 during the Johnson administration, the U.S. economy was headed toward an inflationary gap. Which of the following policies would an economist recommend?

Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the Jaggregate demand curve would cause

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Keynesian economics was mostly concerned with the short run.

Figure 17-1 -Refer to Figure 17-1. The Great Depression began with a shift of

Which of the following is true about the classical theory and the monetarist theory with Jregards to the impact of changes in the money supply on the economy?

New classical theory asserts that, because people have rational expectations, if a policy of reducing the money supply is used

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. Which of the following explains the new classical view regarding economic agents' response to the decrease in money supply?

Suppose the economy experiences a recessionary gap. How does the new classical Japproach to macroeconomic policy (to eliminate the gap) differ from the new Keynesian Japproach? Illustrate your answer with an aggregate demand-aggregate supply graph.

When consumers and producers operate under rational expectations,

Monetarists argue 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

Exam 17: A Brief History of Macroeconomic Thought and Policy

Monetarists argue that

An important distinction between the classical and Keynesian view of the economy is that

Figure 17-3 -Refer to Figure 17-3. Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from

Monetarists argue that impact lags associated with changes in the money supply are long and variable.

The theory that argues most strongly for countercyclical policy activism is

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD2. The below potential output level of Y2 will exist as long as

Suppose the U.S. economy experiences stagflation. An expansionary fiscal policy

Who was the economist who laid the foundations for classical economics?

In 1965 during the Johnson administration, the U.S. economy was headed toward an inflationary gap. Which of the following policies would an economist recommend?

Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the Jaggregate demand curve would cause

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Keynesian economics was mostly concerned with the short run.

Figure 17-1 -Refer to Figure 17-1. The Great Depression began with a shift of

Which of the following is true about the classical theory and the monetarist theory with Jregards to the impact of changes in the money supply on the economy?

New classical theory asserts that, because people have rational expectations, if a policy of reducing the money supply is used

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD2. Which of the following explains the new classical view regarding economic agents' response to the decrease in money supply?

Suppose the economy experiences a recessionary gap. How does the new classical Japproach to macroeconomic policy (to eliminate the gap) differ from the new Keynesian Japproach? Illustrate your answer with an aggregate demand-aggregate supply graph.

When consumers and producers operate under rational expectations,

Monetarists argue 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

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. The below potential output level of Y₂ will exist as long as

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. Which of the following explains the new classical view regarding economic agents' response to the decrease in money supply?