Question 1

Figure 17-3  
-Refer to Figure 17-3. Suppose the economy is at point c. A classical economist would advocate

Accepted Answer

A)  allowing the economy's self-correcting mechanism to move the economy to point a. 
B)  pursuing expansionary fiscal policies to move the economy to point a. 
C)  pursuing expansionary fiscal policies to move the economy to point b. 
D)  pursuing expansionary fiscal policies to move the economy to point d. 
A)  allowing the economy's self-correcting mechanism to move the economy to point a. 
B)  pursuing expansionary fiscal policies to move the economy to point a. 
C)  pursuing expansionary fiscal policies to move the economy to point b. 
D)  pursuing expansionary fiscal policies to move the economy to point d.

Question 2

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 3

Keynes argued that the surest way to bring the economy out of the Great Depression was to

Accepted Answer

A)  rely on expansionary monetary policy. 
B)  use expansionary fiscal policy. 
C)  impose wage controls to prevent drastic decreases in disposable income. 
D)  leave the economy alone and flexible wages and prices would eventually lead to increases in income and employment. 
A)  rely on expansionary monetary policy. 
B)  use expansionary fiscal policy. 
C)  impose wage controls to prevent drastic decreases in disposable income. 
D)  leave the economy alone and flexible wages and prices would eventually lead to increases in income and employment.

Question 4

New Keynesian economics is built on
I. the Keynesian approach
II. the monetarist approach
III. the new classical approach

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II, and III 
A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II, and III

Question 5

The inability of the government to stabilize the economy in the 1970s when real GDP has fallen, but inflation has remained high, led Robert Lucas to challenge the Keynesian macroeconomic policy prescriptions. Which of the following is the main tenet of his argument?

Accepted Answer

A)  Active stabilization policies tend to be destabilizing because of the long policy lags and consequently, slow down the economy's self correction. 
B)  There is no role for active stabilization policies because they do not take into account rational choices by individuals; failure to do so generally cancels the impact of fiscal and monetary policies. 
C)  Individuals respond in predictable ways to their changing economic environment; active stabilization interferes with people's ability to respond to changing economic conditions. 
D)  The economy is inherently stable and any role for stabilization policy should be limited to those that affect long-run aggregate supply to promote economic growth and not aggregate demand. 
A)  Active stabilization policies tend to be destabilizing because of the long policy lags and consequently, slow down the economy's self correction. 
B)  There is no role for active stabilization policies because they do not take into account rational choices by individuals; failure to do so generally cancels the impact of fiscal and monetary policies. 
C)  Individuals respond in predictable ways to their changing economic environment; active stabilization interferes with people's ability to respond to changing economic conditions. 
D)  The economy is inherently stable and any role for stabilization policy should be limited to those that affect long-run aggregate supply to promote economic growth and not aggregate demand.

Question 6

Consider the following statement: "A consistent countercyclical policy has no effect on employment and output, since individuals will recognize those policies as systematic and will anticipate them correctly." This statement is most closely associated with

Accepted Answer

A)  classical theory. 
B)  Keynesian theory. 
C)  new classical theory. 
D)  monetarist theory. 
A)  classical theory. 
B)  Keynesian theory. 
C)  new classical theory. 
D)  monetarist theory.

Question 7

Which of the following is true about new Keynesian economics?
I. It incorporates monetarist ideas about the importance of monetary policy.
II. It incorporates new classical ideas about the importance of aggregate supply.
III. It includes a greater use of microeconomic analysis in macroeconomic analysis than Keynesian economics.
IV. Unlike Keynesian economics, it is opposed to active stabilization policies.

Accepted Answer

A)  I and III only 
B)  II and III only 
C)  I, II, and III only 
D)  I, II, III, and IV 
A)  I and III only 
B)  II and III only 
C)  I, II, and III only 
D)  I, II, III, and IV

Question 8

In the U.S., the Great Recession was fought with traditional monetary and fiscal policies,

Accepted Answer

A) True 
 B)False

Question 9

Which of the following factors contributed to the sharp reduction in aggregate demand during the Great Depression?
I. reduction in wealth
II. reduced consumer confidence
III. tax increases
IV. an expansionary monetary policy that caused inflation

Accepted Answer

A)  I and II only 
B)  I and IV only 
C)  I, II, and III only 
D)  I, II, and IV only 
A)  I and II only 
B)  I and IV only 
C)  I, II, and III only 
D)  I, II, and IV only

Question 10

Keynesian theory was a response to the prevailing

Accepted Answer

A)  classical theory that held that the economy could suffer from a period of sustained unemployment. 
B)  classical theory that held that the economy is self-correcting. 
C)  monetarist theory that held that the economy is self-correcting. 
D)  monetarist theory that held that monetary policy should be used to return the economy to its potential output. 
A)  classical theory that held that the economy could suffer from a period of sustained unemployment. 
B)  classical theory that held that the economy is self-correcting. 
C)  monetarist theory that held that the economy is self-correcting. 
D)  monetarist theory that held that monetary policy should be used to return the economy to its potential output.

Question 11

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 12

New classical economics

Accepted Answer

A)  differs from classical economics in that the latter focuses on the determination of long-run aggregate supply while the former focus on the determination of short-run aggregate supply. 
B)  is similar to classical economics in that both theories incorporate expectations in their analysis of the economy in the long-run. 
C)  differs from classical economics in that the latter focuses on producers' expectations only while the latter also includes consumers' expectations in the determination of long-run macroeconomic equilibrium. 
D)  is similar to classical economics in that both theories focus on the determination of long-run aggregate supply and the economy's ability to reach this level of output quickly. 
A)  differs from classical economics in that the latter focuses on the determination of long-run aggregate supply while the former focus on the determination of short-run aggregate supply. 
B)  is similar to classical economics in that both theories incorporate expectations in their analysis of the economy in the long-run. 
C)  differs from classical economics in that the latter focuses on producers' expectations only while the latter also includes consumers' expectations in the determination of long-run macroeconomic equilibrium. 
D)  is similar to classical economics in that both theories focus on the determination of long-run aggregate supply and the economy's ability to reach this level of output quickly.

Question 13

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

Accepted Answer

The new classical approach to macroecono

Question 14

Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the
Aggregate 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 15

Which of the following factors contributed to the sharp reduction in aggregate demand during the Great Depression?
I. reduction in wealth
II. reduction in net exports
III. a financial crisis that reduced money supply
IV. tax increases

Accepted Answer

A)  I and III only 
B)  I, III, and IV only 
C)  I, II, and III only 
D)  I, II, III, and IV 
A)  I and III only 
B)  I, III, and IV only 
C)  I, II, and III only 
D)  I, II, III, and IV

Question 16

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?

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 17

When did policy makers in the U.S. first use fiscal policy with the intent of manipulating
Aggregate demand to move the economy to its potential level of real GDP?

Accepted Answer

A)  During the Roosevelt administration 
B)  During the Truman administration 
C)  During the Eisenhower administration 
D)  During the Kennedy administration 
A)  During the Roosevelt administration 
B)  During the Truman administration 
C)  During the Eisenhower administration 
D)  During the Kennedy administration

Question 18

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 19

Which of the following is true about the classical theory and the monetarist theory with
Regards 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 20

Which of the following groups of economists perceive the economy as essentially stable and self-correcting?

Accepted Answer

A)  Keynesians, monetarists, and classical economists 
B)  Classical economists, monetarists, and new classical economists. 
C)  Monetarists, classical economists, and socialists 
D)  Classical economists, Keynesians, monetarists, and new classical economists. 
A)  Keynesians, monetarists, and classical economists 
B)  Classical economists, monetarists, and new classical economists. 
C)  Monetarists, classical economists, and socialists 
D)  Classical economists, Keynesians, monetarists, and new classical economists.

Exam 32: Macroeconomic Policy Around the World

Figure 17-3 -Refer to Figure 17-3. Suppose the economy is at point c. A classical economist would advocate

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?

Keynes argued that the surest way to bring the economy out of the Great Depression was to

New Keynesian economics is built on I. the Keynesian approach II. the monetarist approach III. the new classical approach

The inability of the government to stabilize the economy in the 1970s when real GDP has fallen, but inflation has remained high, led Robert Lucas to challenge the Keynesian macroeconomic policy prescriptions. Which of the following is the main tenet of his argument?

Consider the following statement: "A consistent countercyclical policy has no effect on employment and output, since individuals will recognize those policies as systematic and will anticipate them correctly." This statement is most closely associated with

In the U.S., the Great Recession was fought with traditional monetary and fiscal policies,

Which of the following factors contributed to the sharp reduction in aggregate demand during the Great Depression? I. reduction in wealth II. reduced consumer confidence III. tax increases IV. an expansionary monetary policy that caused inflation

Keynesian theory was a response to the prevailing

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

New classical economics

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

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

Which of the following factors contributed to the sharp reduction in aggregate demand during the Great Depression? I. reduction in wealth II. reduction in net exports III. a financial crisis that reduced money supply IV. tax increases

When did policy makers in the U.S. first use fiscal policy with the intent of manipulating Aggregate demand to move the economy to its potential level of real GDP?

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

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

Which of the following groups of economists perceive the economy as essentially stable and self-correcting?

Welcome to Economics

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The Aggregate Demandaggregate Supply Model

The Keynesian Perspective

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