Exam 17: A Brief History of Macroeconomic Thought and Policy

During the 1970s when the U.S. experienced rising inflation and unemployment, economists began to reconsider the significance of aggregate supply as well.

Use the following to answer questions . Exhibit: Responses to a Decrease in Aggregate Demand -(Exhibit: Responses to a Decrease in Aggregate Demand) 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?

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?

Early classical macroeconomics was based largely on the foundation of

Use the following to answer questions . Exhibit: Aggregate Demand and Aggregate Supply and the Great Depression -(Exhibit: Aggregate Demand and Aggregate Supply and the Great Depression) The Great Depression began with a shift of

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?

Economists who subscribe to the rational expectations hypothesis

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

Use the following to answer questions. Exhibit: Economic Adjustments -(Exhibit: Economic Adjustments) 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

Which of the following was not an explanation for the lower volatility of the U.S. economy during the 25-year period that preceded the Great Recession?

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

Keynesian theory was a response to the prevailing

Use the following to answer questions . Exhibit: Aggregate Demand and Aggregate Supply and the Great Depression -(Exhibit: Aggregate Demand and Aggregate Supply and the Great Depression) 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?

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.

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

Use the following to answer questions. Exhibit: Economic Adjustments -(Exhibit: Economic Adjustments) Suppose the economy is at point c. A classical economist would advocate

David Ricardo focused on the economy in the _______ and on the forces that determined an Economy's _______.

Use the following to answer questions . Exhibit: Aggregate Demand and Aggregate Supply and the Great Depression -(Exhibit: Aggregate Demand and Aggregate Supply and the Great Depression) Which price level and output level best illustrates where the U.S. economy was before the Great Depression began?

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?

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