Question 1

Mainstream economists believe that economic instability is primarily due to unexpected changes in consumer spending.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following perspectives believes that both wages and prices are stuck in the immediate short run and that prices are inflexible downward but flexible upward?

Accepted Answer

A) monetarism 
B) mainstream economists 
C) rational expectations economists 
D) None of these-they all see wages and prices as flexible. 
A) monetarism 
B) mainstream economists 
C) rational expectations economists 
D) None of these-they all see wages and prices as flexible.

Question 3

From a monetarist perspective, an expansionary fiscal policy's effect on aggregate demand would be offset by

Accepted Answer

A) the buying of government securities by the Treasury. 
B) the selling of government securities by the Treasury. 
C) a cut in the Federal funds rate. 
D) a cut in the discount rate. 
A) the buying of government securities by the Treasury. 
B) the selling of government securities by the Treasury. 
C) a cut in the Federal funds rate. 
D) a cut in the discount rate.

Question 4

Suppose aggregate demand in the economy sharply declines.Mainstream economists say that the price level (at least for a time) will and real output will .

Accepted Answer

A) decrease; remain constant 
B) increase; remain constant 
C) remain constant; decrease 
D) remain constant; increase 
A) decrease; remain constant 
B) increase; remain constant 
C) remain constant; decrease 
D) remain constant; increase

Question 5

Within the aggregate demand-aggregate supply framework, a strict interpretation of rational expectations theory suggests that a change in aggregate

Accepted Answer

A) demand will have a large effect on the price level but a small effect on output. 
B) demand will have a small effect on the price level but a large effect on output. 
C) demand will have a large effect on the price level but no effect on output. 
D) supply will have a large effect on the price level but no effect on output. 
A) demand will have a large effect on the price level but a small effect on output. 
B) demand will have a small effect on the price level but a large effect on output. 
C) demand will have a large effect on the price level but no effect on output. 
D) supply will have a large effect on the price level but no effect on output.

Question 6

(Consider This) The 2007-2009 recession began with reductions in investment and consumption spending, precipitated by a financial crisis.This explanation for the recession is consistent with

Accepted Answer

A) the monetarist view of macroeconomic instability. 
B) the rational expectations view of macroeconomic instability. 
C) the mainstream view of macroeconomic instability. 
D) none of these views of macroeconomic instability. 
A) the monetarist view of macroeconomic instability. 
B) the rational expectations view of macroeconomic instability. 
C) the mainstream view of macroeconomic instability. 
D) none of these views of macroeconomic instability.

Question 7

Adherents of the traditional monetary rule advocate that the

Accepted Answer

A) functional finance approach to fiscal policy be adopted. 
B) money supply should be increased by a constant rate year after year. 
C) money supply should be reduced during inflation and increased during recession. 
D) money supply should be increased during inflation and reduced during recession. 
A) functional finance approach to fiscal policy be adopted. 
B) money supply should be increased by a constant rate year after year. 
C) money supply should be reduced during inflation and increased during recession. 
D) money supply should be increased during inflation and reduced during recession.

Question 8

Assume that many households and businesses reduce their spending only because they expect other households and consumers to reduce their spending.Also suppose that all households and consumers would be better off if they did not reduce their spending.This situation best describes the

Accepted Answer

A) real-business-cycle theory. 
B) rational expectations theory. 
C) concept of coordination failures. 
D) adaptive expectations theory. 
A) real-business-cycle theory. 
B) rational expectations theory. 
C) concept of coordination failures. 
D) adaptive expectations theory.

Question 9

In real-business-cycle theory, real output can change without a change in the price level.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following pairs helps explain why self-correction from a decline in aggregate demand in the economy may be slow rather than rapid?

Accepted Answer

A) theory of compensation wage differentials; theory of derived demand for labor 
B) efficiency wage theory; insider-outsider theory 
C) insider-outsider theory; principle-agent problem 
D) externalities; efficiency wage theory 
A) theory of compensation wage differentials; theory of derived demand for labor 
B) efficiency wage theory; insider-outsider theory 
C) insider-outsider theory; principle-agent problem 
D) externalities; efficiency wage theory

Question 11

Rational expectations theory assumes that both product and resource markets are competitive and that wages and prices are flexible.

Accepted Answer

A) True 
 B)False

Question 12

(Last Word) Suppose that a prediction market for nominal GDP is predicting 6 percent growth in nominal GDP, but the Fed's desired rate of nominal GDP growth is 5 percent.According to the market monetarist view, the Fed should

Accepted Answer

A) employ a restrictive monetary policy until the predictions market adjusts nominal GDP growth predictions down to a 5 percent growth rate. 
B) employ an expansionary monetary policy until the predictions market adjusts nominal GDP growth predictions down to a 5 percent growth rate. 
C) do nothing, as the market will adjust itself. 
D) adhere to a strict monetary rule of 5 percent growth in the money supply. 
A) employ a restrictive monetary policy until the predictions market adjusts nominal GDP growth predictions down to a 5 percent growth rate. 
B) employ an expansionary monetary policy until the predictions market adjusts nominal GDP growth predictions down to a 5 percent growth rate. 
C) do nothing, as the market will adjust itself. 
D) adhere to a strict monetary rule of 5 percent growth in the money supply.

Question 13

Monetarists argue that when expansionary fiscal policy is financed through borrowing,

Accepted Answer

A) monetary policy becomes tight. 
B) private investment spending will be crowded out. 
C) the demand for money and interest rates both decrease. 
D) the investment demand curve becomes relatively steep. 
A) monetary policy becomes tight. 
B) private investment spending will be crowded out. 
C) the demand for money and interest rates both decrease. 
D) the investment demand curve becomes relatively steep.

Question 14

Which of the following groups of economists believe that cost-push inflation is impossible in the long run without excessive monetary growth?

Accepted Answer

A) mainstream economists and monetarists 
B) mainstream economists and rational expectations economists 
C) monetarists and rational expectations economists 
D) mainstream economists, monetarists, and rational expectations economists 
A) mainstream economists and monetarists 
B) mainstream economists and rational expectations economists 
C) monetarists and rational expectations economists 
D) mainstream economists, monetarists, and rational expectations economists

Question 15

If the economy diverges from its full-employment output, new classical economics would suggest that

Accepted Answer

A) a change in the velocity of money would be all that is needed to return it to its full-employment output. 
B) an improvement in insider-outsider relationships is all that is needed to return it to its full-employment output. 
C) an efficiency wage in the economy would return it to its full-employment output. 
D) internal mechanisms within the economy would automatically return it to its full-employment output. 
A) a change in the velocity of money would be all that is needed to return it to its full-employment output. 
B) an improvement in insider-outsider relationships is all that is needed to return it to its full-employment output. 
C) an efficiency wage in the economy would return it to its full-employment output. 
D) internal mechanisms within the economy would automatically return it to its full-employment output.

Question 16

Monetarists argue that the relationship between

Accepted Answer

A) the quantity of money the public wants to hold and the level of GDP is not stable. 
B) the quantity of money the public wants to hold and the level of GDP is stable. 
C) the quantity of money the public wants to hold and the level of saving is stable. 
D) velocity and the interest rate varies directly. 
A) the quantity of money the public wants to hold and the level of GDP is not stable. 
B) the quantity of money the public wants to hold and the level of GDP is stable. 
C) the quantity of money the public wants to hold and the level of saving is stable. 
D) velocity and the interest rate varies directly.

Question 17

Mainstream macroeconomics has embraced the

Accepted Answer

A) rational expectations view that stabilization policy is totally ineffective. 
B) monetarist view that the Fed should increase the money supply at a fixed annual rate. 
C) rational expectations view that expectations can shift the aggregate demand and aggregate supply curves. 
D) monetarist view that an increase in government spending crowds out an equal amount of investment spending. 
A) rational expectations view that stabilization policy is totally ineffective. 
B) monetarist view that the Fed should increase the money supply at a fixed annual rate. 
C) rational expectations view that expectations can shift the aggregate demand and aggregate supply curves. 
D) monetarist view that an increase in government spending crowds out an equal amount of investment spending.

Question 18

To determine the velocity of money, you would need to know

Accepted Answer

A) nominal GDP and real GDP. 
B) the money supply and the price level. 
C) nominal GDP and the money supply. 
D) nominal GDP and the interest rate. 
A) nominal GDP and real GDP. 
B) the money supply and the price level. 
C) nominal GDP and the money supply. 
D) nominal GDP and the interest rate.

Question 19

Assume that M is $200 billion and V is 6.If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by

Accepted Answer

A) $140 billion. 
B) $180 billion. 
C) $220 billion. 
D) $260 billion. 
A) $140 billion. 
B) $180 billion. 
C) $220 billion. 
D) $260 billion.

Question 20

Mainstream economists say that recessions are unlikely to occur today because prices and wages are highly flexible downward.

Accepted Answer

A) True 
 B)False

Exam 39: Current Issues in Macro Theory and Policy

Mainstream economists believe that economic instability is primarily due to unexpected changes in consumer spending.

Which of the following perspectives believes that both wages and prices are stuck in the immediate short run and that prices are inflexible downward but flexible upward?

From a monetarist perspective, an expansionary fiscal policy's effect on aggregate demand would be offset by

Suppose aggregate demand in the economy sharply declines.Mainstream economists say that the price level (at least for a time) will and real output will .

Within the aggregate demand-aggregate supply framework, a strict interpretation of rational expectations theory suggests that a change in aggregate

(Consider This) The 2007-2009 recession began with reductions in investment and consumption spending, precipitated by a financial crisis.This explanation for the recession is consistent with

Adherents of the traditional monetary rule advocate that the

Assume that many households and businesses reduce their spending only because they expect other households and consumers to reduce their spending.Also suppose that all households and consumers would be better off if they did not reduce their spending.This situation best describes the

In real-business-cycle theory, real output can change without a change in the price level.

Which of the following pairs helps explain why self-correction from a decline in aggregate demand in the economy may be slow rather than rapid?

Rational expectations theory assumes that both product and resource markets are competitive and that wages and prices are flexible.

(Last Word) Suppose that a prediction market for nominal GDP is predicting 6 percent growth in nominal GDP, but the Fed's desired rate of nominal GDP growth is 5 percent.According to the market monetarist view, the Fed should

Monetarists argue that when expansionary fiscal policy is financed through borrowing,

Which of the following groups of economists believe that cost-push inflation is impossible in the long run without excessive monetary growth?

If the economy diverges from its full-employment output, new classical economics would suggest that

Monetarists argue that the relationship between

Mainstream macroeconomics has embraced the

To determine the velocity of money, you would need to know

Assume that M is $200 billion and V is 6.If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by

Mainstream economists say that recessions are unlikely to occur today because prices and wages are highly flexible downward.

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role and Government Failure

Elasticity

Utility Maximization

Behavioral Economics

Businesses and the Costs of Production

Pure Competition in the Short Run

Pure Competition in the Long Run

Pure Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Technology, Rd, and Efficiency

The Demand for Resources

Wage Determination

Rent, Interest, and Profit

Natural Resource and Energy Economics

Public Finance: Expenditures and Taxes

Antitrust Policy and Regulation

Agriculture: Economics and Policy

Income Inequality, Poverty, and Discrimination

Health Care

Immigration

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Financial Economics

Extending the Analysis of Aggregate Supply

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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