Question 1

Proponents of inflation targeting generally think that

Accepted Answer

A) the economy will have fewer, shorter, and less severe business cycles if the Fed holds the rate of inflation to low, targeted levels from year to year. 
B) low interest rates are inflationary and high interest rates are deflationary. 
C) fiscal policy is more effective in stabilizing the economy than monetary policy. 
D) the Fed should strive to achieve zero inflation. 
A) the economy will have fewer, shorter, and less severe business cycles if the Fed holds the rate of inflation to low, targeted levels from year to year. 
B) low interest rates are inflationary and high interest rates are deflationary. 
C) fiscal policy is more effective in stabilizing the economy than monetary policy. 
D) the Fed should strive to achieve zero inflation.

Question 2

Crowding-out results from

Accepted Answer

A) an increase in the supply of money and a decrease in the velocity of money. 
B) a decrease in the supply of money and an increase in the velocity of money. 
C) the inverse relationship between the supply of money and nominal GDP. 
D) deficit financing that increases interest rates and reduces investment. 
A) an increase in the supply of money and a decrease in the velocity of money. 
B) a decrease in the supply of money and an increase in the velocity of money. 
C) the inverse relationship between the supply of money and nominal GDP. 
D) deficit financing that increases interest rates and reduces investment.

Question 3

If money supply is $800 billion and nominal GDP is $2 trillion, then the average number of times that money is spent and changes hands is

Accepted Answer

A) 2.5 times per year. 
B) 2 times per year. 
C) 1.6 times per year. 
D) 16 times per year. 
A) 2.5 times per year. 
B) 2 times per year. 
C) 1.6 times per year. 
D) 16 times per year.

Question 4

Refer to the table.The efficiency wage is

Accepted Answer

A) $10. 
B) $9. 
C) $8 
D) $6.Type: Table 
A) $10. 
B) $9. 
C) $8 
D) $6.Type: Table

Question 5

In the theory of coordination failures, shifts of the nation's long-run aggregate supply curve are the main cause of business cycles.

Accepted Answer

A) True 
 B)False

Question 6

The policy rule recommended by monetarists is that the money supply should be increased at the same rate as the potential growth in

Accepted Answer

A) real GDP. 
B) population. 
C) the level of prices. 
D) the velocity of money. 
A) real GDP. 
B) population. 
C) the level of prices. 
D) the velocity of money.

Question 7

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms.
M = $100 
V = 2
Ca = $160
Xn = $10
G = $10
In equilibrium, Ig is

Accepted Answer

A) $20. 
B) $10. 
C) $5. 
D) $50. 
A) $20. 
B) $10. 
C) $5. 
D) $50.

Question 8

The view that excessive growth of the money supply over long periods leads to inflation

Accepted Answer

A) is accepted by the monetarists but not by mainstream macroeconomists. 
B) is the main contribution of the rational expectations theory. 
C) had been absorbed into the mainstream of macroeconomics. 
D) is known as the monetary rule. 
A) is accepted by the monetarists but not by mainstream macroeconomists. 
B) is the main contribution of the rational expectations theory. 
C) had been absorbed into the mainstream of macroeconomics. 
D) is known as the monetary rule.

Question 9

The mainstream view of macro instability is that

Accepted Answer

A) changes in the money supply directly cause changes in aggregate demand and thus cause changes in real GDP. 
B) changes in investment shift the aggregate demand curve and thus cause changes in real GDP. 
C) bursts of innovation put the economy on an unsustainable growth path, eventually producing recession. 
D) changes in technology and resource availability are the two main sources of fluctuations of real GDP. 
A) changes in the money supply directly cause changes in aggregate demand and thus cause changes in real GDP. 
B) changes in investment shift the aggregate demand curve and thus cause changes in real GDP. 
C) bursts of innovation put the economy on an unsustainable growth path, eventually producing recession. 
D) changes in technology and resource availability are the two main sources of fluctuations of real GDP.

Question 10

According to monetarists, the Great Depression in the United States largely resulted from

Accepted Answer

A) contractionary fiscal policy. 
B) excessive imports relative to exports. 
C) significant changes in technology and resource availability. 
D) inappropriate monetary policy. 
A) contractionary fiscal policy. 
B) excessive imports relative to exports. 
C) significant changes in technology and resource availability. 
D) inappropriate monetary policy.

Question 11

So-called market monetarists suggest that the Fed, based on economic performance data over the past many decades, should aim for which of the following targets?

Accepted Answer

A) a 5 percent per year growth in nominal GDP 
B) a 5 percent per year inflation rate 
C) a 5 percent unemployment rate 
D) a 5 percent per year expansion of real GDP 
A) a 5 percent per year growth in nominal GDP 
B) a 5 percent per year inflation rate 
C) a 5 percent unemployment rate 
D) a 5 percent per year expansion of real GDP

Question 12

According to monetarists, an expansionary fiscal policy is a weak stabilization tool because

Accepted Answer

A) the asset demand for money varies inversely with the rate of interest. 
B) government borrowing to finance a deficit will raise the interest rate and reduce private investment. 
C) government borrowing will reduce the supply of money in circulation and depress the GDP. 
D) government borrowing to finance a deficit will lower interest rates, increase money balances, and lower velocity. 
A) the asset demand for money varies inversely with the rate of interest. 
B) government borrowing to finance a deficit will raise the interest rate and reduce private investment. 
C) government borrowing will reduce the supply of money in circulation and depress the GDP. 
D) government borrowing to finance a deficit will lower interest rates, increase money balances, and lower velocity.

Question 13

Mainstream economists contend that monetary policy tends to be destabilizing, in contrast to monetarists who believe that monetary policy is a stabilizing factor.

Accepted Answer

A) True 
 B)False

Question 14

(Last Word) Market monetarists believe that to inform changes in monetary policy, the Fed should set up a prediction market for

Accepted Answer

A) the money supply. 
B) nominal GDP. 
C) real GDP. 
D) the inflation rate. 
A) the money supply. 
B) nominal GDP. 
C) real GDP. 
D) the inflation rate.

Question 15

The equation of exchange indicates that

Accepted Answer

A) MQ equals VP. 
B) the velocity of money and the supply of money vary proportionately with one another. 
C) other things being equal, an increase in V will increase P and/or Q. 
D) other things being equal, M and P are inversely related. 
A) MQ equals VP. 
B) the velocity of money and the supply of money vary proportionately with one another. 
C) other things being equal, an increase in V will increase P and/or Q. 
D) other things being equal, M and P are inversely related.

Question 16

The velocity of money is equal to

Accepted Answer

A) 1/MPS. 
B) nominal GDP/M. 
C) 1/reserve ratio. 
D) nominal GDP/P. 
A) 1/MPS. 
B) nominal GDP/M. 
C) 1/reserve ratio. 
D) nominal GDP/P.

Question 17

Rational expectations theory suggests that changes in people's expectations in response to changes in fiscal and monetary policy changes will make such policy changes ineffective.

Accepted Answer

A) True 
 B)False

Question 18

(Consider This) According to economist Milton Friedman (1912-2006), the source of instability in the economy could be thought of as a

Accepted Answer

A) baseball manager (the Fed) who removes his starting pitcher too soon and sees a five-run lead evaporate in a single inning. 
B) duck hunter (the Fed) who starts shooting at ducks well before they fly over. 
C) camp councilor (the Fed) who is wearing a baseball cap that has two bills and says, "I am the leader; which way did they go?" 
D) backseat car passenger (the Fed) who occasionally leans over the front seat and abruptly jerks the steering wheel to the left or to the right. 
A) baseball manager (the Fed) who removes his starting pitcher too soon and sees a five-run lead evaporate in a single inning. 
B) duck hunter (the Fed) who starts shooting at ducks well before they fly over. 
C) camp councilor (the Fed) who is wearing a baseball cap that has two bills and says, "I am the leader; which way did they go?" 
D) backseat car passenger (the Fed) who occasionally leans over the front seat and abruptly jerks the steering wheel to the left or to the right.

Question 19

If M is $1,000, P is $8, and Q is 500, then V must be 6.

Accepted Answer

A) True 
 B)False

Question 20

The rational expectations perspective suggests that

Accepted Answer

A) fiscal policy is more powerful than monetary policy. 
B) monetary policy is more powerful than fiscal policy. 
C) fiscal and monetary policy are not likely to achieve their stated aims. 
D) fiscal policy works only to the extent that it is accompanied by fully anticipated changes in the money supply. 
A) fiscal policy is more powerful than monetary policy. 
B) monetary policy is more powerful than fiscal policy. 
C) fiscal and monetary policy are not likely to achieve their stated aims. 
D) fiscal policy works only to the extent that it is accompanied by fully anticipated changes in the money supply.

Exam 39: Current Issues in Macro Theory and Policy

Proponents of inflation targeting generally think that

Crowding-out results from

If money supply is $800 billion and nominal GDP is $2 trillion, then the average number of times that money is spent and changes hands is

Refer to the table.The efficiency wage is

In the theory of coordination failures, shifts of the nation's long-run aggregate supply curve are the main cause of business cycles.

The policy rule recommended by monetarists is that the money supply should be increased at the same rate as the potential growth in

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms. M = $100 V = 2 Ca = $160 Xn = $10 G = $10 In equilibrium, Ig is

The view that excessive growth of the money supply over long periods leads to inflation

The mainstream view of macro instability is that

According to monetarists, the Great Depression in the United States largely resulted from

So-called market monetarists suggest that the Fed, based on economic performance data over the past many decades, should aim for which of the following targets?

According to monetarists, an expansionary fiscal policy is a weak stabilization tool because

Mainstream economists contend that monetary policy tends to be destabilizing, in contrast to monetarists who believe that monetary policy is a stabilizing factor.

(Last Word) Market monetarists believe that to inform changes in monetary policy, the Fed should set up a prediction market for

The equation of exchange indicates that

The velocity of money is equal to

Rational expectations theory suggests that changes in people's expectations in response to changes in fiscal and monetary policy changes will make such policy changes ineffective.

(Consider This) According to economist Milton Friedman (1912-2006), the source of instability in the economy could be thought of as a

If M is $1,000, P is $8, and Q is 500, then V must be 6.

The rational expectations perspective suggests that

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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