Question 1

Real-business-cycle theory suggests that changes in

Accepted Answer

A)  monetary policy are the single most important cause of macroeconomic instability. 
B)  investment spending will have a direct and signiﬁcant effect on aggregate demand. 
C)  technology and resources affect productivity, and thus the long-run growth of aggregate supply. 
D)  the velocity of money is gradual and predictable, and thus is able to accommodate the long-run changes in nominal GDP. 
A)  monetary policy are the single most important cause of macroeconomic instability. 
B)  investment spending will have a direct and signiﬁcant effect on aggregate demand. 
C)  technology and resources affect productivity, and thus the long-run growth of aggregate supply. 
D)  the velocity of money is gradual and predictable, and thus is able to accommodate the long-run changes in nominal GDP. C

Question 2

(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. A

Question 3

According to the monetarists, what is the main cause of macroeconomic instability?

Accepted Answer

According to the monetarists, the main cause of macroeconomic instability is inappropriate
monetary policy. An increase in the money supply directly increases aggregate demand. Under
conditions of full employment, that increase in aggregate demand raises the price level. For a time,
higher prices cause ﬁrms to increase their real output, and the unemployment rate falls below the
natural rate. But once nominal wages rise to restore real wages, real output moves back to its full-
employment level and unemployment returns to its natural rate. The inappropriate increase in the
money supply leads to inﬂation, together with instability of real output and employment. A decrease
in the money supply reduces aggregate demand. Real output temporarily falls, and the
unemployment rate rises above its natural rate. Eventually, nominal wages fall and real output
returns to its full-employment level. The inappropriate decline in the money supply leads to
deﬂation, together with instability of real GDP and employment.

Question 4

An eﬃciency wage is an above-market wage that spurs greater work effort and gives the ﬁrm more
proﬁts because of lower wage costs per unit of output.

Accepted Answer

A) True 
 B)False

Question 5

(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 6

If households and ﬁrms cut back on spending because they expect other households and ﬁrms to do so, and this self-fulﬁlling prophecy causes a recession, then this would be an example of

Accepted Answer

A)  insider-outsider relationships. 
B)  eﬃciency wage theory. 
C)  a coordination failure. 
D)  a price-level surprise. 
A)  insider-outsider relationships. 
B)  eﬃciency wage theory. 
C)  a coordination failure. 
D)  a price-level surprise.

Question 7

The rational expectations view that expectations regarding policy and its effects are important to consider

Accepted Answer

A)  serves as the primary rationale for the Laffer Curve. 
B)  is now accepted by most mainstream economists. 
C)  is consistent with the monetary rule calling for a constant rate of growth in the money supply. 
D)  is challenged by research indicating that expectations have little economic effect. 
A)  serves as the primary rationale for the Laffer Curve. 
B)  is now accepted by most mainstream economists. 
C)  is consistent with the monetary rule calling for a constant rate of growth in the money supply. 
D)  is challenged by research indicating that expectations have little economic effect.

Question 8

In the rational expectations view, the best approach to ﬁscal policy is for the government to

Accepted Answer

A)  cut taxes. 
B)  balance its budget. 
C)  eliminate transfer payments. 
D)  ﬁx government spending. 
A)  cut taxes. 
B)  balance its budget. 
C)  eliminate transfer payments. 
D)  ﬁx government spending.

Question 9

From the mainstream perspective, instability in the economy is due to

Accepted Answer

A)  price ﬂexibility and shocks to either aggregate demand or aggregate supply. 
B)  price stickiness and shocks to either aggregate demand or aggregate supply. 
C)  price ﬂexibility and government policies and regulation. 
D)  price stickiness and government policies and regulation. 
A)  price ﬂexibility and shocks to either aggregate demand or aggregate supply. 
B)  price stickiness and shocks to either aggregate demand or aggregate supply. 
C)  price ﬂexibility and government policies and regulation. 
D)  price stickiness and government policies and regulation.

Question 10

In 2012, the Fed

Accepted Answer

A)  adopted a strict monetary rule of 2 percent per year. 
B)  adopted inﬂation targeting, setting a target rate of 2 percent per year. 
C)  relaxed all monetary rules and targets in favor of a fully ﬂexible monetary policy. 
D)  adopted a nominal GDP growth rate target of 6 percent per year. 
A)  adopted a strict monetary rule of 2 percent per year. 
B)  adopted inﬂation targeting, setting a target rate of 2 percent per year. 
C)  relaxed all monetary rules and targets in favor of a fully ﬂexible monetary policy. 
D)  adopted a nominal GDP growth rate target of 6 percent per year.

Question 11

According to new classical economists, the

Accepted Answer

A)  short-run demand for labor curve is vertical. 
B)  short-run aggregate demand curve is vertical. 
C)  long-run aggregate supply curve is horizontal. 
D)  long-run aggregate supply curve is vertical. 
A)  short-run demand for labor curve is vertical. 
B)  short-run aggregate demand curve is vertical. 
C)  long-run aggregate supply curve is horizontal. 
D)  long-run aggregate supply curve is vertical.

Question 12

According to monetarists, a change in the money supply changes

Accepted Answer

A)  the velocity of money, which in turn changes the nominal GDP. 
B)  investment spending, which in turn changes the nominal GDP. 
C)  the interest rate, which in turn changes the nominal GDP. 
D)  aggregate demand, which in turn changes the nominal GDP. 
A)  the velocity of money, which in turn changes the nominal GDP. 
B)  investment spending, which in turn changes the nominal GDP. 
C)  the interest rate, which in turn changes the nominal GDP. 
D)  aggregate demand, which in turn changes the nominal GDP.

Question 13

Refer to the figure and assume the economy initially is in equilibrium at point a. In the new classical theory, a fully anticipated decrease in aggregate demand from AD2 to AD3 would move the economy

Accepted Answer

A)  directly from a to h. 
B)  from a to g to h. 
C)  directly from a to d. 
D)  from a to c to h. 
A)  directly from a to h. 
B)  from a to g to h. 
C)  directly from a to d. 
D)  from a to c to h.

Question 14

Monetarists and rational expectations theorists generally agree that

Accepted Answer

A)  the Federal Reserve should adhere to a monetary rule. 
B)  the rate of interest and the price of bonds are positively or directly related. 
C)  the money supply cannot be measured and therefore cannot be controlled by the Federal Reserve. 
D)  prices and wages are inﬂexible downward. 
A)  the Federal Reserve should adhere to a monetary rule. 
B)  the rate of interest and the price of bonds are positively or directly related. 
C)  the money supply cannot be measured and therefore cannot be controlled by the Federal Reserve. 
D)  prices and wages are inﬂexible downward.

Question 15

An eﬃciency wage is one that

Accepted Answer

A)  increases the velocity of money. 
B)  minimizes the ﬁrm's labor cost per unit of output. 
C)  results from signiﬁcant changes in technology and labor. 
D)  is imposed by government to guarantee workers a living wage. 
A)  increases the velocity of money. 
B)  minimizes the ﬁrm's labor cost per unit of output. 
C)  results from signiﬁcant changes in technology and labor. 
D)  is imposed by government to guarantee workers a living wage.

Question 16

If the nominal GDP is $477 billion and the velocity of money is 4.5, then the money supply is

Accepted Answer

A)  $122 billion. 
B)  $98 billion. 
C)  $106 billion. 
D)  $477 billion. 
A)  $122 billion. 
B)  $98 billion. 
C)  $106 billion. 
D)  $477 billion.

Question 17

Deﬁne the velocity of money. Explain the monetarist view with regard to the stability of velocity.

Accepted Answer

The velocity of money is the number of t

Question 18

In the mainstream view, the crowding-out effect from the use of ﬁscal policy is

Accepted Answer

A)  small, especially during a recession. 
B)  large, especially during a recession. 
C)  large because the velocity of money is high. 
D)  small because the velocity of money is low. 
A)  small, especially during a recession. 
B)  large, especially during a recession. 
C)  large because the velocity of money is high. 
D)  small because the velocity of money is low.

Question 19

(Last Word) Market monetarists believe 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 20

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.

Exam 19: Current Issues in Macro Theory and Policy

Real-business-cycle theory suggests that changes in

(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

According to the monetarists, what is the main cause of macroeconomic instability?

An eﬃciency wage is an above-market wage that spurs greater work effort and gives the ﬁrm more proﬁts because of lower wage costs per unit of output.

(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

If households and ﬁrms cut back on spending because they expect other households and ﬁrms to do so, and this self-fulﬁlling prophecy causes a recession, then this would be an example of

The rational expectations view that expectations regarding policy and its effects are important to consider

In the rational expectations view, the best approach to ﬁscal policy is for the government to

From the mainstream perspective, instability in the economy is due to

In 2012, the Fed

According to new classical economists, the

According to monetarists, a change in the money supply changes

Refer to the figure and assume the economy initially is in equilibrium at point a. In the new classical theory, a fully anticipated decrease in aggregate demand from AD2 to AD3 would move the economy

Monetarists and rational expectations theorists generally agree that

An eﬃciency wage is one that

If the nominal GDP is $477 billion and the velocity of money is 4.5, then the money supply is

Deﬁne the velocity of money. Explain the monetarist view with regard to the stability of velocity.

In the mainstream view, the crowding-out effect from the use of ﬁscal policy is

(Last Word) Market monetarists believe the Fed should set up a prediction market for

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?

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

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

Filters

Refer to the figure and assume the economy initially is in equilibrium at point a. In the new classical theory, a fully anticipated decrease in aggregate demand from AD₂ to AD₃ would move the economy