Exam 19: Current Issues in Macro Theory and Policy

Mainstream economists have adopted some ideas from RET, and some rational expectations assumptions are being incorporated into current macroeconomic models.

New classical economists say that a fully anticipated decrease in aggregate demand

Define rational expectations theory.

Describe the mainstream view of self-correction in the economy.

The velocity of money is equal to

Rational expectations theory implies that the

Monetarists argue that the amount of money the public will want to hold depends primarily on the level of

Nearly all modern economists support the idea of a monetary rule.

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?

Discuss the Federal Reserve's policy of inflation targeting.

New classical economists

The velocity of money is the

In the mainstream view, one major source of instability in the macroeconomy is the volatility of

The equation of exchange suggests that if the velocity of money and the quantity of goods and services are held constant, a(n)

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.

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

Hourly Wage Rate Output per Hour of Work \ 10 6 9 6 8 4 7 2 6 1 Refer to the table. At the $8 wage, labor cost per unit of output is

A coordination failure

In new classical economics, a "price-level surprise"

The mainstream view of the economy since 1946 is that it has become more stable because of the use of discretionary fiscal and monetary policies.