Question 1

The idea that an economy can get stuck in either an unemployment equilibrium or an inﬂation equilibrium is most closely associated with

Accepted Answer

A)  new classical economics. 
B)  the real-business-cycle theory. 
C)  monetarism. 
D)  the idea of coordination failures. 
A)  new classical economics. 
B)  the real-business-cycle theory. 
C)  monetarism. 
D)  the idea of coordination failures.

Question 2

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 3

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 4

Mainstream macroeconomics would suggest that ﬁscal policy

Accepted Answer

A)  affects GDP and the price level through changes in aggregate supply. 
B)  changes aggregate demand and GDP through the multiplier process. 
C)  has no effect unless the ﬁscal policy is accompanied by changes in the money supply. 
D)  is relatively ineffective because the outcomes are anticipated and offset. 
A)  affects GDP and the price level through changes in aggregate supply. 
B)  changes aggregate demand and GDP through the multiplier process. 
C)  has no effect unless the ﬁscal policy is accompanied by changes in the money supply. 
D)  is relatively ineffective because the outcomes are anticipated and offset.

Question 5

Most monetarists would say that

Accepted Answer

A)  the MV = PQ equation provides a better understanding of the macroeconomy than does the
$C _ { a } + I _ { g } + X _ { n } + G = \mathrm { GDP }$ = GDP equation. 
B)  most changes in the price level are explainable by changes in the level of real output. 
C)  the velocity of money is quite unstable. 
D)  all of these are true. 
A)  the MV = PQ equation provides a better understanding of the macroeconomy than does the
$C _ { a } + I _ { g } + X _ { n } + G = \mathrm { GDP }$ = GDP equation. 
B)  most changes in the price level are explainable by changes in the level of real output. 
C)  the velocity of money is quite unstable. 
D)  all of these are true.

Question 6

If the economy's real output is growing by 2.5 percent a year, then, in order to maintain price stability, a monetarist would most likely recommend that money supply should be

Accepted Answer

A)  held constant. 
B)  decreased by 1 percent a year. 
C)  increased by 2.5 percent a year. 
D)  increased by 7.5 percent a year. 
A)  held constant. 
B)  decreased by 1 percent a year. 
C)  increased by 2.5 percent a year. 
D)  increased by 7.5 percent a year.

Question 7

The equation of exchange is MV = PQ.

Accepted Answer

A) True 
 B)False

Question 8

How do theories of mainstream macroeconomics and monetarism differ in relation to monetary
policy?

Accepted Answer

Mainstream macroeconomics view of moneta

Question 9

According to rational expectations theory, discretionary monetary and ﬁscal policy will be ineffective primarily because of the

Accepted Answer

A)  successes of macroeconomic policymakers 
B)  inability of policymakers to time decisions properly. 
C)  reaction of the public to the expected effects of policy changes. 
D)  slow impact of policy to stimulate changes in real output and employment. 
A)  successes of macroeconomic policymakers 
B)  inability of policymakers to time decisions properly. 
C)  reaction of the public to the expected effects of policy changes. 
D)  slow impact of policy to stimulate changes in real output and employment.

Question 10

The basic equation of monetarism is

Accepted Answer

A)  $M V = P Q$ 
B)  $S _ { a } + T + M = I _ { g } + G + X _ { n }$ 
C)  $V = M / \mathrm { PQ }$ 
D)  $C _ { a } + I _ { g } + X _ { n } + G = \mathrm { GDP }$ 
A)  $M V = P Q$ 
B)  $S _ { a } + T + M = I _ { g } + G + X _ { n }$ 
C)  $V = M / \mathrm { PQ }$ 
D)  $C _ { a } + I _ { g } + X _ { n } + G = \mathrm { GDP }$

Question 11

Monetarists say the velocity of money is highly variable and there is no close link between the
money supply and the level of economic activity.

Accepted Answer

A) True 
 B)False

Question 12

In the equation of exchange, V indicates the

Accepted Answer

A)  value or purchasing power of the dollar. 
B)  number of times per year the average dollar is spent. 
C)  quantity of real output. 
D)  reciprocal of the price level. 
A)  value or purchasing power of the dollar. 
B)  number of times per year the average dollar is spent. 
C)  quantity of real output. 
D)  reciprocal of the price level.

Question 13

Refer to the diagram. The real-business-cycle view of recession would best be described by

Accepted Answer

A)  a decrease of aggregate demand from $A D _ { 1 }$ to $A D _ { 2 }$, followed by a decrease in aggregate supply from $\mathrm { AS } _\mathrm { LR 1} $ to $\mathrm { AS } _\mathrm { LR 2} $. 
B)  an increase in aggregate demand from $A D _ { 1 }$ to $A D _ { 2 }$, which in turn causes a decrease in aggregate supply from $A S _ { \mathrm { LR } 1 }$ to $A S _ { \mathrm { LR } 2 }$. 
C)  a decrease in aggregate supply from $\mathrm { AS } _ { \mathrm { LR } 1 }$ to $\mathrm { AS } _\mathrm { LR2 }$, followed by a decrease in aggregate demand from $A D _ { 1 }$ to $A D _ { 2 }$. 
D)  a decrease in aggregate supply from $\mathrm { AS } _ { \mathrm { LR } 1 }$ to $\mathrm { AS } _ { \mathrm { LR } 2 }$, followed by an increase in aggregate demand from $A D _ { 2 }$ to $A D _ { 1 }$. 
A)  a decrease of aggregate demand from $A D _ { 1 }$ to $A D _ { 2 }$, followed by a decrease in aggregate supply from $\mathrm { AS } _\mathrm { LR 1} $ to $\mathrm { AS } _\mathrm { LR 2} $. 
B)  an increase in aggregate demand from $A D _ { 1 }$ to $A D _ { 2 }$, which in turn causes a decrease in aggregate supply from $A S _ { \mathrm { LR } 1 }$ to $A S _ { \mathrm { LR } 2 }$. 
C)  a decrease in aggregate supply from $\mathrm { AS } _ { \mathrm { LR } 1 }$ to $\mathrm { AS } _\mathrm { LR2 }$, followed by a decrease in aggregate demand from $A D _ { 1 }$ to $A D _ { 2 }$. 
D)  a decrease in aggregate supply from $\mathrm { AS } _ { \mathrm { LR } 1 }$ to $\mathrm { AS } _ { \mathrm { LR } 2 }$, followed by an increase in aggregate demand from $A D _ { 2 }$ to $A D _ { 1 }$.

Question 14

If M is $400, P is $4, and Q is 300, then V must be

Accepted Answer

A)  1.33. 
B)  3. 
C)  5.33. 
D)  100. 
A)  1.33. 
B)  3. 
C)  5.33. 
D)  100.

Question 15

According to monetarists,

Accepted Answer

A)  changes in the money supply are the primary cause of changes in the price level. 
B)  an expansionary ﬁscal policy will lower interest rates and overstimulate the economy. 
C)  changes in the velocity of money are more important than changes in the money supply in causing the level of economic activity to change. 
D)  the supply of money changes in response to changes in the levels of real output and prices. 
A)  changes in the money supply are the primary cause of changes in the price level. 
B)  an expansionary ﬁscal policy will lower interest rates and overstimulate the economy. 
C)  changes in the velocity of money are more important than changes in the money supply in causing the level of economic activity to change. 
D)  the supply of money changes in response to changes in the levels of real output and prices.

Question 16

According to the equation of exchange, changes in the money supply can affect

Accepted Answer

A)  only the velocity of money. 
B)  both the price level and real output. 
C)  only real output and employment. 
D)  only the price level. 
A)  only the velocity of money. 
B)  both the price level and real output. 
C)  only real output and employment. 
D)  only the price level.

Question 17

In the rational expectations theory, a temporary change in real output could result from

Accepted Answer

A)  anticipated price-level changes. 
B)  a price-level surprise. 
C)  a coordination failure. 
D)  insider-outsider relationships. 
A)  anticipated price-level changes. 
B)  a price-level surprise. 
C)  a coordination failure. 
D)  insider-outsider relationships.

Question 18

Which of the following is the basic equation underlying aggregate expenditures?

Accepted Answer

A)  MV = PQ 
B)  AS = AD 
C)  Saving = Income ?Consumption 
D)  $C _ { a } + I _ { g } + X _ { n } + G = G D P$ 
A)  MV = PQ 
B)  AS = AD 
C)  Saving = Income ?Consumption 
D)  $C _ { a } + I _ { g } + X _ { n } + G = G D P$

Question 19

If ﬁrms are paying eﬃciency wages, they

Accepted Answer

A)  may be reluctant to increase nominal wages when aggregate demand increases. 
B)  are highly vulnerable to import competition. 
C)  may be targeted for takeover by ﬁrms paying market wages. 
D)  may be reluctant to cut wages when aggregate demand declines. 
A)  may be reluctant to increase nominal wages when aggregate demand increases. 
B)  are highly vulnerable to import competition. 
C)  may be targeted for takeover by ﬁrms paying market wages. 
D)  may be reluctant to cut wages when aggregate demand declines.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 19: Current Issues in Macro Theory and Policy

The idea that an economy can get stuck in either an unemployment equilibrium or an inﬂation equilibrium is most closely associated with

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 _________.

Monetarists argue that the relationship between

Mainstream macroeconomics would suggest that ﬁscal policy

Most monetarists would say that

If the economy's real output is growing by 2.5 percent a year, then, in order to maintain price stability, a monetarist would most likely recommend that money supply should be

The equation of exchange is MV = PQ.

How do theories of mainstream macroeconomics and monetarism differ in relation to monetary policy?

According to rational expectations theory, discretionary monetary and ﬁscal policy will be ineffective primarily because of the

The basic equation of monetarism is

Monetarists say the velocity of money is highly variable and there is no close link between the money supply and the level of economic activity.

In the equation of exchange, V indicates the

Refer to the diagram. The real-business-cycle view of recession would best be described by

If M is $400, P is $4, and Q is 300, then V must be

According to monetarists,

According to the equation of exchange, changes in the money supply can affect

In the rational expectations theory, a temporary change in real output could result from

Which of the following is the basic equation underlying aggregate expenditures?

If ﬁrms are paying eﬃciency wages, they

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

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

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 ___.