Question 1

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 2

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 3

Which of the following contributes to the downward inﬂexibility of wages, according to mainstream economists?

Accepted Answer

A)  eﬃciency wages 
B)  a monetary rule 
C)  price-level surprises 
D)  coordination failures 
A)  eﬃciency wages 
B)  a monetary rule 
C)  price-level surprises 
D)  coordination failures

Question 4

According to monetarists, an expansionary ﬁscal policy

Accepted Answer

A)  will be ineffective because the interest rate will rise and crowd out private investment spending. 
B)  should not be permitted so long as a public debt exists. 
C)  should be used only when unemployment exceeds 6 percent of the labor force. 
D)  will be effective, provided the money supply is held constant. 
A)  will be ineffective because the interest rate will rise and crowd out private investment spending. 
B)  should not be permitted so long as a public debt exists. 
C)  should be used only when unemployment exceeds 6 percent of the labor force. 
D)  will be effective, provided the money supply is held constant.

Question 5

Monetarists base their assessment of the speed of adjustment for self-correction in the economy on

Accepted Answer

A)  adaptive expectations. 
B)  rational expectations. 
C)  coordination failures. 
D)  eﬃciency wages. 
A)  adaptive expectations. 
B)  rational expectations. 
C)  coordination failures. 
D)  eﬃciency wages.

Question 6

One reason the lowest wage rate is not necessarily the same as the eﬃciency wage is that workers might

Accepted Answer

A)  be more productive at a higher wage rate. 
B)  have more incentive to shirk at higher wage rates. 
C)  be tempted to switch jobs more frequently at higher wage rates. 
D)  be less inclined to work well at a higher wage rate. 
A)  be more productive at a higher wage rate. 
B)  have more incentive to shirk at higher wage rates. 
C)  be tempted to switch jobs more frequently at higher wage rates. 
D)  be less inclined to work well at a higher wage rate.

Question 7

Assume monetary equilibrium exists-that is, the desired and the actual supply of money are equal -when nominal GDP equals $480 billion and the money supply is $160 billion. According to a strict
Monetarist view, an increase in the money supply of $10 billion will increase the nominal GDP by

Accepted Answer

A)  $30 billion. 
B)  $25 billion. 
C)  $20 billion. 
D)  $10 billion. 
A)  $30 billion. 
B)  $25 billion. 
C)  $20 billion. 
D)  $10 billion.

Question 8

The idea that the economy will self-correct when confronted with changes in aggregate demand is
associated with new classical economics.

Accepted Answer

A) True 
 B)False

Question 9

What rationale does rational expectations theory provide for the ineffectiveness of discretionary
policies?

Accepted Answer

Rational expectations theory economists

Question 10

An eﬃciency wage is

Accepted Answer

A)  a below-market wage. 
B)  an above-market wage. 
C)  a "wage" that contains a proﬁt-sharing component. 
D)  a wage that is free to rise or fall from day to day, depending on labor supply and demand. 
A)  a below-market wage. 
B)  an above-market wage. 
C)  a "wage" that contains a proﬁt-sharing component. 
D)  a wage that is free to rise or fall from day to day, depending on labor supply and demand.

Question 11

Mainstream economics views monetary policy as a

Accepted Answer

A)  source of instability, similar to the view of monetarism. 
B)  stabilizing factor, similar to the view of monetarism. 
C)  source of instability, while monetarism views it as a stabilizing factor. 
D)  stabilizing factor, while monetarism views it as a source of instability. 
A)  source of instability, similar to the view of monetarism. 
B)  stabilizing factor, similar to the view of monetarism. 
C)  source of instability, while monetarism views it as a stabilizing factor. 
D)  stabilizing factor, while monetarism views it as a source of instability.

Question 12

(Last Word) 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 13

According to rational expectations theory, observed instability in the private economy would most likely be due to

Accepted Answer

A)  changes in aggregate supply. 
B)  inappropriate monetary policy. 
C)  the instability of investment spending in the economy. 
D)  unanticipated aggregate demand and aggregate supply shocks in the short run. 
A)  changes in aggregate supply. 
B)  inappropriate monetary policy. 
C)  the instability of investment spending in the economy. 
D)  unanticipated aggregate demand and aggregate supply shocks in the short run.

Question 14

If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, then the

Accepted Answer

A)  velocity of money is 5. 
B)  money supply is $40 billion. 
C)  level of the price index is 320. 
D)  equilibrium level of GDP is $320 billion. 
A)  velocity of money is 5. 
B)  money supply is $40 billion. 
C)  level of the price index is 320. 
D)  equilibrium level of GDP is $320 billion.

Question 15

Which of the following ideas is associated with mainstream economics?

Accepted Answer

A)  Capitalist economies tend to be stable. 
B)  Monetary policy rules are desirable. 
C)  Fiscal policy is a useful stabilization tool. 
D)  Crowding-out of investment makes ﬁscal policy ineffective. 
A)  Capitalist economies tend to be stable. 
B)  Monetary policy rules are desirable. 
C)  Fiscal policy is a useful stabilization tool. 
D)  Crowding-out of investment makes ﬁscal policy ineffective.

Question 16

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)  has been accepted by mainstream macroeconomists. 
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)  has been accepted by mainstream macroeconomists. 
D)  is known as the monetary rule.

Question 17

According to mainstream economic analysis, a balanced-budget rule for ﬁscal policy would be

Accepted Answer

A)  countercyclical. 
B)  ineffective. 
C)  destabilizing. 
D)  pro-growth. 
A)  countercyclical. 
B)  ineffective. 
C)  destabilizing. 
D)  pro-growth.

Question 18

What is the supply-side cause of instability according to the mainstream view?

Accepted Answer

Occasionally, external events such as wa

Question 19

(Last Word) In the aftermath of the Great Recession of 2007-2009, a new breed of "market monetarists" suggested that the Fed and other central banks should use which of the following to
Adjust monetary policy?

Accepted Answer

A)  stock markets 
B)  domestic and export markets 
C)  predictions markets 
D)  labor markets 
A)  stock markets 
B)  domestic and export markets 
C)  predictions markets 
D)  labor markets

Question 20

The mainstream view is that macro instability is caused by

Accepted Answer

A)  erratic growth of the nation's money supply. 
B)  government interference in the economy. 
C)  signiﬁcant changes in investment spending. 
D)  consumption "booms" and "busts". 
A)  erratic growth of the nation's money supply. 
B)  government interference in the economy. 
C)  signiﬁcant changes in investment spending. 
D)  consumption "booms" and "busts".

Exam 19: Current Issues in Macro Theory and Policy

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

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

Which of the following contributes to the downward inﬂexibility of wages, according to mainstream economists?

According to monetarists, an expansionary ﬁscal policy

Monetarists base their assessment of the speed of adjustment for self-correction in the economy on

One reason the lowest wage rate is not necessarily the same as the eﬃciency wage is that workers might

Assume monetary equilibrium exists-that is, the desired and the actual supply of money are equal -when nominal GDP equals $480 billion and the money supply is $160 billion. According to a strict Monetarist view, an increase in the money supply of $10 billion will increase the nominal GDP by

The idea that the economy will self-correct when confronted with changes in aggregate demand is associated with new classical economics.

What rationale does rational expectations theory provide for the ineffectiveness of discretionary policies?

An eﬃciency wage is

Mainstream economics views monetary policy as a

(Last Word) 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 rational expectations theory, observed instability in the private economy would most likely be due to

If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, then the

Which of the following ideas is associated with mainstream economics?

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

According to mainstream economic analysis, a balanced-budget rule for ﬁscal policy would be

What is the supply-side cause of instability according to the mainstream view?

(Last Word) In the aftermath of the Great Recession of 2007-2009, a new breed of "market monetarists" suggested that the Fed and other central banks should use which of the following to Adjust monetary policy?

The mainstream view is that macro instability is caused by

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

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