Question 1

New classical macroeconomists believe that the predominant factor causing fluctuations in aggregate demand is

Accepted Answer

A)  increases in taxes. 
B)  instability in the investment function. 
C)  the weak self-regulating mechanisms of a free enterprise economy. 
D)  the unstable marginal propensity to consume. 
E)  erratic and unpredictable government policy. 
A)  increases in taxes. 
B)  instability in the investment function. 
C)  the weak self-regulating mechanisms of a free enterprise economy. 
D)  the unstable marginal propensity to consume. 
E)  erratic and unpredictable government policy. E

Question 2

The phrase "You can't push on a string" is

Accepted Answer

A)  a line from a 1930s song. 
B)  used to suggest that monetary policy can make money available but cannot ensure it will be spent. 
C)  an analogy used by monetarists to describe the ineffectiveness of fiscal policy. 
D)  used by rational expectations theorists in their criticisms of supply-side economics. 
E)  a reference to the fact that Congress is in control of the government's purse strings and determines spending without regard to economic impact. 
A)  a line from a 1930s song. 
B)  used to suggest that monetary policy can make money available but cannot ensure it will be spent. 
C)  an analogy used by monetarists to describe the ineffectiveness of fiscal policy. 
D)  used by rational expectations theorists in their criticisms of supply-side economics. 
E)  a reference to the fact that Congress is in control of the government's purse strings and determines spending without regard to economic impact. B

Question 3

Real business cycle theorists maintain that business fluctuations are due to

Accepted Answer

A)  changes in the real money supply. 
B)  inflexible wages and prices. 
C)  increases and decreases in government spending. 
D)  shifts in the aggregate supply curve. 
E)  variability in household spending decisions on durable goods. 
A)  changes in the real money supply. 
B)  inflexible wages and prices. 
C)  increases and decreases in government spending. 
D)  shifts in the aggregate supply curve. 
E)  variability in household spending decisions on durable goods. D

Question 4

In real business cycle models,a favorable supply shock

Accepted Answer

A) pushes the aggregate demand curve to the right. 
B)  causes real GDP to rise. 
C)  lowers the income of firms and individuals. 
D)  increases the price level. 
E)  pushes the aggregate supply curve to the left. 
A) pushes the aggregate demand curve to the right. 
B)  causes real GDP to rise. 
C)  lowers the income of firms and individuals. 
D)  increases the price level. 
E)  pushes the aggregate supply curve to the left.

Question 5

Which of the listed policy rules tends to be supported by the new classical macroeconomists?

Accepted Answer

A)  feedback 
B)  golden 
C)  marginal 
D)  discretionary 
E)  rigid 
A)  feedback 
B)  golden 
C)  marginal 
D)  discretionary 
E)  rigid

Question 6

Monetary policy seems to be of little use during a depression because

Accepted Answer

A)  even though money is made available, there is no way to ensure it will be spent. 
B)  increases in the money supply raise interest rates and choke off investment. 
C)  people do not save when incomes are low. 
D)  if more money is created, it goes to pay taxes. 
E)  increases in money lead to inflation. 
A)  even though money is made available, there is no way to ensure it will be spent. 
B)  increases in the money supply raise interest rates and choke off investment. 
C)  people do not save when incomes are low. 
D)  if more money is created, it goes to pay taxes. 
E)  increases in money lead to inflation.

Question 7

One explanation for why product prices adjust slowly is that

Accepted Answer

A)  most markets are perfectly competitive. 
B)  businesses incur menu costs when they change prices. 
C)  markets clear continuously, making price adjustments difficult. 
D)  if wages adjust rapidly, prices take a while to catch up. 
E)  most markets are subject to government price control laws. 
A)  most markets are perfectly competitive. 
B)  businesses incur menu costs when they change prices. 
C)  markets clear continuously, making price adjustments difficult. 
D)  if wages adjust rapidly, prices take a while to catch up. 
E)  most markets are subject to government price control laws.

Question 8

The view that the cause of economic stabilization is best served by adherence to a rigid monetary rule is associated with

Accepted Answer

A)  Milton Friedman. 
B)  new Keynesians. 
C)  Franco Modigliani. 
D)  policy activists. 
E)  eclectic subversives. 
A)  Milton Friedman. 
B)  new Keynesians. 
C)  Franco Modigliani. 
D)  policy activists. 
E)  eclectic subversives.

Question 9

One strategy consistent with the new classical macroeconomists' theories would have

Accepted Answer

A)  fiscal policy focus on maintaining full employment regardless of the size of the resulting budget deficit. 
B)  monetary policy stick to an announced policy to keep the rate of inflation to some specified low figure. 
C)  the government emphasize policies of wage and price controls to achieve a targeted full-employment rate with stable prices. 
D)  monetary authorities impose a structure of variable tax rates that automatically adjusts to changes in the unemployment rate. 
E)  both fiscal and monetary policy coordinated in a way that ensures that both the Phillips curve and long-run aggregate supply curves are vertical. 
A)  fiscal policy focus on maintaining full employment regardless of the size of the resulting budget deficit. 
B)  monetary policy stick to an announced policy to keep the rate of inflation to some specified low figure. 
C)  the government emphasize policies of wage and price controls to achieve a targeted full-employment rate with stable prices. 
D)  monetary authorities impose a structure of variable tax rates that automatically adjusts to changes in the unemployment rate. 
E)  both fiscal and monetary policy coordinated in a way that ensures that both the Phillips curve and long-run aggregate supply curves are vertical.

Question 10

If menu costs associated with a price increase are $15,000,under which of the following situations will it pay the firm to raise prices?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D 
E)  It should raise prices in all of these situations. 
A)  A 
B)  B 
C)  C 
D)  D 
E)  It should raise prices in all of these situations.

Question 11

A favorable supply shock

Accepted Answer

A) pushes the aggregate demand curve to the right. 
B)  shifts aggregate supply to the right.
Shifts aggregate supply to the left 
C)  shifts aggregate demand to the left. 
D) shifts aggregate demand to the right. 
E)  has no effect on either the aggregate supply or aggregate demand, only on the quantities supplied and demanded. 
A) pushes the aggregate demand curve to the right. 
B)  shifts aggregate supply to the right.
Shifts aggregate supply to the left 
C)  shifts aggregate demand to the left. 
D) shifts aggregate demand to the right. 
E)  has no effect on either the aggregate supply or aggregate demand, only on the quantities supplied and demanded.

Question 12

Opponents of policy activism argue that even if intended private spending is NOT stable,economic stability nonetheless occurs because of

Accepted Answer

A)  large government budget deficit spending. 
B)  the willingness of banks to hold excess reserves. 
C)  offsetting fluctuations in the velocity of circulation. 
D)  flexible wages and prices. 
E)  the acceleration effect. 
A)  large government budget deficit spending. 
B)  the willingness of banks to hold excess reserves. 
C)  offsetting fluctuations in the velocity of circulation. 
D)  flexible wages and prices. 
E)  the acceleration effect.

Question 13

Critics of the new classical macroeconomics argue that

Accepted Answer

A)  the necessary information for firms to formulate rational expectations is not generally available. 
B)  deviations from the natural rate of unemployment are too small and transitory to have resulted from purely unexpected events. 
C)  the theory neglects the slow and adaptive manner in which wages and prices adjust, thus extending the duration of a business cycle. 
D)  markets clear too rapidly and continuously for individuals and firms to plan effectively. 
E)  the natural rate of unemployment stated in the assumptions of the new classical macroeconomic theory is too high to be of much use to policy makers. 
A)  the necessary information for firms to formulate rational expectations is not generally available. 
B)  deviations from the natural rate of unemployment are too small and transitory to have resulted from purely unexpected events. 
C)  the theory neglects the slow and adaptive manner in which wages and prices adjust, thus extending the duration of a business cycle. 
D)  markets clear too rapidly and continuously for individuals and firms to plan effectively. 
E)  the natural rate of unemployment stated in the assumptions of the new classical macroeconomic theory is too high to be of much use to policy makers.

Question 14

A(n)________ policy rule allows the behavior of the variable governed by the policy rule to change based on future circumstances.

Accepted Answer

A)  effective 
B)  domestic 
C)  feedback 
D)  managerial 
E)  golden 
A)  effective 
B)  domestic 
C)  feedback 
D)  managerial 
E)  golden

Question 15

In which of the following countries has the central bank NOT adopted the policy framework known as inflation targeting?

Accepted Answer

A)  Australia 
B)  Canada 
C)  Sweden 
D)  the United Kingdom 
E)  the United States 
A)  Australia 
B)  Canada 
C)  Sweden 
D)  the United Kingdom 
E)  the United States

Question 16

The belief that the self-regulating capabilities of a market economy are insufficient to ensure a stable,full-employment equilibrium is associated with

Accepted Answer

A)  monetarists. 
B)  Keynesians. 
C)  supply siders. 
D)  rational expectations theorists. 
E)  new classical macroeconomists. 
A)  monetarists. 
B)  Keynesians. 
C)  supply siders. 
D)  rational expectations theorists. 
E)  new classical macroeconomists.

Question 17

Philosophically,the monetarists are most closely aligned with the views of

Accepted Answer

A)  Karl Marx. 
B)  Keynes. 
C)  classical economists. 
D)  the Federal Reserve System. 
E)  Walter Heller. 
A)  Karl Marx. 
B)  Keynes. 
C)  classical economists. 
D)  the Federal Reserve System. 
E)  Walter Heller.

Question 18

The next question is based on the following table:
Wage Increases in First, Second, and Third Years of Union Contracts, United States, 1997-2003
  
-What can be said on the basis of the union contract settlement data shown?

Accepted Answer

A)  Unions are becoming much more powerful in their ability to negotiate wage increases. 
B)  Price levels in the country are rising rapidly. 
C)  The most recently negotiated wage increase for a given year is below the average increase prevailing under continuing contracts for that year. 
D)  Wage rates adjust immediately throughout the economy in response to changing labor market conditions. 
E)  Labor markets are tight, so firms are increasing employment. 
A)  Unions are becoming much more powerful in their ability to negotiate wage increases. 
B)  Price levels in the country are rising rapidly. 
C)  The most recently negotiated wage increase for a given year is below the average increase prevailing under continuing contracts for that year. 
D)  Wage rates adjust immediately throughout the economy in response to changing labor market conditions. 
E)  Labor markets are tight, so firms are increasing employment.

Question 19

Supply-siders advocate influencing aggregate supply through the use of reductions in

Accepted Answer

A)  spending. 
B)  income. 
C)  money. 
D)  tax rates. 
E)  foreign imports. 
A)  spending. 
B)  income. 
C)  money. 
D)  tax rates. 
E)  foreign imports.

Question 20

The monetarist views of economic stabilization policy gained significant support during the late

Accepted Answer

A)  1930s. 
B)  1940s. 
C)  1950s. 
D)  1960s. 
E)  1970s. 
A)  1930s. 
B)  1940s. 
C)  1950s. 
D)  1960s. 
E)  1970s.

Exam 26: Controversies Over Stabilization Policy

New classical macroeconomists believe that the predominant factor causing fluctuations in aggregate demand is

The phrase "You can't push on a string" is

Real business cycle theorists maintain that business fluctuations are due to

In real business cycle models,a favorable supply shock

Which of the listed policy rules tends to be supported by the new classical macroeconomists?

Monetary policy seems to be of little use during a depression because

One explanation for why product prices adjust slowly is that

The view that the cause of economic stabilization is best served by adherence to a rigid monetary rule is associated with

One strategy consistent with the new classical macroeconomists' theories would have

If menu costs associated with a price increase are $15,000,under which of the following situations will it pay the firm to raise prices?

A favorable supply shock

Opponents of policy activism argue that even if intended private spending is NOT stable,economic stability nonetheless occurs because of

Critics of the new classical macroeconomics argue that

A(n)________ policy rule allows the behavior of the variable governed by the policy rule to change based on future circumstances.

In which of the following countries has the central bank NOT adopted the policy framework known as inflation targeting?

The belief that the self-regulating capabilities of a market economy are insufficient to ensure a stable,full-employment equilibrium is associated with

Philosophically,the monetarists are most closely aligned with the views of

The next question is based on the following table: Wage Increases in First, Second, and Third Years of Union Contracts, United States, 1997-2003 -What can be said on the basis of the union contract settlement data shown?

Supply-siders advocate influencing aggregate supply through the use of reductions in

The monetarist views of economic stabilization policy gained significant support during the late

What is Economics

Markets and Prices

The Business Firm: Organization,motivation,and Optimal Input Decisions

Getting Behind the Demand and Supply Curves

Market Demand and Price Elasticity

Economic Efficiency,market Supply,and Perfect Competition

Monopoly and Its Regulation

Monopolistic Competition,oligopoly,and Antitrust Policy

Pollution and the Environment

The Supply and Demand for Labor

Interest,rent,and Profit

Poverty,income Inequality,and Discrimination

Economic Growth

Public Goods and the Role of the Government

National Income and Product

Business Fluctuations and Unemployment

The Determination of National Output and the Keynesian Multiplier

Fiscal Policy and National Output

Inflation

Money and the Banking System

The Federal Reserve and Monetary Policy

Supply Shocks and Inflation

Productivity,growth,and Technology Policy

Surpluses,deficits,public Debt,and the Federal Budget

Monetary Policy,interest Rates,and Economic Activity

International Trade

Exchange Rates and the Balance of Payments

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