Exam 18: Alternative Views in Macroeconomics

What is the basic principle behind supply-side economics? After supply-side policies were implemented in 1981, the economy pulled out of the 1980 recession and entered an expansionary period. How would a supply-side economist explain the success of these policies? How do critics of supply-side policies explain the recovery from the recession?

What is the basic policy implication of the Lucas supply function?

What do economists mean when they say that rational expectations are correct on average, even though their predictions are not exactly right all the time?

What did early real business cycle theorists emphasize in their work and why do many economists regard it as unsuccessful?

Explain what would happen to tax revenue if policy makers cut tax rates while existing rates are above the bend in the Laffer Curve. Why does this happen?

Identify three beliefs of Keynesian theory regarding the role of government and monetary authorities.

Suppose that the money supply is $800 billion. If the velocity of money were only to change by .2 percent (without a change in the money supply) how much of a change should that elicit in nominal GDP?

What is the equation that the quantity theory of money uses and its assumption?

What is required for inflation to be sustained indefinitely?

What do traditional macroeconomic models assume about people's expectations of inflation?

Economists will reason that any true test of the rational-expectations model is really a joint test of two things. Identify and discuss what these two tests are. What might we conclude if the test rejects the hypothesis?

Assume the money supply grows by 3 percent. According to the "strict monetarists" view what should be the result? (Hint: M x V = P x Y)

What is the price surprise?

Explain how the following statements relate to the velocity of money. Assume a constant money supply. (a) Businesses around the country decide to pay workers only once a month in order to reduce paperwork and improve efficiency. (b) Banks around the country begin using a new check clearing system that allows checks to clear much faster than they did previously.

If $9 trillion worth of final goods and services are produced in a given year and if the money stock is $3 trillion what is the velocity of money?

Write out the Lucas supply function in algebraic terms and identify each component.

What is one of the main insights of monetarism concerning sustained inflation?

Discuss the basis for the rational-expectations hypothesis.

Discuss the principal critiques of the Rational Expectations Theory?

What is sustained inflation? What do most economists believe to be true about its cause?