Deck 15: Macroeconomic Viewpoints: New Keynesian, Monetarist, and New Classical

Question 1

_____ school of thought would most likely be associated with the statement: "When wages are rigid, changes in output result in small changes in goods market prices and a relatively flat aggregate supply curve."

A) The traditional Keynesian
B) The modern Keynesian
C) The Monetarist
D) The classical
E) The new classical

Answer 1

A

Question 2

Which of the following schools of thought reject the simple fixed-price model in favor of a model in which the aggregate supply curve is relatively flat at low levels of real GDP and slopes upward as real GDP approaches its potential level?

A) The new Keynesian economists
B) The monetarists
C) The traditional classical economists
D) The new classical economists
E) The Marxists

Answer 2

A

Question 3

NARRBEGIN: Figure 15.1
The figure given below shows the supply curves with different slopes.
Figure 15.1

Refer to Figure 15.1. Which of the following supply curves represents the supply curve described by the modern Keynesians?

A) S2
B) S5
C) S3
D) S1
E) S4

Answer 3

E

Question 4

Which of the following schools of thought stressed on a fixed-price model for macroeconomic equilibrium?

A) Traditional Keynesians
B) New Keynesians
C) Monetarists
D) Classical economists
E) New classical economists

Question 5

Which of the following would explain wage rigidities?

A) Inflexible long-term contracts
B) Inflation
C) The liquidity of financial assets
D) The reluctance of firms to lay off workers
E) High worker productivity

Question 6

Traditional Keynesian economists believed that:

A) the aggregate supply curve is a vertical line at a fixed level of prices.
B) an increase in aggregate demand would cause a change in the price level.
C) the government should take an active role in the economy to restore equilibrium.
D) changes in aggregate demand does not determine equilibrium real GDP.
E) the private sector is not an important source for shifts in aggregate demand.

Question 7

The new Keynesian economists believed that:

A) wages and prices are flexible in the short run.
B) wages and real GDP are not flexible in the long run.
C) wages and real GDP are flexible in the short run.
D) wages and prices are not flexible in the short run.
E) wages and prices are not flexible in the long run.

Question 8

Traditional Keynesians argued that when wages are rigid, changes in output result in:

A) small changes in goods market prices and a flat aggregate supply curve.
B) large changes in goods market prices and a flat aggregate supply curve.
C) large changes in goods market prices and a steep aggregate supply curve.
D) small changes in goods market prices and a steep aggregate supply curve.
E) small changes in goods market prices and a horizontal aggregate demand curve.

Question 9

The flat region of the aggregate supply curve reflects the Keynesian belief that:

A) both inflation and unemployment does not exist.
B) high growth rate of money supply poses problems in the economy.
C) unemployment is usually experienced amidst high real GDP.
D) government intervention in the economy aggravates the problems of inflation and unemployment.
E) inflation is not a problem when unemployment is high.

Question 10

In traditional Keynesian economics:

A) the aggregate supply curve is vertical.
B) the aggregate supply curve is horizontal.
C) the aggregate supply curve is upward-sloping.
D) the aggregate demand curve is horizontal.
E) the aggregate demand curve is vertical.

Question 11

According to new Keynesian economics:

A) the aggregate supply curve is horizontal at relatively low levels of real GDP and becomes negatively sloped, as more and more industries reach their full capacity level of output.
B) the aggregate supply curve is negatively sloped at relatively low levels of real GDP and becomes horizontal, as more and more industries reach their full capacity level of output.
C) the aggregate supply curve is horizontal at relatively low levels of real GDP and becomes positively sloped, as more and more industries reach their full capacity level of output.
D) the aggregate supply curve is positively sloped at relatively low levels of real GDP and becomes horizontal, as more and more industries reach their full capacity level of output.
E) the aggregate supply curve is positively sloped at relatively low levels of real GDP and becomes negatively sloped, as more and more industries reach their full capacity level of output.

Question 12

NARRBEGIN: Figure 15.1
The figure given below shows the supply curves with different slopes.
Figure 15.1

Refer to Figure 15.1. Which of the following supply curves represents the supply curve in the simple Keynesian model?

A) S1
B) S2
C) S3
D) S4
E) S5

Question 13

In the fixed-price Keynesian model, what would be the impact of an increase in aggregate expenditure on the aggregate demand curve and real GDP?

A) The aggregate demand curve would shift rightward and real GDP would increase.
B) The aggregate demand curve would shift leftward and real GDP would decrease.
C) The aggregate demand curve would shift rightward and real GDP would decrease.
D) The aggregate demand curve would shift leftward and real GDP would increase.
E) The aggregate demand curve and real GDP would both remain constant.

Question 14

Which of the following macroeconomic schools of thought had dominated the economics profession from the 1940s through the 1960s?

A) New classical economics
B) Classical economics
C) Keynesian economics
D) Rational economics
E) Positive economics

Question 15

The new Keynesians believe that the economy is not always in equilibrium because:

A) unemployment is voluntary.
B) Federal Reserve policy is too restrictive.
C) government intervention destabilizes the economy.
D) wage and price rigidities exist.
E) inflation is too high.

Question 16

In the Keynesian region of the aggregate supply curve:

A) increases in aggregate demand are associated with decreases in output, but not with increases in prices.
B) decreases in aggregate demand are associated with increases in prices, but not with increases in output.
C) increases in aggregate demand are associated with increases in output, but not with increases in prices.
D) decreases in aggregate demand are associated with increases in output, but not with increases in prices.
E) increases in aggregate demand are associated with increases in prices, but not with increases in output.

Question 17

Which of the following is true of the simple Keynesian model?

A) Price level increases with increase in aggregate demand
B) The aggregate supply curve is assumed to be perfectly inelastic
C) The aggregate demand curve is assumed to perfectly elastic
D) Price level is solely determined by the aggregate demand curve
E) Changes in aggregate demand determine equilibrium real GDP

Question 18

Which of the following is true from the New Keynesian perspective?

A) Fluctuations in private spending does not affect aggregate demand in an economy.
B) Investment spending remains relatively constant irrespective of the supply shocks.
C) Fluctuations in aggregate demand are not the primary source of problems for policymakers.
D) The government should limit its role to administrative functions.
E) Monetary and fiscal policies often fail to restore macroeconomic equilibrium.

Question 19

If the traditional Keynesian views turn out to be accurate, an increase in government spending would:

A) increase the price level.
B) decrease the investment.
C) increase the equilibrium level of real GDP.
D) decrease the consumption.
E) decrease the money supply.

Question 20

Which of the following thoughts do the Keynesian and the new Keynesian economists share?

A) The belief that wages and prices are not flexible in the short run
B) The belief that the aggregate supply curve is always a horizontal line
C) The belief that the government's role in the economy should be minimized
D) The belief that the natural rate of unemployment in an economy is always zero
E) The belief that only unexpected changes can affect real GDP

Question 21

Monetarists believe that changes in monetary policy would have:

A) only short-term effect on the price level.
B) only short-term effect on real GDP.
C) only long-term effect on real GDP.
D) no effect on price level and real GDP.
E) both short-term and long term effect on real GDP.

Question 22

In case of classical model, increase in aggregate expenditure would:

A) shift the aggregate demand curve upward leading to increase in real GDP and prices.
B) shift the aggregate demand curve downward leading to increase in real GDP and prices.
C) shift the aggregate demand curve upward leading to decrease in real GDP and prices.
D) shift the aggregate demand curve downward leading to decrease in real GDP and prices.
E) shift the aggregate demand curve upward leading to increase in prices and no change in real GDP.

Question 23

According to the monetarists, deliberate government intervention:

A) will stabilize the economy if the money supply is increased during recessions and decreased during expansions.
B) will effectively reduce the unemployment rate below its natural rate.
C) will stabilize the economy if the money supply is reduced during recessions and increased during expansions.
D) will destabilize the economy only if the government uses fiscal policy to change equilibrium income.
E) will destabilize the economy and cause a business cycle of its own, regardless of whether fiscal or monetary policy is used.

Question 24

Who is the leading proponent of the monetarist theory?

A) John Maynard Keynes
B) Paul Volcker
C) Adam Smith
D) Milton Friedman
E) Alan Greenspan

Question 25

"The dramatic reduction of the money supply during the 1930s was responsible for the Great Depression. The macroeconomy is intrinsically stable if left alone by the prying hand of government. The Federal Reserve Board, instead of tightening money during booms and loosening money during recessions (policies that are ineffective due to time lags), should simply increase the supply of money at a steady rate of 3 to 5 percent per year." This statement reflects which school of thought?

A) The traditional Keynesians
B) The monetarists
C) The traditional classicals
D) The new Keynesians
E) The new classicals

Question 26

Monetarists think that the government:

A) should take an active role in the economy.
B) should change the money supply growth rate regularly to achieve low inflation.
C) should actively intervene in the economy, but only by decreasing the fiscal expenditure.
D) should intervene in the economy as little as possible.
E) should consciously set out to achieve full employment.

Question 27

Milton Friedman in his book on consumption function, discussed the importance of _____, rather than _____, to understand consumer spending.

A) savings; expenditure
B) permanent income; current income
C) money supply; real output
D) wages; savings
E) real output; prices

Question 28

Monetarists believe that:

A) the government should follow a fixed rule to change money supply in response to business cycles.
B) the government should not use discretionary monetary policy to achieve its goals of economic growth and low inflation.
C) government intervention should be well thought out and should be used only during recessions.
D) government intervention in the economy makes business cycles disappear.
E) government intervention policies have only long-run effects.

Question 29

_____ believe that a government that takes an active role in the economy may do more harm than good because economic policy operates with a long and variable lag.

A) Traditional Keynesians
B) Keynesians
C) Monetarists
D) Classical economists
E) New classical economists

Question 30

Monetarists believe that in the short run:

A) the natural rate of unemployment cannot be changed.
B) expansionary monetary policy is ineffective in raising real GDP.
C) a change in the money supply is fully reflected in a change in the interest level.
D) contractionary monetary policy will decrease unemployment.
E) there is a tradeoff between unemployment and inflation.

Question 31

According to the traditional Keynesian school of thought, expansionary fiscal and monetary policy will:

A) increase interest rates, thereby shifting the investment function to the right.
B) reduce both consumption and investment spending, thereby eliminating all inflationary pressures.
C) reduce investment spending, thereby stabilizing the aggregate supply shocks.
D) stimulate both consumption and investment spending, thereby increasing aggregate demand.
E) shift the aggregate demand curve to the left, thereby reducing the unemployment rate.

Question 32

_____ have faith in the free market (price) system that leads them to favor minimal government intervention.

A) New Keynesian economists
B) Traditional Keynesian economists
C) Monetarist economists
D) Traditional classical economists
E) New classical economists

Question 33

The time it takes for a particular monetary policy to change income is called the _____.

A) recognition lag
B) data lag
C) reaction lag
D) effect lag
E) action lag

Question 34

Which of the following events challenged Keynesian views, and led to the popularity of Milton Friedman's ideas?

A) The hippie community started advocating socialist values.
B) Hard-core republicans came into office.
C) The U.S. economy faced high levels of inflation and unemployment simultaneously.
D) The oil crisis exploded.
E) Countries that followed Friedman's ideas performed better.

Question 35

The recognition lag refers to the:

A) time taken for changes in the money supply to be translated into changes in real
GDP)
B) time taken by policymakers to formulate an appropriate policy to solve an
Economic problem.
C) time taken by policies to have an impact on the different macroeconomic variables.
D) time taken by policymakers to recognize that an economic problem exists.
E) natural difference between monetary policy timing and fiscal policy timing.

Question 36

According to the new Keynesians:

A) prices adjust to equate demand and supply in every market simultaneously.
B) random variations in the money supply are the original source of economic fluctuations.
C) unemployment is voluntary.
D) aggregate supply shocks can be a prime source of economic instability.
E) government policy cannot stabilize the economy.

Question 37

"The market is not a self-regulating mechanism because prices are not flexible and nothing ensures that planned leakages will be offset by planned injections. To bring the economy out of depression and end high unemployment, some way of stimulating aggregate demand is required. This can be best achieved by a combination of government deficit spending and regulation of tax rates." Which school of thought does this statement best represent?

A) Rationalist economics
B) Monetarist economics
C) Classical economics
D) Keynesian economics
E) Marxist economics

Question 38

The school of thought that assumes that real GDP is determined by aggregate supply, whereas the equilibrium price level is determined by aggregate demand is known as _____.

A) neoclassical economics
B) classical economics
C) new Keynesian economics
D) Keynesian economics
E) Marxist economics

Question 39

Which of the following schools of thought emphasize the role of money supply in determining equilibrium real GDP and price level?

A) Traditional Keynesian economics
B) New Keynesian economics
C) New classical economics
D) Classical economics
E) Monetarist economics

Question 40

What is the main difference between new Keynesian economics and monetarists?

A) Monetarists support a fixed-price model, whereas new Keynesians believe that prices fluctuate.
B) Monetarists reject the idea that government intervention can stabilize the economy, whereas new Keynesians support this notion.
C) Monetarists believe that the aggregate supply curve is always vertical, whereas new Keynesians believe that the aggregate supply curve is always horizontal.
D) Monetarists believe that an increase in the money supply changes real GDP instantaneously, whereas new Keynesians assume that economic policy operates with a long and variable lag.
E) Monetarists believe that deficit spending helps stimulate economic growth, whereas new Keynesians advocate a balanced budget.

Question 41

New classical economists contend that an unexpected increase in the money supply will:

A) increase the unemployment rate in the short run.
B) reduce the unemployment rate in the short run.
C) cause no short-run change in the unemployment rate.
D) reduce the unemployment rate in the long run.
E) increase the unemployment rate in the long run.

Question 42

Which of the following is true of the classical model?

A) Changes in aggregate demand does not have any impact on the aggregate price level.
B) The aggregate supply curve is perfectly elastic.
C) An increase in aggregate demand increases the price level, output remaining unchanged.
D) Changes in aggregate demand determines the equilibrium output of the economy.
E) Real GDP and price level remain unchanged irrespective of changes in aggregate demand and supply.

Question 43

The new classical school holds that:

A) macroeconomic equilibrium is achieved only through active government intervention.
B) unemployment is only temporary, because the economy tends naturally toward equilibrium.
C) rigid prices and wages prevent the economy from achieving equilibrium.
D) macroeconomic equilibrium cannot occur as long as the aggregate supply curve is vertical.
E) rational expectations result in involuntary unemployment and prolonged periods of macroeconomic disequilibrium.

Question 44

NARRBEGIN: Figure 15.2
The figure given below represents the new classical long run and short run Phillips curve measuring inflation rate on vertical axis and unemployment rate on horizontal axis.
Figure 15.2

According to the new classical school, an expected increase in government spending is associated with:

A) a downward movement along the long-run Phillips curve.
B) an upward movement along the short-run Phillips curve.
C) a parallel outward shift of the long-run Phillips curve.
D) an upward movement along the long-run Phillips curve.
E) a downward shift of the short-run Phillips curve.

Question 45

According to classical economics:

A) real GDP is determined by aggregate demand, while the equilibrium price level is determined by aggregate supply.
B) both real GDP and price level are determined by aggregate demand.
C) both real GDP and price level are determined by aggregate supply.
D) real GDP is determined by aggregate supply, while the equilibrium price level is determined by aggregate demand.
E) price level cannot be changed as prices and wages are perfectly rigid.

Question 46

The main reason why the traditional classical school ceased to be widely accepted was that:

A) it did not reflect the realities of the modern economy.
B) when Keynes received the Nobel Prize, the academic establishment started believing his ideas.
C) it could not explain the persistence of the high levels of unemployment seen during the Great Depression.
D) it was too abstract to be completely understood.
E) it could not explain the relationship between inflation and unemployment.

Question 47

NARRBEGIN: Figure 15.2
The figure given below represents the new classical long run and short run Phillips curve measuring inflation rate on vertical axis and unemployment rate on horizontal axis.
Figure 15.2

Refer to Figure 15.2. Assume that the economy is now at point B. If government officials announce and carry out a policy that will maintain the inflation rate at 15 percent, we would expect:

A) the economy to move to point A.
B) the economy to remain at point B.
C) the economy to move to point C.
D) the economy to move to point D.
E) the economy to move to point E.

Question 48

NARRBEGIN: Figure 15.2
The figure given below represents the new classical long run and short run Phillips curve measuring inflation rate on vertical axis and unemployment rate on horizontal axis.
Figure 15.2

Refer to the Figure 15.2. Assume the economy is currently at point C. According to the new classical school, an expected increase in government spending:

A) would move the economy to point A.
B) would move the economy to point B.
C) would move the economy to point D.
D) would move the economy above point A.
E) would move the economy below point C.

Question 49

Which of the following economic theories takes into account the rational expectations of people in the economy?

A) Traditional Keynesian economic theory
B) Monetarist economic theory
C) New classical economic theory
D) Classical economic theory
E) New Keynesian economic theory

Question 50

Traditional classical economists believe that:

A) wage rates are perfectly flexible.
B) people do not have perfect information about the economy.
C) prices are fixed for long periods of time.
D) the price of resources, technology, and expectations cannot influence the equilibrium level of real GDP.
E) changes in aggregate demand change only the real GDP.

Question 51

New classical economists believe that:

A) market failure on a large scale is possible.
B) disequilibrium in commodity markets demand government intervention.
C) people are completely aware and informed about everything that is happening.
D) wages are fixed in the short run.
E) people purposefully substitute non-labor activities for work during recession.

Question 52

NARRBEGIN: Figure 15.2
The figure given below represents the new classical long run and short run Phillips curve measuring inflation rate on vertical axis and unemployment rate on horizontal axis.
Figure 15.2

Refer to the Figure 15.2. If the actual inflation rate is 15 percent and the expected inflation rate was 10 percent, the economy must currently be at:

A) point A.
B) point B.
C) point C.
D) point D.
E) point E.

Question 53

NARRBEGIN: Figure 15.2
The figure given below represents the new classical long run and short run Phillips curve measuring inflation rate on vertical axis and unemployment rate on horizontal axis.
Figure 15.2

Refer to Figure 15.2. Assume that the government adopted an unexpected expansionary monetary policy that has the economy currently at point D. If people expect that this inflation rate will persist next year, the economy will now:

A) move to point A.
B) move to point B.
C) move to point C.
D) move to point E.
E) remain at point D.

Question 54

An economist from which school of thought would be most likely to say the following- "An increase in government expenditure will only increase inflation, because the aggregate supply curve is vertical."

A) Neoclassical economics
B) Traditional classical economics
C) New Keynesian economics
D) Keynesian economics
E) Marxist economics

Question 55

According to new classical school of economics, the aggregate supply curve is:

A) horizontal in both the short run and the long run.
B) vertical in the short run and upward-sloping in the long run.
C) upward-sloping in both the short run and the long run.
D) vertical in both the short run and the long run.
E) upward-sloping in the short run and vertical in the long run.

Question 56

_____ is the theory that was popular before _____ changed the face of economics post Great Depression in the 1930s.

A) Classical economics; Milton Friedman
B) Keynesian economics; Monetarists
C) Classical economics; Keynes
D) Monetarist economics; Adam Smith
E) Keynesian economics; Milton Friedman

Question 57

Assume that workers have perfect information about changes in inflation. Which of the following statements is true in this context?

A) Wage rates will not adjust immediately to the price level on account of the fixed contracts.
B) The aggregate supply curve of the economy will become perfectly elastic.
C) The aggregate supply curve will shift to the right.
D) Nominal wage rates will always exceed the real wage rate.
E) The economy will continue to produce at the potential level of real GDP.

Question 58

The _____ aggregate supply curve assumed by classical economists means that the equilibrium level of _____ is determined only by the aggregate supply curve.

A) vertical; output
B) horizontal; price
C) upward-sloping; price
D) horizontal; output
E) downward-sloping; price

Question 59

Suppose the central bank increases the money supply in an economy unexpectedly during a year. If the current inflation rate in this country is 3.4 percent, then according to new classical economists the expected inflation rate for the following year would be:

A) 3.4 percent.
B) less than 3.4 percent.
C) 2.4 percent, because people form their expectations adaptively.
D) around 6.8 percent.
E) greater than 3.4 percent.

Question 60

The monetarist assumption that monetary policy cannot change long-run equilibrium income is based on the idea that:

A) the long-run aggregate supply curve is horizontal.
B) the long-run Phillips curve is vertical.
C) the price level in the long run is fixed.
D) the aggregate demand curve cannot shift.
E) the long-run Phillips curve is upward-sloping.

Question 61

Traditional Keynesians would argue that fluctuations in aggregate demand are closely tied to fluctuations in investment.

Question 62

According to the Keynesian school of thought, the economy is not self-regulating. That is, to achieve a satisfactory level of real GDP, the government often has to intervene by managing aggregate demand.

Question 63

Keynesian economists today favor a model in which the aggregate supply curve is relatively flat at low levels of real GDP and slopes downward as real GDP approaches its potential level.

Question 64

The economic theory that suggested an alternative to the rising unemployment and inflation that the static Phillips curve analysis could not explain was the:

A) new classical economic theory.
B) monetarist economic theory.
C) new Keynesian economic theory.
D) classical economic theory.
E) traditional Keynesian economic theory.

Question 65

Which of the following economic theories became popular in the 1930s in response to the shortcomings of existing theories of the Great Depression?

A) New classical theory
B) Classical theory
C) Traditional Keynesian theory
D) Monetarist theory
E) New Keynesian theory

Question 66

Which of the following school of thought believes that the major source of the macroeconomic problems are the disequilibria in the private labor and goods market?

A) Keynesians and new Keynesians
B) Only monetarists
C) Only new classical economists
D) Monetarists and new classical economists
E) Monetarists and Keynesians

Question 67

New Keynesians argue that a decrease in government spending reduces inflation.

Question 68

Which school calls for more information from policymakers so that people can incorporate government plans into their outlook for the future?

A) The new classical school
B) The new Keynesian school
C) The traditional Keynesian school
D) The monetarist school
E) The classical school

Question 69

Which of the following economic theories favors an active role for government in promoting low inflation and economic growth?

A) New Keynesian
B) Monetarists
C) New classical economists
D) Classical economists
E) Marxists

Question 70

Which of the following statements accurately expresses the assumptions on which new Keynesian and new classical theory are based?

A) New Keynesian economics assumes that the economy can reach equilibrium below the natural rate of unemployment, whereas new classical economics assumes that macroeconomic equilibrium is always at the natural rate of unemployment.
B) New Keynesian economics maintains that government intervention is unnecessary, whereas classical economics supports an active government role.
C) New Keynesian economics assumes that the long-run Phillips curve is vertical, whereas new classical economics views the long-run Phillips curve as horizontal.
D) New Keynesian economics assumes that all prices are flexible, whereas new classical economics applies a fixed-price model.
E) New Keynesian economics emphasizes short-run reductions in inflation rates, whereas new classical economics focuses on short-run reductions in the unemployment rate.

Question 71

According to the new Keynesian school of thought, fiscal policy is a completely ineffective tool in combating supply-side shocks.

Question 72

Monetarists would argue that in the short run, increases in the money supply act to raise both investment and consumption, while also increasing the price level.

Question 73

The primary difference between new Keynesian economics and traditional Keynesian economics is that the former is more realistic about international trade, whereas the latter stresses the importance of inward oriented strategies.

Question 74

Which of the following schools of thought believes that wages and prices are rigid in the short run?

A) Keynesians and new Keynesians
B) Only monetarists
C) Only new classical economists
D) Monetarists and new classical economists
E) Monetarists and Keynesians

Question 75

Traditional Keynesian economics assumes that prices are relatively flexible in response to changes in aggregate expenditures.

Question 76

An economist from which school of thought would most likely accept the following- "The wide acceptance and practice of activist government fiscal policy."

A) Traditional classical economics
B) Neoclassical economics
C) Marxist economics
D) New monetarist economics
E) Keynesian economics

Question 77

Which of the following is the basic tenet of new classical economics?

A) A change in the fiscal policy affects the equilibrium level of real GDP but has no impact on the equilibrium price level.
B) A government-induced shift in aggregate demand affects the real GDP only if they are expected by the economic agents.
C) A change in aggregate demand affects the aggregate price level only if the aggregate supply curve is perfectly elastic.
D) A change in monetary policy affects the equilibrium level of real GDP only if those changes are unexpected.
E) An expected change in a monetary or fiscal policy leads to a proportional shift of the long run supply curve.

Question 78

Which of the following promoted legislation that would give private citizens greater information regarding public policymaking?

A) The Keynesians
B) The monetarists
C) The new classicals
D) The traditional classicals
E) The consumer advocates

Question 79

Milton Friedman is widely considered to be the father of monetarism.

Question 80

Which of the following schools of thought criticized the Fed's policy of targeting interest rates?

A) The new Keynesians
B) The Keynesians
C) The monetarists
D) The classical economists
E) The new classical economists