Deck 24: Epilogue: the Story of Macroeconomics

Question 1

Explain what is meant by liquidity preference.

Answer 1

Liquidity preference is the phrase Keynes gave to money demand.

Question 2

The theories of investment were developed by

A)Friedman and Phelps.
B)Hicks and Hansen.
C)Modigliani and Friedman.
D)Lucas and Sargent.
E) Tobin and Jorgenson.

Answer 2

Tobin and Jorgenson.

Question 3

Which of the following was not part of the neoclassical synthesis?

A)the IS curve
B)the LM curve
C)the Phillips curve
D)aggregate demand
E) rational expectations

Answer 3

rational expectations

Question 4

Explain several of the key contributions of Keynes.

Question 5

The intellectual leader of the monetarists was

A)Robert Lucas.
B)Milton Friedman.
C)John Maynard Keynes.
D)Paul Romer.
E) John Taylor.

Question 6

According to Keynes,

A)the Great Depression was caused by ill-considered expansionary fiscal policy.
B)balancing the budget in the midst of a depression would be a serious mistake.
C)inflation is always and everywhere a monetary phenomenon.
D)the Phillips curve is stable.
E) none of the above

Question 7

Which of the following argued that the Great Depression was caused by monetary factors?

A)Friedman and Schwartz
B)Hicks and Hansen
C)Modigliani and Friedman
D)Lucas and Sargent
E) Tobin and Jorgenson

Question 8

The IS-LM model was developed by

A)Friedman and Phelps.
B)Hicks and Hansen.
C)Modigliani and Friedman.
D)Lucas and Sargent.
E) none of the above

Question 9

Which of the following schools of thought advised against fine-tuning,due to our limited understanding of the economy?

A)Monetarist
B)Keynesian
C)New Keynesianism
D)New growth
E) Neoclassical

Question 10

The theories of consumption were developed by

A)Friedman and Phelps.
B)Hicks and Hansen.
C)Modigliani and Friedman.
D)Lucas and Sargent.

Question 11

If the IS curve is relatively steep,then

A)there can be no long-run tradeoff between inflation and unemployment.
B)monetary policy cannot be very effective in changing GDP.
C)rational expectations theory is probably correct.
D)Ricardian equivalence most likely holds.
E) budget deficits will not affect future capital accumulation.

Question 12

Which of the following statements about Keynes' contribution to macroeconomics is correct?

A)Although he published his most important ideas about the economy long before the 1930s, few economists paid attention to Keynes until the Great Depression proved him correct.
B)Keynes argued that depressions and recessions were almost always caused by changes in the money supply.
C)Keynes argued that balancing the budget could be an effective way to cure a recession or depression.
D)all of the above
E) none of the above

Question 13

"Effective demand" represents which of the following?

A)money demand
B)demand for exports
C)domestic demand
D)the demand for labor
E) aggregate demand

Question 14

"In the long run,we're all dead" was Keynes' way of saying that

A)intellectual pursuits, like understanding the economy, are unimportant in the scheme of things.
B)no one would appreciate his theories during his lifetime.
C)there is no point in saving for retirement.
D)it is very important to save for one's retirement.
E) none of the above

Question 15

In the 1960s,the monetarist school of thought held that

A)monetary and fiscal policy could explain most of the output fluctuations in U.S. history.
B)there is a long-run tradeoff between inflation and unemployment.
C)efforts to fine-tune the economy are likely to do more harm than good.
D)all of the above
E) none of the above

Question 16

Liquidity preference refers to

A)Keynes' name for the demand for money.
B)the "random walk" behavior of consumption spending.
C)monetarists explanations for stagflation.
D)real business cycle theorists' explanations for stagflation.
E) the controversy sparked by the Lucas critique.

Question 17

Liquidity preference refers to the theory of

A)money demand.
B)consumption.
C)investment.
D)expectations.

Question 18

During the 1970s and 1980s,macroeconomists were busy integrating the insights of which of the following into their ideas about the economy?

A)real business cycle theory
B)Keynesian theory
C)supply side economics
D)classical macroeconomics
E) none of the above

Question 19

The neoclassical synthesis

A)was a name coined by Keynes himself for his new theories.
B)rejected virtually all of Keynes' insights.
C)held that econometric models of the economy could not be used to predict the future.
D)held that economy always operated at or very near the natural rate of unemployment.
E) was the dominant school of thought among economists in the 1950s and 1960s.

Question 20

The neoclassical synthesis had emerged by what decade?

A)1930s
B)1940s
C)1950s
D)1960s
E) 1990s

Question 21

As the IS curve becomes steeper,we know that

A)a given change in the money supply will cause a larger change in output.
B)a given change in the money supply will cause a smaller change in output.
C)a given change in the money supply will cause the same change in output.
D)monetary policy becomes more effective.

Question 22

According to rational expectations theory,monetary policy will affect output only if it is

A)anticipated.
B)unanticipated.
C)a very large change.
D)a very small change.
E) a policy that has been tried in the past.

Question 23

The new classical interpretation of the economy suggests that

A)output is always above the natural level.
B)output is always below the natural level.
C)output is always equal to the natural level.
D)recessions will not occur.

Question 24

The less staggered are labor contracts,

A)the more rapidly the economy will adjust to changes in aggregate demand.
B)the less rapidly the economy will adjust to changes in aggregate demand.
C)the greater the inflationary effects of a given change in money growth in the medium run.
D)the less inflationary effects of a given change in money growth in the medium run.

Question 25

Discuss what is meant by the neoclassical synthesis and explain how it emerged.

Question 26

Which of the following argued that a long-run trade-off between inflation and unemployment could not exist?

A)Friedman and Phelps
B)Hicks and Hansen
C)Modigliani and Friedman
D)Lucas and Sargent
E) Tobin and Jorgenson

Question 27

Which of the following is an implication of rational expectations theory?

A)Deviations of output from the natural rate are likely to be serious and long-lived.
B)The economy is like a complex machine, that needs to be optimally controlled with the proper policy.
C)Macroeconometric models based on past behavior will not be very useful in formulating policy.
D)Wages and prices are set almost entirely at random, so it is pointless to try to model their behavior.
E) Business cycles almost always result from a shift in aggregate demand.

Question 28

Discuss some of the implications of rational expectations.

Question 29

Most economists would agree that,unless it incorporates rational expectations or something like it,a model cannot account for

A)the Great Depression.
B)shifts in aggregate supply.
C)the relationship between consumption and income.
D)the stagflation of the 1970s.
E) the different initial impact of a permanent versus a temporary policy change.

Question 30

Which of the following events led to the crisis in macroeconomics and to the development of rational expectations theory?

A)the Great Depression
B)the stock market crash of 1987
C)the stock market speculative bubble of the late 1990s
D)stagflation in the 1970s
E) large budget deficits in the 1980s

Question 31

In the 1960s,there was significant debate between Keynesians and monetarists.Explain several aspects of this debate.

Question 32

Milton Friedman attributed the Great Depression primarily to

A)the government's failure to respond to an increase in the budget deficit.
B)a reduction in the money supply.
C)economists' and policy-makers' failure to acknowledge their limited knowledge.
D)the failure of wages to rise.
E) inaccurate expectations by consumers and firms.

Question 33

The staggering of wage and price decisions suggests that

A)people do not possess rational expectations.
B)people do possess rational expectations.
C)the economy will adjust slowly to shocks even if people possess rational expectations.
D)the Lucas critique is entirely correct.
E) real business cycle theory is correct.

Question 34

The flatter is the IS curve,

A)the more effective is monetary policy.
B)the less effective is monetary policy.
C)the effectiveness of monetary policy does not change.
D)a given change in the money supply will have a smaller effect on output.

Question 35

The steeper is the IS curve,

A)the more effective is monetary policy.
B)the less effective is monetary policy.
C)the effectiveness of monetary policy does not change.
D)a given change in the money supply will have a greater effect on output.

Question 36

Stagflation refers to

A)a reduction in inflation.
B)a simultaneous reduction in inflation and reduction in unemployment.
C)a liquidity trap.
D)reduction in the price level and a reduction in the unemployment rate.
E) none of the above

Question 37

Which of the following led a strong attack against mainstream macroeconomists during the 1970s?

A)Friedman and Phelps
B)Hicks and Hansen
C)Modigliani and Friedman
D)Lucas, Barro, and Sargent

Question 38

The research by Robert Hall on the theory of consumption suggests that the best forecast of consumption for next year would be

A)unpredictable.
B)random.
C)this year's consumption.
D)last year's consumption.

Question 39

As the IS curve becomes flatter,we know that

A)a given change in the money supply will cause a larger change in output.
B)a given change in the money supply will cause a smaller change in output.
C)a given change in the money supply will cause the same change in output.
D)monetary policy becomes less effective.

Question 40

The more staggered are labor contracts,

A)the more rapidly the economy will adjust to changes in aggregate demand.
B)the less rapidly the economy will adjust to changes in aggregate demand.
C)the greater the inflationary effects of a given change in money growth in the medium run.
D)the less inflationary effects of a given change in money growth in the medium run.

Question 41

Work by Doug Diamond and Philip Dybvig in the 1980s had clarified the nature of

A)unemployment.
B)bank runs.
C)inflation.
D)growth.

Question 42

One of the most important areas of disagreement among macroeconomists today is over

A)the slope of the IS curve.
B)the slope of the LM curve.
C)the definition of consumption spending.
D)the definition of government spending.
E) none of the above

Question 43

Discuss new classical economics and real business cycle theory.

Question 44

Both the new classical and new Keynesian models had in common the belief that

A)in the medium run, output returns to its natural level.
B)output is always at its natural level.
C)in the short run, output would likely deviate from its natural level.
D)none of the above

Question 45

A core belief of modern macroeconomics is that in the long run,

A)a change in money growth will affect the level of output, but not its composition.
B)a change in money growth will affect the composition of output, but not its level.
C)output can deviate permanently from its natural level.
D)a change in fiscal policy will not affect the composition of output.
E) greater saving will result in greater output.

Question 46

If consumers are very foresighted,we would expect actual consumption spending to

A)increase during recessions.
B)increase during episodes of stagflation.
C)have no relation to wealth.
D)resemble a "random walk."
E) be entirely predictable.

Question 47

One problem with real business cycle theory is that

A)it is more successful in explaining expansions than in explaining contractions.
B)it relies almost entirely on Keynes' original ideas, ignoring much of the progress made since then.
C)it treats government officials as well-meaning public servants, despite much evidence to the contrary.
D)it defines "productivity" in a new and not very intuitive way.
E) its models downplay the importance of technological progress in the economy.

Question 48

Economist ________ shows the "limits of arbitrage."

A)Doug Diamond
B)Andrei Shleifer
C)Philip Dybvig
D)Richard Thaler

Question 49

The Great Depression had led economists to suggest a larger role for

A)market mechanism.
B)government intervention.
C)price mechanism.
D)international trade.

Question 50

Briefly discuss new growth theory.

Question 51

The crisis reflects a major intellectual failure of macroeconomics to understand the macroeconomic importance of

A)financial system.
B)growth.
C)unemployment.
D)inflation.

Question 52

First,what is the Lucas critique? Second,explain how it might relate to the implementation of monetary policy.

Question 53

Explain the menu cost explanation of output fluctuations.

Question 54

The intellectual leader of new classicals is

A)Edward Prescott.
B)John Taylor.
C)Stanley Fischer.
D)Ben Bernanke.

Question 55

Those economists who attempt to explain why wages and prices do not freely adjust would most likely be

A)real business cycle theorists.
B)new classical economists.
C)new Keynesian economists.
D)new growth theorists.
E) none of the above

Question 56

According to real business cycle theorists,

A)fiscal policy explains most changes in output.
B)price and wage rigidity explain most changes in output.
C)efficiency wage theory explains wage rigidity.
D)changes in output primarily represent changes in the natural level of output.
E) fiscal policy explains most changes in efficiency wage theory.

Question 57

A core belief of modern macroeconomics is that in the short run,

A)fiscal policy is more effective in changing output than monetary policy.
B)monetary policy is more effective in changing output than fiscal policy.
C)fluctuations in aggregate demand affect unemployment.
D)fluctuations in aggregate demand have no impact on the price level.
E) the economy always operates at or near the natural rate of unemployment.

Question 58

The main debate during the 1960s was

A)between Keynesians and classicals.
B)between new Keynesians and new classicals.
C)between Keynesians and monetarists.
D)between new Keynesians and monetarists.

Question 59

Explain what is meant by "new Keynesians" and discuss some of the research conducted in this area.

Question 60

The existence of menu costs are often used to explain why

A)fiscal and monetary policies should be relatively effective.
B)the price of services, like those provided by restaurants and barbers, rise at a faster rate than the price of goods, like automobiles and clothing.
C)food prices tend to rise disproportionately rapidly in the consumer price index.
D)price and wage adjustments will be relatively rapid.
E) people prefer to look backward, instead of forward, when anticipating the future.

Question 61

Recent research up to the crisis proceeded mainly on three fronts.Discuss each of them.

Question 62

Discuss the major intellectual failure on macroeconomics from the crisis.

Question 63

Discuss research on the role of banks and other financial institutions in the intermediation of funds between lenders and borrowers.

Question 64

Discuss the consensus on the adjustment process after the crisis.