Deck 15: A Century of Economic Theory

Question 1

During the 19^th century,____ was the mainstream school of economics.

A)classical
B)Keynesian
C)monetarism
D)supply-side
E)rational expectationist

Answer 1

A

Question 2

If V = 10,Q = 4,000,M = 800,then P

A)is 2.
B)is 4.
C)is 20.
D)is 40.
E)cannot be found.

Answer 2

A

Question 3

According to Keynes,investment was determined

A)equally by the interest rate and the expected profit rate.
B)mainly by the interest rate.
C)mainly by the expected profit rate.

Answer 3

C

Question 4

The velocity of circulation,V,is equal to

A)PQ.
B)MQ.
C)PQ/M.
D)M/PQ.
E)Q.

Question 5

The concept that shows the relationship among GDP,the money stock,and the velocity of circulation of money is called the

A)law of diminishing marginal utility.
B)equation of exchange.
C)law of demand.
D)law of diminishing returns.
E)the quantity theory of money.

Question 6

The equation of exchange

A)always balances.
B)usually balances.
C)sometimes balances.
D)never balances.

Question 7

If Q = 800,P = 20,and V = 4,then M

A)is 2,000.
B)is 4,000.
C)is 8,000.
D)is 16,000.
E)cannot be found.

Question 8

Each of the following was considered a proponent of supply-side economics except

A)Arthur Laffer.
B)Ronald Reagan.
C)Congressman Jack Kemp.
D)Milton Friedman.

Question 9

Which school of economics held that individuals and business firms learn,through experience,to instantaneously anticipate the consequences of changes in monetary and fiscal policy?

A)The classicals
B)The Keynesians
C)The monetarists
D)The supply-siders
E)The rational expectationists

Question 10

Say's law was the centerpiece of

A)Keynesian economics.
B)communism.
C)classical economics.
D)rational expectations theory.

Question 11

The classical economists believed that recessions

A)needed to be fought with monetary and fiscal policy.
B)would probably develop into depressions.
C)develop into inflations.
D)would cure themselves.

Question 12

The equation of exchange

A)is GDP = C + I + G + Xn.
B)never balances.
C)states that if M rises by a certain percentage,P must rise by that same percentage.
D)is MV = PQ.

Question 13

The only school of economics that could be construed as advocating big government are the

A)classicals.
B)Keynesians.
C)monetarists.
D)supply-siders.
E)rational expectationists.

Question 14

The quantity theory of money originated under

A)classical economics.
B)Keynesian economics.
C)monetarism.
D)supply-side economics.
E)the rational expectationists.

Question 15

If M is 2,000,Q is 1,000,and P = 6,then V

A)Is 2.
B)Is 3.
C)Is 6.
D)Is 12.
E)Cannot be found.

Question 16

The most prominent classical economist was

A)Karl Marx.
B)Adam Smith.
C)John Maynard Keynes.
D)Milton Friedman.
E)John Stuart Mill.

Question 17

John Maynard Keynes believed that a recession was caused entirely by

A)inadequate aggregate supply.
B)inadequate aggregate demand.
C)too much inflation.
D)too much government intervention.

Question 18

Lowering tax rates was the main priority of the

A)classicals.
B)Keynesians.
C)monetarists.
D)supply-siders.
E)economic behaviorists.

Question 19

Keynesian economics focused on

A)equally at curing recessions and inflations.
B)mainly at curing inflations.
C)mainly at curing recessions.
D)curing hyperinflation.

Question 20

The crude quantity theory of money assumes that

A)V and Q remain constant.
B)V and Q vary.
C)V is constant and Q varies.
D)Q is constant and V varies.

Question 21

The theory of rational expectations concludes that

A)since expectations can cause discretionary stabilization policies to be pro-cyclical,it is better to rely upon policy rules.
B)discretionary monetary policy is a more powerful stabilization device than is discretionary fiscal policy.
C)discretionary fiscal policy is a more powerful stabilization device than is discretionary monetary policy.
D)discretionary policies are more effective than rules in stabilizing the economy.

Question 22

The average number of times each dollar is used per year to buy goods and services in the economy is called the

A)velocity of circulation.
B)equation of exchange.
C)law of demand.
D)law of diminishing returns.
E)quantity theory of money.

Question 23

The monetarists believe that an increase in the money supply of about 4% per year,regardless of economic conditions,is a good monetary policy.Why was 4% chosen?

A)It reflects the fact that the output of the economy has been growing at about 3 to 4% per year,and a 4% increase in the money supply would tend to stabilize the price level.
B)By equating the money supply growth rate and the unemployment rate,the monetarists believe that the output of the economy will increase.
C)By restricting the increase in money supply to 4%,the monetarists hope to limit fluctuations in the price trend to 4% and stabilize velocity.
D)Price fluctuations have been shown to be historically more than 4%.By a steady 4% increase in the money supply,the monetarists hope to drive prices down.

Question 24

According to crude versions of the quantity theory of money

A)the income velocity of money is highly variable in the short run.
B)a full employment rate of output is not characteristic of market equilibrium.
C)a 10-percent increase in the money supply will result in a 10-percent increase in the price level.
D)a 25-percent decrease in the money supply will result in a 25-percent decrease in velocity.
E)speculative motives are the major sources of the demand for money.

Question 25

Non-interventionists include all of the following,except

A)new classical economists.
B)supply-side economists.
C)Keynesian economists.
D)monetarists.
E)rational expectationists.

Question 26

Statement I: Monetarists argue that discretionary economic policies are destabilizing.
Statement II: Like Keynesians,monetarists believe that the economy is inherently unstable.

A)Statement I is true and statement II is false.
B)Statement I is false and statement II is true.
C)Both statements are true.
D)Both statements are false.
E)Not enough information is provided to determine if either statement is true or false

Question 27

Which of the following is NOT a component of the equation of exchange?

A)The price level
B)The interest rate
C)Real output
D)The velocity of money
E)The supply of money

Question 28

A key issue in the present disagreement between Keynesian and monetarist economists is whether

A)monetary policy can bring the economy to full employment.
B)the economy is better off with policy makers adopting a strict rule or using their discretion to set policies.
C)monetary policy can influence interest rates.
D)fiscal policy involves the use of taxation.
E)federal budgets must be financed.

Question 29

This curve is

A)a Phillips curve.
B)a Laffer curve.
C)an aggregate supply curve.
D)an aggregate demand curve.

Question 30

According to crude versions of the quantity theory of money

A)the money supply determines the real interest rate in equilibrium.
B)the general price level is determined strictly by the real costs of production.
C)the general price level is exactly proportional to the money supply in equilibrium.
D)increases in the money supply will increase output and employment in the long run.

Question 31

The _____ hypothesis is based on the assumption that the best indicator of the future is what has happened in the past.

A)adaptive expectations
B)rational expectations
C)monetary
D)supply-side

Question 32

The new classical economists are the

A)Keynesians.
B)economic behaviorists.
C)supply-siders.
D)rational expectationists.
E)adaptive expectationists.

Question 33

Milton Friedman and others,citing imperfections and mistakes in the administration of fiscal policy,argue that government stabilization policies

A)often destabilize the economy.
B)are usually in doses too small to correct fluctuations in the economy.
C)are always for political gain,not economic stability.
D)always cause inflation.
E)have no effect on the economy.

Question 34

One major assumption of the theory of rational expectations is that

A)all firms use rational expectations.
B)the economy does not have a self-correction mechanism.
C)the economy has a very effective self-correction mechanism.
D)all consumers use rational expectations.

Question 35

Supply-side economists believe that,in general,

A)by raising tax rates we can raise tax revenue.
B)by lowering tax rates we can raise tax revenue.
C)tax rates have very little effect on tax revenue.
D)tax rates are much too low.
E)taxes should be abolished.

Question 36

Keynesian economists tend to believe that the private sector of the economy (households and businesses)is inherently

A)very stable in its consumption and investment decisions.
B)unstable in its consumption and investment decisions.
C)smaller than the foreign trade sector of the economy.

Question 37

Supply-side economists would say that tax rates are generally

A)at the level 0F.
B)at some level below 0F.
C)at some level above 0F.
D)such that an increase in tax rates will increase tax revenue.

Question 38

Which one of the following macroeconomic theories is most closely associated with the Laffer curve?

A)Monetarism
B)New classical economics
C)Keynesian economics
D)Supply-side economics
E)The theory of rational expectations

Question 39

Systematic error is most clearly associated with

A)rational expectations.
B)adaptive expectations.
C)supply-side expectations.
D)monetary expectations.
E)economic behaviorists.

Question 40

According to monetarists

A)changes in the money supply are the primary cause of changes in real output and the price level.
B)an expansionary fiscal policy will lower interest rates and thereby tend to over-stimulate the economy.
C)changes in the velocity of money are more important than changes in the money supply in causing the level of economic activity to change.
D)the supply of money changes in response to changes in the levels of real output and prices.

Question 41

Most modern monetarists believe that

A)the capitalist system is inherently unstable and unpredictable.
B)structural economic changes are major causes of business cycles.
C)inflation is explained by too rapid a rate of growth of the nominal money supply,resulting in "too much money chasing too few goods."
D)deflations are caused by contagious pessimism among investors.

Question 42

Rational expectations refer to

A)the use of all available information in forecasting economic variables.
B)the use of aggregate supply to forecast unemployment.
C)the use of opportunity costs to forecast inflation.
D)disinflation.

Question 43

Which one of the following statements best describes the monetarist view of economic stabilization?

A)Discretionary policies often do more harm than good.
B)Monetary policy should be used to fine-tune the economy.
C)Fiscal policy is more effective than monetary policy.
D)Both monetary and fiscal policy are unable to influence output,employment,and the price level.
E)Discretionary policies are not very helpful but neither are they particularly harmful.

Question 44

Milton Friedman,a leading monetarist,believes the Fed should not manage the money supply in a discretionary manner.Which of the following statements is NOT a reason for Friedman's belief?

A)The limitations of our knowledge make any discretionary policy very unpredictable.
B)The past performance of the Fed has not given a strong indication that it has the ability to regulate the money supply in such a manner.
C)Friedman advocates the rule of steady monetary growth.
D)Discretionary monetary policy promotes confidence within the business community by providing a greater amount of stability to money and credit.

Question 45

Classical economists perceive that

A)investors' expectations about returns on investment are unstable.
B)large investment swings are responses to small changes in interest rates.
C)the best way to cure unemployment is to start a war.
D)the proper cure for unemployment is active fiscal policy.

Question 46

The theory that people will expect fiscal and monetary policies to have certain effects and that they will take actions that make these policies ineffective is the

A)accelerating inflation theory.
B)adaptive expectations theory.
C)rational expectations theory.
D)quantity theory of money.
E)None of the choices/statements are true.

Question 47

According to the monetarist point of view

A)to avoid inflation,the Federal Reserve should create reserves at the same rate as the velocity of money.
B)velocity of money is not constant;therefore,the increase in the money supply should not be constant.
C)in the short run,increased unemployment and/or reduced inflation are the result of a reduction in the growth of the money supply.
D)in the short run,changes in the money supply can have no effect on output in the economy,only on prices.

Question 48

According to the rational expectations theory the rate of inflation largely depends on

A)business expectations of interest rate levels.
B)business expectations about international trade.
C)what people expect to happen to prices.
D)the unemployment rate.

Question 49

Statement I: Policy activists believe that the economy is inherently unstable and that discretionary fiscal and monetary policies are necessary to provide economic stabilization.
Statement II: Non-interventionists believe that the economy has built-in stabilizing forces.

A)Statement I is true and statement II is false.
B)Statement I is false and statement II is true.
C)Both statements are true.
D)Both statements are false.
E)Not enough information is provided to determine if either statement is true or false.

Question 50

Which one of the following statements is incorrect?

A)Policy activists believe in the use of fiscal and monetary policies to combat inflation and unemployment.
B)Monetarists are policy activists.
C)Keynesians are policy activists.
D)New classical economists are non-interventionists.
E)Non-interventionists believe that discretionary fiscal and monetary policies are destabilizing.

Question 51

According to classical economic theory

A)expansionary fiscal policies are required to bring the economy out of recession.
B)deficit financing is the only effective remedy for recession.
C)fiscal policies are more effective than monetary policies as economic stabilization tools.
D)if the economy is experiencing excessive inflation,the government should raise taxes and/or cut expenditures.
E)falling wages and prices would be the natural cure to recession.

Question 52

Which of the main economic schools of thought would believe that the government should undertake a tax policy stressing work and investment incentives?

A)Rational expectations
B)Classical
C)Supply-side
D)Keynesian
E)Monetarist

Question 53

According to supply-side economics,when operating in the upper portion of the Laffer curve,tax cuts result in

A)interest rate increases.
B)productivity decreases.
C)income decreases.
D)tax revenue increases.
E)savings decreases.

Question 54

The rule suggested by the monetarists is that the money supply increases at the same rate as

A)the price level.
B)the interest rate.
C)the velocity of money.
D)the potential growth in real GDP.

Question 55

According to the rational expectations theory

A)anticipation of inflation can cause deflation.
B)anticipation of inflation actually causes inflation.
C)inflation rates are unrelated to unemployment rates.
D)the economic understanding of workers and managers is incomplete,making it unlikely that their inflationary expectations will influence the economy.
E)anticipation of unemployment levels will help prepare workers for impending layoffs.

Question 56

Monetarists take the policy position that the supply of money should be

A)increased at a constant rate each year.
B)decreased during recession and increased during inflation.
C)held constant over time.
D)increased during recession and decreased during inflation.

Question 57

Supply-side economics would include such policies as

A)open-market operations in which the Fed sold its supply of bonds.
B)raising government spending to stimulate the multiplier effect.
C)cutting marginal income tax rates.
D)erecting tariff barriers to protect American jobs.
E)eliminating depreciation as a tax-deductible business expense.

Question 58

Which of the following theories of expectations holds that individuals form expectations by looking only to past values of the variable to be forecast?

A)Rational expectations theory
B)Certainty equivalent theory
C)Expected value analysis
D)Adaptive expectations theory

Question 59

Which of the following theories of expectations holds that individuals use all information available in forming expectations?

A)Rational expectations theory
B)Certainty equivalent theory
C)Expected value analysis
D)Adaptive expectations theory
E)Economic behaviorists

Question 60

Which of the following is NOT a supply-side policy?

A)Decrease taxes
B)Cut government spending
C)Balance the budget
D)Increase government spending in response to a deflationary gap
E)Decrease entitlement programs

Question 61

A supply-side economist would recommend a cut in marginal tax rates on capital gains and on investment expenditures

A)When the economy is in a recession.
B)If government spending is cut by an equal amount.
C)If it is judged that the resulting deficit will not crowd out very much investment.
D)Regardless of the state of the economy or other policies.

Question 62

Statement I: The key difference between supply-siders and other economists is in their judgment about how much output would be changed by a change in the tax rates or regulations facing taxpayers.
Statement II: A supply-side economist would argue that a big tax cut would cause an output increase,but not inflation,when the economy is already near full employment.

A)Statement I is true and statement II is false.
B)Statement II is true and statement I is false.
C)Both statements are true.
D)Both statements are false.

Question 63

Which school is the most opposed to government countercyclical intervention?

A)The Keynesians
B)The monetarists
C)The supply-siders
D)The new classical economists

Question 64

Milton Friedman's macroeconomic theory and political philosophy have the relationship one would expect.He is a

A)Keynesian and a political liberal.
B)new classical macroeconomist and a political liberal.
C)monetarist and a political conservative.
D)supply-sider and a political conservative.

Question 65

When the money supply is increased,what do monetarists expect to happen to the nominal or market rate of interest?

A)It will rise immediately.
B)It will fall in the short run,then rise in the long run.
C)It will rise in the short run,then fall in the long run.
D)It will fall and remain lower.
E)It will be unchanged.

Question 66

An economist is most likely to favor discretionary aggregate demand policies,rather than a policy rule,if he or she is in which economic tradition?

A)Keynesian
B)Classical
C)Monetarist
D)Supply-side
E)Libertarian

Question 67

The monetarists' prescription for monetary policy is called the "monetary rule." The monetary rule means that

A)monetary policy does not have an impact on the economy until 6 to 9 months after the money supply is changed.
B)expansionary fiscal policy should be accompanied by an easy monetary policy.
C)the annual rate of increase in the money supply should be equal to the long-term increase in the price level.
D)the rate of increase in the money supply should be slow and steady;for price stability it should equal the potential annual growth rate of real GDP.

Question 68

While most economists believe that Keynes was correct when he placed primary focus on aggregate demand manipulation to solve the recessionary gap of the Great Depression,supply-siders are critical of this focus,claiming that

A)Keynesian economics can only be successful if interest rates are allowed to rise.
B)Keynesian economics diverted attention away from important factors such as work effort,labor productivity,and incentives to save and invest.
C)the Great Depression was caused by the stock market crash of 1929,not a decline in aggregate demand.
D)greater control of the way in which stocks and bonds were traded would have brought the economy out of the Great Depression.
E)the supply of goods and services should have been placed under the control of the government until the economy had time to adjust to the decline of aggregate demand.

Question 69

John Maynard Keynes did NOT accept the classical assumption that

A)the velocity of money is constant in the short run.
B)full employment is the natural state of the economy.
C)money balances are held only for transaction purposes.
D)interest rates do not affect the quantity of money demandeD.
E)Keynes did not accept any of the above assumptions.

Question 70

Keynesians

A)believe capitalism is inherently stable.
B)believe the markets in a capitalistic economy are highly competitive.
C)argue against the use of discretionary monetary policy.
D)contend that government intervention in the economy is desirable.

Question 71

Which tax rate will provide the government with the maximum revenue?

A)F
B)G
C)H
D)I
E)J

Question 72

If V in the equation of exchange is constant,an increase in M will necessarily increase

A)P.
B)Q.
C)Both P and Q.
D)P times Q.

Question 73

New classical economists believe that

A)wage and price controls are needed to help control inflation.
B)governmental intervention is destabilizing and harmful to the economy.
C)the federal government has abdicated its responsibility to promote a non-inflationary full employment economy.
D)antitrust laws should be toughened in order to restrain inflation.
E)people are irrational.

Question 74

Which tax revenue given here will be generated by two different tax rates?

A)F
B)G
C)H
D)I
E)J

Question 75

In periods of relatively high levels of unemployment,a classical economist would advocate which of the following governmental policies to move the economy toward full employment?

A)Wage and price controls
B)None or a laissez-faire policy
C)Fiscal policy
D)Monetary policy
E)Money surpluses because only unanticipated changes work

Question 76

Which tax rates result in zero tax revenue?

A)F and G
B)G and H
C)F and H
D)0 and 100%
E)All of the choices are correct

Question 77

According to the monetarists

A)the supply of money changes in response to changes in the levels of real output and prices.
B)changes in the velocity of money are more important than changes in the money supply in causing the level of economic activity to change.
C)an expansionary fiscal policy will lower interest rates and thereby tend to over stimulate investment and consumption.
D)changes in the money supply are the primary cause of changes in the price level.

Question 78

Monetarists

A)argue for the use of discretionary monetary policy.
B)contend that government policies have reduced the stability of the economy.
C)believe a capitalistic economy is inherently unstable.
D)believe the markets in a capitalistic economy are largely noncompetitive.

Question 79

Monetarists advocate that the

A)money supply should be increased during inflation and reduced during recession.
B)money supply should be reduced during inflation and increased during recession.
C)money supply should be increased by a constant rate year after year.
D)counter cyclical approach to fiscal policy be adopteD.

Question 80

The theory of rational expectations concludes that

A)the public's expectations can influence the outcome of monetary policy,but not of fiscal policy.
B)the public's expectations can influence the outcome of fiscal policy,but not of monetary policy.
C)the public's expectations as to the effects of economic policies will tend to reinforce the effectiveness of those policies.
D)by reacting in its self-interest to the expected effects of stabilization policy,the public will tend to negate the impact of those policies.