Question 1

New classical economics and classical economics both:

Accepted Answer

A)  hold that prices and wages are flexible. 
B)  hold that there will be no cyclical unemployment over the long run. 
C)  question the effectiveness of government intervention into the economy. 
D)  all of the above.

Question 2

The new classical economists hold that rational expectations and adaptive expectations by businesses and households are important factors standing in the way of the federal government's success in managing the economy.

Accepted Answer

A) True 
 B)False

Question 3

-According to classical economics, if aggregate demand were at AD2 and prices and wages were at P1W1:

Accepted Answer

A)  aggregate supply would shift to the left. 
B)  prices and wages would fall from P1W1 to P2W2. 
C)  aggregate demand would increase from AD2 to AD1. 
D)  the economy would continually operate with unemployed resources.

Question 4

The policy implication of new Keynesian economics is that:

Accepted Answer

A)  the government should maintain tight control over the money supply. 
B)  government intervention to correct problems in the economy is unnecessary and will be rendered ineffective by actions of households and businesses. 
C)  price stickiness and the conflict between individuals' and society's interests require consistent, full government intervention to stimulate demand. 
D)  none of the above.

Question 5

In the new classical model, the aggregate supply curve is:

Accepted Answer

A)  upward sloping in both the short run and the long run. 
B)  perfectly vertical at the natural rate of unemployment in both the short run and the long run. 
C)  upward sloping in the short run and perfectly vertical at the natural rate of unemployment in the long run. 
D)  perfectly vertical at the natural rate of unemployment in the short run and upward sloping in the long run.

Question 6

In which of the following economic theories is the short-run aggregate supply curve thought to be upward sloping, and the long-run aggregate supply curve thought to be perfectly vertical at the natural rate of unemployment?

Accepted Answer

A)  Supply-side economics. 
B)  The new classical theory. 
C)  The new Keynesian theory. 
D)  All of the above.

Question 7

According to the Keynesian approach, if leakages from the spending stream exceed injections:

Accepted Answer

A)  business inventories will decrease and the level of economic activity will increase. 
B)  business inventories will remain unchanged and the level of unemployment will decrease. 
C)  unplanned business inventories will accumulate and the level of economic activity will decrease. 
D)  unplanned business inventories will accumulate as the economy moves toward full employment.

Question 8

The natural rate of unemployment occurs when there is only frictional and structural unemployment.

Accepted Answer

A) True 
 B)False

Question 9

-According to classical economics, which of the following would cause aggregate supply, AS, to shift to the left?

Accepted Answer

A)  an increase in wages. 
B)  an increase in prices. 
C)  an increase in either wages or prices. 
D)  none of the above.

Question 10

Using the Keynesian approach, if leakages from the spending stream are less than injections into the spending stream, total spending will be:

Accepted Answer

A)  less than total output, and total output will decrease. 
B)  less than total output, and total spending will increase. 
C)  greater than total output, and total output will increase. 
D)  greater than total output, and total spending will decrease.

Question 11

According to the rational expectations approach, an announcement that interest rates may be raised to curb inflation would likely cause businesses and households to:

Accepted Answer

A)  put political pressure on officials to cancel the planned interest rate changes. 
B)  go along with the policy knowing that it is in their best interest to curb inflation. 
C)  immediately borrow and increase their spending to beat the rise in the interest rates. 
D)  reduce borrowing and depend more on the expenditure of saved income and earnings.

Question 12

The acceptance of economic theories depends only on their logic, and not on how well they explain economic events.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is NOT an assumption of new Keynesian economics?

Accepted Answer

A)  Wage and prices are inflexible downward. 
B)  In the long run an economy may operate at less than full employment. 
C)  Individual decision makers act to maximize the interests of all of society. 
D)  Firms set prices based on maximizing their own profits.

Question 14

Classical economics, new classical economics, monetarism, and supply-side economics all favor:

Accepted Answer

A)  free markets and limited government intervention in the economy. 
B)  changes in taxes rather than the money supply to control the economy. 
C)  immediate and extensive government intervention to stabilize the economy. 
D)  placing the Federal Reserve under control of the U.S. Secretary of the Treasury.

Question 15

-Business inventories would be expected to increase at an output level of:

Accepted Answer

A)  $100 billion. 
B)  $200 billion. 
C)  $300 billion. 
D)  $400 billion.

Question 16

Using the Keynesian approach, if leakages from the spending stream are less than injections into the spending stream:

Accepted Answer

A)  the economy is at its equilibrium level of output. 
B)  the economy is operating below its equilibrium level, and output will increase. 
C)  the economy is operating above its equilibrium level, and output will decrease. 
D)  the relationship between the actual and equilibrium levels of output cannot be established without more information.

Question 17

In the Keynesian model, total spending in the economy will be less than total output if leakages from the spending stream are less than injections.

Accepted Answer

A) True 
 B)False

Question 18

Explain how the Great Depression weakened the popularity of classical economics and opened the way to Keynesian economics.

Accepted Answer

The answer of Explain how the Great Depression weakened the...

Question 19

An important assumption of classical economic theory is:

Accepted Answer

A)  savings equals investment in the macroeconomy. 
B)  supply creates its own demand in the macroeconomy. 
C)  wages and prices will either increase or decrease to ensure that the economy operates at full employment. 
D)  all of the above.

Question 20

The argument that individual decision making in businesses and households affects the macroeconomy is part of new Keynesian economics.

Accepted Answer

A) True 
 B)False

Exam 9: Macroeconomic Viewpoints and Models

New classical economics and classical economics both:

The new classical economists hold that rational expectations and adaptive expectations by businesses and households are important factors standing in the way of the federal government's success in managing the economy.

-According to classical economics, if aggregate demand were at AD₂ and prices and wages were at P₁W₁:

The policy implication of new Keynesian economics is that:

In the new classical model, the aggregate supply curve is:

In which of the following economic theories is the short-run aggregate supply curve thought to be upward sloping, and the long-run aggregate supply curve thought to be perfectly vertical at the natural rate of unemployment?

According to the Keynesian approach, if leakages from the spending stream exceed injections:

The natural rate of unemployment occurs when there is only frictional and structural unemployment.

-According to classical economics, which of the following would cause aggregate supply, AS, to shift to the left?

Using the Keynesian approach, if leakages from the spending stream are less than injections into the spending stream, total spending will be:

According to the rational expectations approach, an announcement that interest rates may be raised to curb inflation would likely cause businesses and households to:

The acceptance of economic theories depends only on their logic, and not on how well they explain economic events.

Which of the following is NOT an assumption of new Keynesian economics?

Classical economics, new classical economics, monetarism, and supply-side economics all favor:

-Business inventories would be expected to increase at an output level of:

Using the Keynesian approach, if leakages from the spending stream are less than injections into the spending stream:

In the Keynesian model, total spending in the economy will be less than total output if leakages from the spending stream are less than injections.

Explain how the Great Depression weakened the popularity of classical economics and opened the way to Keynesian economics.

An important assumption of classical economic theory is:

The argument that individual decision making in businesses and households affects the macroeconomy is part of new Keynesian economics.