Question 1

During the financial crisis of 2007-2009, the proper policy response was

Accepted Answer

A)  contractionary monetary and fiscal policy. 
B)  contractionary monetary and expansionary fiscal policy. 
C)  expansionary monetary and fiscal policy. 
D)  expansionary monetary and contractionary fiscal policy. 
A)  contractionary monetary and fiscal policy. 
B)  contractionary monetary and expansionary fiscal policy. 
C)  expansionary monetary and fiscal policy. 
D)  expansionary monetary and contractionary fiscal policy.

Question 2

Advocates of stabilization policy prefer quick medicine for economic ills.This leads some observers to favor fiscal policy while others endorse monetary policy.Describe the positions of each side in the debate and what seems to be the current consensus.

Accepted Answer

Fiscal policy advocates argue that fisca

Question 3

As the price level rises, the demand for money

Accepted Answer

A)  decreases because interest rates also increase. 
B)  decreases because consumers buy fewer goods and services. 
C)  increases because more money is needed for each transaction. 
D)  increases because investment spending will also increase. 
A)  decreases because interest rates also increase. 
B)  decreases because consumers buy fewer goods and services. 
C)  increases because more money is needed for each transaction. 
D)  increases because investment spending will also increase.

Question 4

Which of the following will increase the velocity of circulation?

Accepted Answer

A)  Interest rates increase. 
B)  The inflation rate decreases. 
C)  Federal banking legislation abolishes credit cards. 
D)  Employers decide to pay employees once a month instead of once a week. 
A)  Interest rates increase. 
B)  The inflation rate decreases. 
C)  Federal banking legislation abolishes credit cards. 
D)  Employers decide to pay employees once a month instead of once a week.

Question 5

During the financial crisis of 2007-2009, why did the Federal Reserve begin to utilize various types of unconventional monetary policy?

Accepted Answer

A)  the federal funds rate had already been increased as much as possible 
B)  the discount rate had already been increased as much as possible 
C)  the federal funds rate had already been reduced to zero 
D)  the discount rate had already been reduced to zero 
A)  the federal funds rate had already been increased as much as possible 
B)  the discount rate had already been increased as much as possible 
C)  the federal funds rate had already been reduced to zero 
D)  the discount rate had already been reduced to zero

Question 6

If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation?

Accepted Answer

A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to inflation. 
A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to inflation.

Question 7

Are forecasts of economic activity accurate enough to permit "fine-tuning" of the economy?

Accepted Answer

A)  No, forecasting is so inaccurate that it should be abandoned. 
B)  No, forecasts are not accurate enough for this. 
C)  Yes, forecasts are accurate and reliable enough for this. 
D)  Yes, at least most of the time. 
A)  No, forecasting is so inaccurate that it should be abandoned. 
B)  No, forecasts are not accurate enough for this. 
C)  Yes, forecasts are accurate and reliable enough for this. 
D)  Yes, at least most of the time.

Question 8

Attempts to keep the economy always within a hair's breadth of full employment is called

Accepted Answer

A)  shock absorption. 
B)  lagging. 
C)  fine tuning. 
D)  crowding out. 
A)  shock absorption. 
B)  lagging. 
C)  fine tuning. 
D)  crowding out.

Question 9

Which of the following policies would a Keynesian expect to produce the largest decrease in income?

Accepted Answer

A)  a reduction in government spending of $100 billion 
B)  a decrease in transfer payments of $100 billion 
C)  an increase in government spending of $100 billion 
D)  a tax increase of $100 billion 
A)  a reduction in government spending of $100 billion 
B)  a decrease in transfer payments of $100 billion 
C)  an increase in government spending of $100 billion 
D)  a tax increase of $100 billion

Question 10

Nominal GDP is proportional to money stock when

Accepted Answer

A)  velocity of money is volatile. 
B)  velocity of money is constant. 
C)  there are major changes in the value of velocity of money. 
D)  velocity of money is zero. 
A)  velocity of money is volatile. 
B)  velocity of money is constant. 
C)  there are major changes in the value of velocity of money. 
D)  velocity of money is zero.

Question 11

If the demand for money is insensitive to the interest rate, then the most effective expansionary policy would be

Accepted Answer

A)  fiscal policy. 
B)  monetary policy. 
C)  neither fiscal nor monetary policy. 
D)  both fiscal and monetary policy. 
A)  fiscal policy. 
B)  monetary policy. 
C)  neither fiscal nor monetary policy. 
D)  both fiscal and monetary policy.

Question 12

When comparing the Keynesian and monetarist approaches, the only substantive difference is that

Accepted Answer

A)  the Keynesian equation leads to a prediction of real GDP; the monetarist equation leads to a prediction of nominal GDP. 
B)  Keynesians concentrate on aggregate demand and monetarists concentrate on aggregate supply. 
C)  Keynesians approach aggregate demand by multiplying the money supply by velocity, while monetarists use the equilibrium conditions of the expenditure schedule. 
D)  Keynesian analysis suggests that money affects consumption first while monetarist analysis suggests that money affects investment spending first. 
A)  the Keynesian equation leads to a prediction of real GDP; the monetarist equation leads to a prediction of nominal GDP. 
B)  Keynesians concentrate on aggregate demand and monetarists concentrate on aggregate supply. 
C)  Keynesians approach aggregate demand by multiplying the money supply by velocity, while monetarists use the equilibrium conditions of the expenditure schedule. 
D)  Keynesian analysis suggests that money affects consumption first while monetarist analysis suggests that money affects investment spending first.

Question 13

More economists adopted monetarism in the early 1990s.

Accepted Answer

A) True 
 B)False

Question 14

Monetarists believe that the aggregate supply curve is relatively steep in the short and long runs.This means they expect

Accepted Answer

A)  inflation with no change in output. 
B)  increases in output to bring much inflation. 
C)  increases in output to bring little inflation. 
D)  decreases in output to bring much inflation. 
A)  inflation with no change in output. 
B)  increases in output to bring much inflation. 
C)  increases in output to bring little inflation. 
D)  decreases in output to bring much inflation.

Question 15

Describe an asset price bubble and give examples.Explain why it is extremely difficult if not impossible for the Federal Reserve to prevent such bubbles.

Accepted Answer

A price bubble is an increase in the pri

Question 16

If nominal GDP is $7,700 billion and M₁ is $1,000 billion, then velocity is

Accepted Answer

A)  10.7. 
B)  7.7. 
C)  7.1. 
D)  7.0. 
A)  10.7. 
B)  7.7. 
C)  7.1. 
D)  7.0.

Question 17

Many banks offer accounts featuring "Automatic Transfer from Savings" allowing customers to overdraw checking accounts and the bank will transfer enough funds to cover the check automatically.Most likely, what is the effect of this feature on velocity?

Accepted Answer

A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to saving accounts. 
A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to saving accounts.

Question 18

Although asset price bubbles seem obvious after the fact, it is much more difficult to draw such a conclusion before the fact.

Accepted Answer

A) True 
 B)False

Question 19

Critics of macroeconomic stabilization policies argue that

Accepted Answer

A)  economists are unable to influence policy. 
B)  stabilization policies often do more harm than good. 
C)  stabilization theory has no practical effect. 
D)  policy makers need practical advice, not theory. 
A)  economists are unable to influence policy. 
B)  stabilization policies often do more harm than good. 
C)  stabilization theory has no practical effect. 
D)  policy makers need practical advice, not theory.

Question 20

The longer and more unpredictable that the policy lags are, the stronger the case for active stabilization policy.

Accepted Answer

A) True 
 B)False

Exam 32: The Debate over Monetary and Fiscal Policy

During the financial crisis of 2007-2009, the proper policy response was

Advocates of stabilization policy prefer quick medicine for economic ills.This leads some observers to favor fiscal policy while others endorse monetary policy.Describe the positions of each side in the debate and what seems to be the current consensus.

As the price level rises, the demand for money

Which of the following will increase the velocity of circulation?

During the financial crisis of 2007-2009, why did the Federal Reserve begin to utilize various types of unconventional monetary policy?

If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation?

Are forecasts of economic activity accurate enough to permit "fine-tuning" of the economy?

Attempts to keep the economy always within a hair's breadth of full employment is called

Which of the following policies would a Keynesian expect to produce the largest decrease in income?

Nominal GDP is proportional to money stock when

If the demand for money is insensitive to the interest rate, then the most effective expansionary policy would be

When comparing the Keynesian and monetarist approaches, the only substantive difference is that

More economists adopted monetarism in the early 1990s.

Monetarists believe that the aggregate supply curve is relatively steep in the short and long runs.This means they expect

Describe an asset price bubble and give examples.Explain why it is extremely difficult if not impossible for the Federal Reserve to prevent such bubbles.

If nominal GDP is $7,700 billion and M₁ is $1,000 billion, then velocity is

Many banks offer accounts featuring "Automatic Transfer from Savings" allowing customers to overdraw checking accounts and the bank will transfer enough funds to cover the check automatically.Most likely, what is the effect of this feature on velocity?

Although asset price bubbles seem obvious after the fact, it is much more difficult to draw such a conclusion before the fact.

Critics of macroeconomic stabilization policies argue that

The longer and more unpredictable that the policy lags are, the stronger the case for active stabilization policy.

What Is Economics?

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: An Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: The Importance of Marginal Analysis

Securities: Business Finance, and the Economy: The Tail that Wags the Dog?

The Firm and the Industry under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets I: The Price System

The Shortcomings of Free Markets

The Market's Prime Achievement: Innovation and Growth

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: The Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation?

Bringing in the Supply Side: Unemployment and Inflation?

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

Budget Deficits in the Short and Long Run

The Trade-Off between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder?

Exchange Rates and the Macroeconomy

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