Exam 19: Current Issues in Macro Theory and Policy

The idea that business fluctuations are primarily caused by factors affecting aggregate supply rather than aggregate demand is a central tenet of:

Refer to the graph above. Assume that the economy is initially in equilibrium at the intersection of AD₁ and AS₁. Suppose that there is economic growth which shifts AS₁ to AS₂. Mainstream economists would suggest that the application of a monetary rule to keep prices constant might produce demand-pull inflation because the investment spending might:

Real-business cycle theory views changes in resource availability and technology as shifting aggregate demand and thus causing macroeconomic instability.

From a rational expectations perspective, an easy money policy is likely to be completely:

From the mainstream perspective, instability in the economy is due to:

In the monetarist view:

Rational expectations theory suggests that people make consistent forecasting errors regarding the effects of policy.

The Taylor rule is a:

Which of the following contributes to the downward inflexibility of wages, according to mainstream economists?

Refer to the graph above. Assume that the economy is in initial equilibrium where AD₁ intersects AS₁. If there is an unanticipated increase in aggregate demand and the economy self-corrects, then the adaptive-expectations adjustment path would go from point:

Which of the following economic perspectives would be most opposed to a balanced-budget rule?

In real-business-cycle theory, real output can change without a change in the price level.

Rational expectations theory considers the aggregate:

Monetarists recommend that the supply of money should be increased at a constant rate each year, proportionate with the long-run growth of real output.

Refer to the graph above. Assume that the economy is initially in equilibrium at the intersection of AD₁ and AS₁. Suppose that there is economic growth which shifts AS₁ to AS₂. With the shift from AS₁ to AS₂, the monetary rule would call for an increase in the money supply such that:

If M is $1,000, P is $8, and Q is 500, then V must be 6.

Refer to the graph above. Assume that the economy is in initial equilibrium where AD₁ intersects AS₁. If there is an unanticipated decrease in aggregate demand to AD₂, then in the view of new classical economics the economy will:

Mainstream economists contend that monetary policy tends to be destabilizing, in contrast to monetarists who believe that monetary policy is a stabilizing factor.

In rational expectations theory, a fully anticipated change in aggregate demand or in the price level results in no change in real output.

One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might: