Exam 19: Current Issues in Macro Theory and Policy

If the velocity of money remains unchanged and the economy is at full employment, then the equation of exchange predicts that a rise in the money supply will:

Mainstream economists identify wage-price rigidities as one cause of economic instability.

The theory of rational expectations calls for monetary policy rules because:

The notion that the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP best describes the:

According to the Taylor rule, if real GDP rises by 1 percent above potential GDP, the Fed should raise:

If the economy's real output is growing by 2.5 percent a year, then in order to maintain price stability a monetarist would most likely recommend that money supply should be:

According to rational expectations theory, the cause of observed instability in the private economy would most likely be due to:

The key implication for macroeconomic instability is that insider-outside relationships in the labor market:

Mainstream economists think that the best way to stabilize the economy is to shift aggregate supply.

Dividing nominal gross domestic product (GDP) by the money supply (M) is a way to obtain the:

An efficiency wage is an above-market wage that spurs greater work effort and gives the firm more profits because of lower wage costs per unit of output.

Monetarists believe that a monetary policy rule will tend to lead to inflation.

Refer to the above graph. Assume that the economy is in initial equilibrium where AD₁ intersects AS₁. If there is a decrease in aggregate demand to AD₂, then according to mainstream economists, if prices and wages are not flexible, this will result in an equilibrium at point:

New classical economists see the economy as incapable of self-correction when disturbed and pushed away from its full-employment level of real output.

One of the basic assumptions of rational expectations theory is that:

Real-business-cycle theory focuses on factors affecting:

According to mainstream economists the basic determinant of real output, employment, and the price level is:

Mainstream economists believe that economic instability is primarily due to unexpected changes in consumer spending.

Monetarists base their assessment of the speed of adjustment for self-correction in the economy on:

Which of the following is the basic equation underlying aggregate expenditures?