Question 1

In the rational expectations view, the best approach to fiscal policy is for the government to:

Accepted Answer

A)  Cut taxes 
B)  Balance its budget 
C)  Eliminate transfer payments 
D)  Fix government spending 
A)  Cut taxes 
B)  Balance its budget 
C)  Eliminate transfer payments 
D)  Fix government spending

Question 2

Monetarists take the position that monetary policy:

Accepted Answer

A)  Is limited by the crowding-out effect on investment 
B)  Is enhanced by the crowding-out effect on investment 
C)  Should be based on rules rather than discretion 
D)  Should be based on discretion rather than rules 
A)  Is limited by the crowding-out effect on investment 
B)  Is enhanced by the crowding-out effect on investment 
C)  Should be based on rules rather than discretion 
D)  Should be based on discretion rather than rules

Question 3

New classical economics suggests that in the long-run changes in aggregate demand will cause:

Accepted Answer

A)  Only short-run changes in output and employment 
B)  Long-run changes in output and employment 
C)  Only short-run changes in the price level 
D)  No change in output and employment 
A)  Only short-run changes in output and employment 
B)  Long-run changes in output and employment 
C)  Only short-run changes in the price level 
D)  No change in output and employment

Question 4

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, then according to new classical economics the economy will self-correct with a:

Accepted Answer

A)  Movement from point B to point A 
B)  Movement from point A to point B 
C)  Shift from AS1 to AS2 
D)  Shift from AD2 to AD1 
A)  Movement from point B to point A 
B)  Movement from point A to point B 
C)  Shift from AS1 to AS2 
D)  Shift from AD2 to AD1

Question 5

If the money supply growth is set at a slower pace than the growth of real GDP, then inflation will occur.

Accepted Answer

A) True 
 B)False

Question 6

A mainstream criticism of the rational expectations theory is that:

Accepted Answer

A)  The theorists confuse correlation with causation in interpreting the empirical evidence 
B)  People do not make consistent forecasting errors which can be exploited by policy makers 
C)  Many markets are not purely competitive and do not adjust rapidly to changing market conditions 
D)  The data indicate that economic policy does not affect real GDP and employment 
A)  The theorists confuse correlation with causation in interpreting the empirical evidence 
B)  People do not make consistent forecasting errors which can be exploited by policy makers 
C)  Many markets are not purely competitive and do not adjust rapidly to changing market conditions 
D)  The data indicate that economic policy does not affect real GDP and employment

Question 7

Monetarists and rational expectation theorists believe that cost-push inflation as impossible in the long run in the absence of excessive money supply growth.

Accepted Answer

A) True 
 B)False

Question 8

Mainstream economists contend that the a policy rule based on the equation of exchange breaks down because:

Accepted Answer

A)  There is a tight relationship between the money supply and nominal GDP 
B)  Velocity is more variable and unpredictable than expected 
C)  The money supply increases at a constant, not a variable rate 
D)  Nominal GDP is directly related to changes in the price level 
A)  There is a tight relationship between the money supply and nominal GDP 
B)  Velocity is more variable and unpredictable than expected 
C)  The money supply increases at a constant, not a variable rate 
D)  Nominal GDP is directly related to changes in the price level

Question 9

The average number of times per year that a dollar bill is used to pay for final goods and services is the:

Accepted Answer

A)  Monetary rule 
B)  Velocity of money 
C)  Asset demand for money 
D)  Transactions demand for money 
A)  Monetary rule 
B)  Velocity of money 
C)  Asset demand for money 
D)  Transactions demand for money

Question 10

A coordination failure is said to occur when people do not reach a mutually beneficial equilibrium because they lack some way to jointly coordinate their actions to achieve it.

Accepted Answer

A) True 
 B)False

Question 11

If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchanged at $4,800 billion, then the income velocity of money:

Accepted Answer

A)  Rises by 33 percent 
B)  Falls by 33 percent 
C)  Rises from 6 to 8 
D)  Falls from 8 to 6 
A)  Rises by 33 percent 
B)  Falls by 33 percent 
C)  Rises from 6 to 8 
D)  Falls from 8 to 6

Question 12

The equation of exchange is:

Accepted Answer

A)  AS = AD 
B)  Saving = Income - Spending 
C)  MV = PQ 
D)  AD = C + Ig + G + Xn 
A)  AS = AD 
B)  Saving = Income - Spending 
C)  MV = PQ 
D)  AD = C + Ig + G + Xn

Question 13

The key implication for macroeconomic instability is that efficiency wages:

Accepted Answer

A)  Contribute to the downward inflexibility of wages 
B)  Help reduce the downward inflexibility of wages 
C)  Increase the velocity of money 
D)  Reduce the velocity of money 
A)  Contribute to the downward inflexibility of wages 
B)  Help reduce the downward inflexibility of wages 
C)  Increase the velocity of money 
D)  Reduce the velocity of money

Question 14

If M is $800, P is $2, and Q is 1,200, then:

Accepted Answer

A)  Aggregate expenditures will be $1,600 
B)  Aggregate expenditures will be $960,000 
C)  V must be 3 
D)  V must be 1.5 
A)  Aggregate expenditures will be $1,600 
B)  Aggregate expenditures will be $960,000 
C)  V must be 3 
D)  V must be 1.5

Question 15

Which economic perspective would be most closely associated with the view that discretionary monetary policy is an effective force for stabilizing the economy?

Accepted Answer

A)  Monetarism 
B)  Mainstream economics 
C)  Rational expectations 
D)  New classical economics 
A)  Monetarism 
B)  Mainstream economics 
C)  Rational expectations 
D)  New classical economics

Question 16

Assume that M is $200 billion and V is 6. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by:

Accepted Answer

A)  $140 billion 
B)  $180 billion 
C)  $220 billion 
D)  $260 billion 
A)  $140 billion 
B)  $180 billion 
C)  $220 billion 
D)  $260 billion

Question 17

Which of the following ideas is associated with mainstream economics?

Accepted Answer

A)  Capitalist economies tend to be stable 
B)  Monetary policy rules are desirable 
C)  Fiscal policy is a useful stabilization tool 
D)  Crowding-out of investment makes fiscal policy ineffective 
A)  Capitalist economies tend to be stable 
B)  Monetary policy rules are desirable 
C)  Fiscal policy is a useful stabilization tool 
D)  Crowding-out of investment makes fiscal policy ineffective

Question 18

An idea from monetarism which has been absorbed into mainstream macroeconomics would be the:

Accepted Answer

A)  Effects of aggregate supply shocks on the level of real output and the price level 
B)  Importance of the effects of changes in the money supply on the economy 
C)  Use of discretion rather than rules for guiding economic policy in the economy 
D)  Influence of real changes, such as in technology and resource availability, on the level of output 
A)  Effects of aggregate supply shocks on the level of real output and the price level 
B)  Importance of the effects of changes in the money supply on the economy 
C)  Use of discretion rather than rules for guiding economic policy in the economy 
D)  Influence of real changes, such as in technology and resource availability, on the level of output

Question 19

Which of the following is a likely result of firms paying efficiency wages?

Accepted Answer

A)  Lesser work effort 
B)  A lower wage rate 
C)  Increased job turnover 
D)  Reduced supervision costs 
A)  Lesser work effort 
B)  A lower wage rate 
C)  Increased job turnover 
D)  Reduced supervision costs

Question 20

The equation of exchange suggests that if the velocity of money and the quantity of goods and services are held constant, a(n):

Accepted Answer

A)  Decrease in the money supply will increase the price level 
B)  Increase in the money supply will decrease the price level 
C)  Increase in the money supply will increase the price level 
D)  Decrease in the money supply will have no effect on the price level 
A)  Decrease in the money supply will increase the price level 
B)  Increase in the money supply will decrease the price level 
C)  Increase in the money supply will increase the price level 
D)  Decrease in the money supply will have no effect on the price level

Exam 19: Current Issues in Macro Theory and Policy

In the rational expectations view, the best approach to fiscal policy is for the government to:

Monetarists take the position that monetary policy:

New classical economics suggests that in the long-run changes in aggregate demand will cause:

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, then according to new classical economics the economy will self-correct with a:

If the money supply growth is set at a slower pace than the growth of real GDP, then inflation will occur.

A mainstream criticism of the rational expectations theory is that:

Monetarists and rational expectation theorists believe that cost-push inflation as impossible in the long run in the absence of excessive money supply growth.

Mainstream economists contend that the a policy rule based on the equation of exchange breaks down because:

The average number of times per year that a dollar bill is used to pay for final goods and services is the:

A coordination failure is said to occur when people do not reach a mutually beneficial equilibrium because they lack some way to jointly coordinate their actions to achieve it.

If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchanged at $4,800 billion, then the income velocity of money:

The equation of exchange is:

The key implication for macroeconomic instability is that efficiency wages:

If M is $800, P is $2, and Q is 1,200, then:

Which economic perspective would be most closely associated with the view that discretionary monetary policy is an effective force for stabilizing the economy?

Assume that M is $200 billion and V is 6. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by:

Which of the following ideas is associated with mainstream economics?

An idea from monetarism which has been absorbed into mainstream macroeconomics would be the:

Which of the following is a likely result of firms paying efficiency wages?

The equation of exchange suggests that if the velocity of money and the quantity of goods and services are held constant, a(n):

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role and Government Failure

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Financial Economics

Extending the Analysis of Aggregate Supply

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

Filters

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, then according to new classical economics the economy will self-correct with a: