Question 1

The most likely advocates for a monetary rule would be:

Accepted Answer

A)  Monetarists 
B)  Real-business-cycle theorists 
C)  Mainstream economists 
D)  Supply-side economists 
A)  Monetarists 
B)  Real-business-cycle theorists 
C)  Mainstream economists 
D)  Supply-side economists

Question 2

According to the Taylor rule, when real GDP is equal to potential GDP and inflation is equal to its target rate of 2 percent, the Federal fund rate should:

Accepted Answer

A)  Be increased by 10 percent 
B)  Be decreased by 10 percent 
C)  Remain at about 4 percent 
D)  Remain at about 8 percent 
A)  Be increased by 10 percent 
B)  Be decreased by 10 percent 
C)  Remain at about 4 percent 
D)  Remain at about 8 percent

Question 3

Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability?

Accepted Answer

A)  Monetarism 
B)  Mainstream economics 
C)  Real business cycle theory 
D)  Rational expectations theory 
A)  Monetarism 
B)  Mainstream economics 
C)  Real business cycle theory 
D)  Rational expectations theory

Question 4

An efficiency wage is one that:

Accepted Answer

A)  Increases the velocity of money 
B)  Minimizes the firm's labor cost per unit of output 
C)  Results from significant changes in technology and labor 
D)  Is imposed by government to guarantee workers a living wage 
A)  Increases the velocity of money 
B)  Minimizes the firm's labor cost per unit of output 
C)  Results from significant changes in technology and labor 
D)  Is imposed by government to guarantee workers a living wage

Question 5

Mainstream economists think that:

Accepted Answer

A)  Market participants change their actions in response to anticipated price-level changes such that no change in real output occurs 
B)  The economy self-corrects when unanticipated events divert it from its full-employment level of real output 
C)  The downward inflexibility of wages and prices may leave the economy stuck in a costly recession for long periods 
D)  Significant changes in technology and resource availability cause macroeconomic instability 
A)  Market participants change their actions in response to anticipated price-level changes such that no change in real output occurs 
B)  The economy self-corrects when unanticipated events divert it from its full-employment level of real output 
C)  The downward inflexibility of wages and prices may leave the economy stuck in a costly recession for long periods 
D)  Significant changes in technology and resource availability cause macroeconomic instability

Question 6

Given the equation of exchange, if V is stable, an increase in M will necessarily increase:

Accepted Answer

A)  The demand for money 
B)  The price level 
C)  Nominal GDP 
D)  Real GDP 
A)  The demand for money 
B)  The price level 
C)  Nominal GDP 
D)  Real GDP

Question 7

Monetarists and rational-expectations theorists both favor policy rules and both argue against discretionary policy.

Accepted Answer

A) True 
 B)False

Question 8

In real-business-cycle theory, changes in the:

Accepted Answer

A)  Demand for money respond to changes in the supply of money 
B)  Supply of money respond to changes in the demand for money 
C)  Demand for money respond to changes in efficiency wages 
D)  Supply of money respond to changes in coordination failures 
A)  Demand for money respond to changes in the supply of money 
B)  Supply of money respond to changes in the demand for money 
C)  Demand for money respond to changes in efficiency wages 
D)  Supply of money respond to changes in coordination failures

Question 9

In the view of rational expectations theory:

Accepted Answer

A)  People make economic forecasts that are based on insider-outsider relationships and self-fulfilling prophecies 
B)  People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur 
C)  People form their expectations on present realities and only gradually change their expectations as experience unfolds 
D)  The economy does not respond quickly to changes in prices, which causes a mis-allocation of economic resources 
A)  People make economic forecasts that are based on insider-outsider relationships and self-fulfilling prophecies 
B)  People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur 
C)  People form their expectations on present realities and only gradually change their expectations as experience unfolds 
D)  The economy does not respond quickly to changes in prices, which causes a mis-allocation of economic resources

Question 10

The policy rule recommended by monetarists is that the money supply should be increased at the same rate as the potential growth in:

Accepted Answer

A)  Real GDP 
B)  Population 
C)  The level of prices 
D)  The velocity of money 
A)  Real GDP 
B)  Population 
C)  The level of prices 
D)  The velocity of money

Question 11

Refer to the graph above. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is an anticipated decrease in aggregate demand to AD2, then according to rational expectations theory, the path for adjustment runs from point:

Accepted Answer

A)  A to B to C 
B)  A to D to C 
C)  A directly to C 
D)  A directly to D 
A)  A to B to C 
B)  A to D to C 
C)  A directly to C 
D)  A directly to D

Question 12

In the mainstream view, the economic instability brought about by "oil shocks" works through changes in:

Accepted Answer

A)  Aggregate demand 
B)  Wage and price inflexibility 
C)  Money supply 
D)  Aggregate supply 
A)  Aggregate demand 
B)  Wage and price inflexibility 
C)  Money supply 
D)  Aggregate supply

Question 13

Rational expectations theory allows for temporary changes in output due to expansionary policy, whereas adaptive expectations theory holds that no such changes in output could occur.

Accepted Answer

A) True 
 B)False

Question 14

Monetarists argue that V in the equation of exchange is stable and thus a change in M will bring about a direct and proportional change in nominal GDP.

Accepted Answer

A) True 
 B)False

Question 15

To stabilize the economy, monetarists and rational-expectations economists:

Accepted Answer

A)  Would like a monetary rule to be adopted 
B)  Would like to see coordination failures eliminated 
C)  Recommend the use of discretionary fiscal policy 
D)  Recommend the use of discretionary monetary policy 
A)  Would like a monetary rule to be adopted 
B)  Would like to see coordination failures eliminated 
C)  Recommend the use of discretionary fiscal policy 
D)  Recommend the use of discretionary monetary policy

Question 16

According to rational expectations theory, instantaneous market adjustments make:

Accepted Answer

A)  Expansionary economic policy more effective in increasing output 
B)  Expansionary economic policy ineffective in increasing output 
C)  Economic policy more rational and more stable 
D)  Economic policy less rational and less stable 
A)  Expansionary economic policy more effective in increasing output 
B)  Expansionary economic policy ineffective in increasing output 
C)  Economic policy more rational and more stable 
D)  Economic policy less rational and less stable

Question 17

According to economist Milton Friedman, a major reason for macroeconomic instability is due to:

Accepted Answer

A)  Tax changes by the Federal government 
B)  Spending reductions by the Federal government 
C)  The discretionary monetary policy of the Federal Reserve 
D)  The issuance of bonds by the U.S. Treasury Department 
A)  Tax changes by the Federal government 
B)  Spending reductions by the Federal government 
C)  The discretionary monetary policy of the Federal Reserve 
D)  The issuance of bonds by the U.S. Treasury Department

Question 18

Mainstream economists support:

Accepted Answer

A)  Adoption of a monetary rule for increases in the money supply 
B)  Elimination of efficiency wages and insider-outsider relationships 
C)  The requirement that the government annually balance its budget 
D)  The use of discretionary monetary and fiscal policy for achieving major economic goals 
A)  Adoption of a monetary rule for increases in the money supply 
B)  Elimination of efficiency wages and insider-outsider relationships 
C)  The requirement that the government annually balance its budget 
D)  The use of discretionary monetary and fiscal policy for achieving major economic goals

Question 19

With inflation targeting, the Federal Reserve would be required to announce its targeted band for:

Accepted Answer

A)  Unemployment 
B)  Economic growth 
C)  Changes in the price level 
D)  Changes in the rate of taxation 
A)  Unemployment 
B)  Economic growth 
C)  Changes in the price level 
D)  Changes in the rate of taxation

Question 20

Economist Milton Friedman compared the economy to a car needing:

Accepted Answer

A)  An efficiency wage to make the labor markets work like an efficient engine 
B)  Regular price-level surprises, like oil changes, to make it run smoothly 
C)  A "steering wheel" that the government can use to guide it forward 
D)  A monetary rule to prevent a "backseat driver" from making it go off course 
A)  An efficiency wage to make the labor markets work like an efficient engine 
B)  Regular price-level surprises, like oil changes, to make it run smoothly 
C)  A "steering wheel" that the government can use to guide it forward 
D)  A monetary rule to prevent a "backseat driver" from making it go off course

Exam 19: Current Issues in Macro Theory and Policy

The most likely advocates for a monetary rule would be:

According to the Taylor rule, when real GDP is equal to potential GDP and inflation is equal to its target rate of 2 percent, the Federal fund rate should:

Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability?

An efficiency wage is one that:

Mainstream economists think that:

Given the equation of exchange, if V is stable, an increase in M will necessarily increase:

Monetarists and rational-expectations theorists both favor policy rules and both argue against discretionary policy.

In real-business-cycle theory, changes in the:

In the view of rational expectations theory:

The policy rule recommended by monetarists is that the money supply should be increased at the same rate as the potential growth in:

Refer to the graph above. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is an anticipated decrease in aggregate demand to AD2, then according to rational expectations theory, the path for adjustment runs from point:

In the mainstream view, the economic instability brought about by "oil shocks" works through changes in:

Rational expectations theory allows for temporary changes in output due to expansionary policy, whereas adaptive expectations theory holds that no such changes in output could occur.

Monetarists argue that V in the equation of exchange is stable and thus a change in M will bring about a direct and proportional change in nominal GDP.

To stabilize the economy, monetarists and rational-expectations economists:

According to rational expectations theory, instantaneous market adjustments make:

According to economist Milton Friedman, a major reason for macroeconomic instability is due to:

Mainstream economists support:

With inflation targeting, the Federal Reserve would be required to announce its targeted band for:

Economist Milton Friedman compared the economy to a car needing:

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 anticipated decrease in aggregate demand to AD₂, then according to rational expectations theory, the path for adjustment runs from point: