Question 1

New classical economists believe that:

Accepted Answer

A)  market failure on a large scale is possible. 
B)  disequilibrium in commodity markets demand government intervention. 
C)  people are completely aware and informed about everything that is happening. 
D)  wages are fixed in the short run. 
E)  people purposefully substitute non-labor activities for work during recession.

Question 2

_____ believe that a government that takes an active role in the economy may do more harm than good because economic policy operates with a long and variable lag.

Accepted Answer

A)  Traditional Keynesians 
B)  Keynesians 
C)  Monetarists 
D)  Classical economists 
E)  New classical economists

Question 3

Milton Friedman in his book on consumption function, discussed the importance of _____, rather than _____, to understand consumer spending.

Accepted Answer

A)  savings; expenditure 
B)  permanent income; current income 
C)  money supply; real output 
D)  wages; savings 
E)  real output; prices

Question 4

The figure given below represents the new classical long run and short run Phillips curve measuring inflation rate on vertical axis and unemployment rate on horizontal axis.
Figure 15.2
 
-Refer to the Figure 15.2. Assume the economy is currently at point C. According to the new classical school, an expected increase in government spending:

Accepted Answer

A)  would move the economy to point A. 
B)  would move the economy to point B. 
C)  would move the economy to point D. 
D)  would move the economy above point A. 
E)  would move the economy below point C.

Question 5

A by-product of the acceptance of the Keynesian school was the wide approval and practice of activist fiscal policy around the world.

Accepted Answer

A) True 
 B)False

Question 6

Who is the leading proponent of the monetarist theory?

Accepted Answer

A)  John Maynard Keynes 
B)  Paul Volcker 
C)  Adam Smith 
D)  Milton Friedman 
E)  Alan Greenspan

Question 7

Monetarists believe that:

Accepted Answer

A)  the government should follow a fixed rule to change money supply in response to business cycles. 
B)  the government should not use discretionary monetary policy to achieve its goals of economic growth and low inflation. 
C)  government intervention should be well thought out and should be used only during recessions. 
D)  government intervention in the economy makes business cycles disappear. 
E)  government intervention policies have only long-run effects.

Question 8

Monetarists argue that the long-run Phillips curve is negatively sloped.

Accepted Answer

A) True 
 B)False

Question 9

Traditional Keynesian economics assumes that prices are relatively flexible in response to changes in aggregate expenditures.

Accepted Answer

A) True 
 B)False

Question 10

The school of thought that assumes that real GDP is determined by aggregate supply, whereas the equilibrium price level is determined by aggregate demand is known as _____.

Accepted Answer

A)  neoclassical economics 
B)  classical economics 
C)  new Keynesian economics 
D)  Keynesian economics 
E)  Marxist economics

Question 11

According to new classical economics, fiscal policy can change equilibrium real GDP only if it changes the price level or one of the determinants of aggregate supply, and people expect this change.

Accepted Answer

A) True 
 B)False

Question 12

The _____ aggregate supply curve assumed by classical economists means that the equilibrium level of _____ is determined only by the aggregate supply curve.

Accepted Answer

A)  vertical; output 
B)  horizontal; price 
C)  upward-sloping; price 
D)  horizontal; output 
E)  downward-sloping; price

Question 13

The new Keynesians believe that the economy is not always in equilibrium because:

Accepted Answer

A)  unemployment is voluntary. 
B)  Federal Reserve policy is too restrictive. 
C)  government intervention destabilizes the economy. 
D)  wage and price rigidities exist. 
E)  inflation is too high.

Question 14

New classical economists advocate less government intervention than the new Keynesian school of thought.

Accepted Answer

A) True 
 B)False

Question 15

_____ school of thought would most likely be associated with the statement: "When wages are rigid, changes in output result in small changes in goods market prices and a relatively flat aggregate supply curve."

Accepted Answer

A)  The traditional Keynesian 
B)  The modern Keynesian 
C)  The Monetarist 
D)  The classical 
E)  The new classical

Question 16

Which of the following would explain wage rigidities?

Accepted Answer

A)  Inflexible long-term contracts 
B)  Inflation 
C)  The liquidity of financial assets 
D)  The reluctance of firms to lay off workers 
E)  High worker productivity

Question 17

According to the Keynesian school of thought, the economy is not self-regulating. That is, to achieve a satisfactory level of real GDP, the government often has to intervene by managing aggregate demand.

Accepted Answer

A) True 
 B)False

Question 18

New classical economists contend that both the short-run and long-run aggregate supply curves are vertical.

Accepted Answer

A) True 
 B)False

Question 19

Keynesian economists today favor a model in which the aggregate supply curve is relatively flat at low levels of real GDP and slopes downward as real GDP approaches its potential level.

Accepted Answer

A) True 
 B)False

Question 20

An economist from which school of thought would be most likely to say the following- "An increase in government expenditure will only increase inflation, because the aggregate supply curve is vertical."

Accepted Answer

A)  Neoclassical economics 
B)  Traditional classical economics 
C)  New Keynesian economics 
D)  Keynesian economics 
E)  Marxist economics

Exam 15: Macroeconomic Viewpoints: New Keynesian, Monetarist, and New Classical

New classical economists believe that:

_____ believe that a government that takes an active role in the economy may do more harm than good because economic policy operates with a long and variable lag.

Milton Friedman in his book on consumption function, discussed the importance of _, rather than _, to understand consumer spending.

A by-product of the acceptance of the Keynesian school was the wide approval and practice of activist fiscal policy around the world.

Who is the leading proponent of the monetarist theory?

Monetarists believe that:

Monetarists argue that the long-run Phillips curve is negatively sloped.

Traditional Keynesian economics assumes that prices are relatively flexible in response to changes in aggregate expenditures.

The school of thought that assumes that real GDP is determined by aggregate supply, whereas the equilibrium price level is determined by aggregate demand is known as _____.

According to new classical economics, fiscal policy can change equilibrium real GDP only if it changes the price level or one of the determinants of aggregate supply, and people expect this change.

The _ aggregate supply curve assumed by classical economists means that the equilibrium level of _ is determined only by the aggregate supply curve.

The new Keynesians believe that the economy is not always in equilibrium because:

New classical economists advocate less government intervention than the new Keynesian school of thought.

_____ school of thought would most likely be associated with the statement: "When wages are rigid, changes in output result in small changes in goods market prices and a relatively flat aggregate supply curve."

Which of the following would explain wage rigidities?

According to the Keynesian school of thought, the economy is not self-regulating. That is, to achieve a satisfactory level of real GDP, the government often has to intervene by managing aggregate demand.

New classical economists contend that both the short-run and long-run aggregate supply curves are vertical.

Keynesian economists today favor a model in which the aggregate supply curve is relatively flat at low levels of real GDP and slopes downward as real GDP approaches its potential level.

An economist from which school of thought would be most likely to say the following- "An increase in government expenditure will only increase inflation, because the aggregate supply curve is vertical."