Question 1

Adherents of the traditional monetary rule advocate that the

Accepted Answer

A)  functional finance approach to fiscal policy be adopted.
B)  money supply should be increased by a constant rate year after year.
C)  money supply should be reduced during inflation and increased during recession.
D)  money supply should be increased during inflation and reduced during recession.E) A) and B)
F) A) and C)

Question 2

(Last Word)  Suppose that a prediction market for nominal GDP is predicting 6 percent growth in nominal GDP, but the Fed's desired rate of nominal GDP growth is 5 percent.According to the market monetarist view, the Fed should

Accepted Answer

A)  employ a restrictive monetary policy until the predictions market adjusts nominal GDP growth predictions down to a 5 percent growth rate.
B)  employ an expansionary monetary policy until the predictions market adjusts nominal GDP growth predictions down to a 5 percent growth rate.
C)  do nothing, as the market will adjust itself.
D)  adhere to a strict monetary rule of 5 percent growth in the money supply.E) A) and D)
F) B) and C)

Question 3

To determine the velocity of money, you would need to know

Accepted Answer

A)  nominal GDP and real GDP.
B)  the money supply and the price level.
C)  nominal GDP and the money supply.
D)  nominal GDP and the interest rate.E) C) and D)
F) A) and D)

Question 4

Which of the following groups of economists believe that cost-push inflation is impossible in the long run without excessive monetary growth?

Accepted Answer

A)  mainstream economists and monetarists
B)  mainstream economists and rational expectations economists
C)  monetarists and rational expectations economists
D)  mainstream economists, monetarists, and rational expectations economistsE) B) and C)
F) A) and D)

Question 5

Mainstream macroeconomics has embraced the

Accepted Answer

A)  rational expectations view that stabilization policy is totally ineffective.
B)  monetarist view that the Fed should increase the money supply at a fixed annual rate.
C)  rational expectations view that expectations can shift the aggregate demand and aggregate supply curves.
D)  monetarist view that an increase in government spending crowds out an equal amount of investment spending.E) A) and B)
F) A) and C)

Question 6

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.E) A) and C)
F) B) and C)

Question 7

Assume that many households and businesses reduce their spending only because they expect other households and consumers to reduce their spending.Also suppose that all households and consumers would be better off if they did not reduce their spending.This situation best describes the

Accepted Answer

A)  real-business-cycle theory.
B)  rational expectations theory.
C)  concept of coordination failures.
D)  adaptive expectations theory.E) None of the above
F) B) and D)

Question 8

(Consider This)  The 2007-2009 recession began with reductions in investment and consumption spending, precipitated by a financial crisis.This explanation for the recession is consistent with

Accepted Answer

A)  the monetarist view of macroeconomic instability.
B)  the rational expectations view of macroeconomic instability.
C)  the mainstream view of macroeconomic instability.
D)  none of these views of macroeconomic instability.E) C) and D)
F) B) and C)

Question 9

Monetarists argue that the relationship between

Accepted Answer

A)  the quantity of money the public wants to hold and the level of GDP is not stable.
B)  the quantity of money the public wants to hold and the level of GDP is stable.
C)  the quantity of money the public wants to hold and the level of saving is stable.
D)  velocity and the interest rate varies directly.E) A) and B)
F) A) and C)

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Rational expectations theory assumes that both product and resource markets are competitive and that wages and prices are flexible.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following perspectives believes that both wages and prices are stuck in the immediate short run and that prices are inflexible downward but flexible upward?

Accepted Answer

A)  monetarism
B)  mainstream economists
C)  rational expectations economists
D)  None of these-they all see wages and prices as flexible.E) B) and C)
F) B) and D)

Question 13

Within the aggregate demand-aggregate supply framework, a strict interpretation of rational expectations theory suggests that a change in aggregate

Accepted Answer

A)  demand will have a large effect on the price level but a small effect on output.
B)  demand will have a small effect on the price level but a large effect on output.
C)  demand will have a large effect on the price level but no effect on output.
D)  supply will have a large effect on the price level but no effect on output.E) A) and C)
F) B) and C)

Question 14

From a monetarist perspective, an expansionary fiscal policy's effect on aggregate demand would be offset by

Accepted Answer

A)  the buying of government securities by the Treasury.
B)  the selling of government securities by the Treasury.
C)  a cut in the Federal funds rate.
D)  a cut in the discount rate.E) C) and D)
F) A) and C)

Question 15

If the economy diverges from its full-employment output, new classical economics would suggest that

Accepted Answer

A)  a change in the velocity of money would be all that is needed to return it to its full-employment output.
B)  an improvement in insider-outsider relationships is all that is needed to return it to its full-employment output.
C)  an efficiency wage in the economy would return it to its full-employment output.
D)  internal mechanisms within the economy would automatically return it to its full-employment output.E) C) and D)
F) B) and C)

Question 16

Which of the following pairs helps explain why self-correction from a decline in aggregate demand in the economy may be slow rather than rapid?

Accepted Answer

A)  theory of compensation wage differentials; theory of derived demand for labor
B)  efficiency wage theory; insider-outsider theory
C)  insider-outsider theory; principle-agent problem
D)  externalities; efficiency wage theoryE) B) and C)
F) None of the above

Question 17

Monetarists argue that when expansionary fiscal policy is financed through borrowing,

Accepted Answer

A)  monetary policy becomes tight.
B)  private investment spending will be crowded out.
C)  the demand for money and interest rates both decrease.
D)  the investment demand curve becomes relatively steep.E) B) and C)
F) All of the above

Question 18

Suppose aggregate demand in the economy sharply declines.Mainstream economists say that the price level (at least for a time)  will and real output will .

Accepted Answer

A)  decrease; remain constant
B)  increase; remain constant
C)  remain constant; decrease
D)  remain constant; increaseE) A) and D)
F) B) and D)

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Mainstream economists say that recessions are unlikely to occur today because prices and wages are highly flexible downward.

Accepted Answer

A) True 
 B)False

Exam 39: Current Issues in Macro Theory and Policy

Within the aggregate demand-aggregate supply framework, a strict interpretation of rational expectations theory suggests that a change in aggregate

Correct AnswerverifiedShow Answer

(Last Word) Suppose that a prediction market for nominal GDP is predicting 6 percent growth in nominal GDP, but the Fed's desired rate of nominal GDP growth is 5 percent.According to the market monetarist view, the Fed should

Correct AnswerverifiedShow Answer

Assume that many households and businesses reduce their spending only because they expect other households and consumers to reduce their spending.Also suppose that all households and consumers would be better off if they did not reduce their spending.This situation best describes the

Correct AnswerverifiedShow Answer

Which of the following groups of economists believe that cost-push inflation is impossible in the long run without excessive monetary growth?

Correct AnswerverifiedShow Answer

Rational expectations theory assumes that both product and resource markets are competitive and that wages and prices are flexible.

Correct AnswerverifiedShow Answer

(Consider This) The 2007-2009 recession began with reductions in investment and consumption spending, precipitated by a financial crisis.This explanation for the recession is consistent with

Correct AnswerverifiedShow Answer

Which of the following perspectives believes that both wages and prices are stuck in the immediate short run and that prices are inflexible downward but flexible upward?

Correct AnswerverifiedShow Answer

Which of the following pairs helps explain why self-correction from a decline in aggregate demand in the economy may be slow rather than rapid?

Correct AnswerverifiedShow Answer

If the economy diverges from its full-employment output, new classical economics would suggest that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Monetarists argue that the relationship between

Correct AnswerverifiedShow Answer

Mainstream macroeconomics has embraced the

Correct AnswerverifiedShow Answer

Monetarists argue that when expansionary fiscal policy is financed through borrowing,

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To determine the velocity of money, you would need to know

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Adherents of the traditional monetary rule advocate that the

Correct AnswerverifiedShow Answer

From a monetarist perspective, an expansionary fiscal policy's effect on aggregate demand would be offset by

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Mainstream economists say that recessions are unlikely to occur today because prices and wages are highly flexible downward.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose aggregate demand in the economy sharply declines.Mainstream economists say that the price level (at least for a time) will and real output will .

Correct AnswerverifiedShow Answer

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