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Refer to the graph. Assume that the economy is in initial equilibrium where AD A D _ { 1 } intersects A A S _ { 1 } . If There is an unanticipated increase in aggregate demand, then according to new classical Economics, the economy will self-correct with a A) movement from point B to point A. B) movement from point A to point B. C) shift from A \mathrm { AS } _ { 1 } \text { to } A S _ { 2 } D) shift from AD A D _ { 2 } \text { to } A D _ { 1 } Refer to the graph. Assume that the economy is in initial equilibrium where AD AD1A D _ { 1 } intersects A AS1A S _ { 1 } . If There is an unanticipated increase in aggregate demand, then according to new classical Economics, the economy will self-correct with a


A) movement from point B to point A.
B) movement from point A to point B.
C) shift from A AS1 to AS2\mathrm { AS } _ { 1 } \text { to } A S _ { 2 }
D) shift from AD AD2 to AD1A D _ { 2 } \text { to } A D _ { 1 }

E) C) and D)
F) A) and B)

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Assume there is an increase in government spending financed by government borrowing. With a specific money supply, the consequent


A) contractionary impact might be lessened by the resulting increase in the interest rate.
B) expansionary impact might be lessened by the resulting increase in the interest rate.
C) contractionary impact might be enhanced by the resulting decline in the interest rate.
D) expansionary impact might be enhanced by the resulting decline in the interest rate.

E) All of the above
F) A) and D)

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In the monetarist equation of exchange, MV is the monetarist counterpart of


A) money supply.
B) aggregate expenditures.
C) total saving.
D) government spending.

E) B) and D)
F) B) and C)

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A mainstream criticism of rational expectations theory is that


A) the theorists confuse correlation with causation in interpreting the empirical evidence.
B) people do not make consistent forecasting errors that can be exploited by policymakers.
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.

E) B) and D)
F) All of the above

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Crowding-out results from


A) an increase in the supply of money and a decrease in the velocity of money.
B) a decrease in the supply of money and an increase in the velocity of money.
C) the inverse relationship between the supply of money and nominal GDP.
D) deficit financing that increases interest rates and reduces investment.

E) A) and B)
F) A) and D)

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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


A) rises by 33 percent.
B) falls by 33 percent.
C) rises from 6 to 8.
D) falls from 8 to 6.

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

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Which monetarist idea has been absorbed into mainstream macroeconomics?


A) The net export effect has a stronger effect on fiscal policy than monetary policy.
B) Cuts in tax rates significantly increase the productive capacity of the economy over the historical averages.
C) Excessive growth in the money supply over long periods leads to inflation.
D) The federal funds rate is a more important monetary target than the money supply.

E) A) and D)
F) None of the above

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According to monetarists, discretionary monetary policy has been a major source of economic instability.

A) True
B) False

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One of the basic assumptions of rational expectations theory is that


A) people can anticipate the future effects of policy changes and the actions they take may offset the effects of economic policy.
B) people are not able to assess the future effects of policy changes, so government can use economic policy effectively.
C) markets are not very competitive and fail to adjust quickly to changes in demand and supply.
D) people expect government to solve the major unemployment and inflation problems facing the nation and behave accordingly.

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

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The equation underlying the mainstream view of macroeconomics is


A) MV=PQM V = P Q
B) Ca+Ig+Xn+G= GDP. C _ { a } + I _ { g } + X _ { n } + G = \text { GDP. }
C) S=a−bYS = a - b Y
D) GDP=P×Q\mathrm { GDP } = P \times Q

E) A) and D)
F) A) and C)

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Which of the following is a component of the equation of exchange?


A) consumption
B) the interest rate
C) investment
D) the velocity of money

E) A) and B)
F) None of the above

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

A) True
B) False

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A) self-correct through a shift in AS, which brings output back to Q \mathrm { Q } _ { 1 } . B) self-correct through a shift in AD, which brings output back to Q \mathrm { Q } _ { 1 } . C) need the government to implement expansionary policy in order to bring output back to Q _ { 1 } . D) need the government to implement contractionary policy in order to bring output back to \mathrm { Q } _ { 1 } \text {. }


A) self-correct through a shift in AS, which brings output back to Q Q1.\mathrm { Q } _ { 1 } .
B) self-correct through a shift in AD, which brings output back to Q Q1.\mathrm { Q } _ { 1 } .
C) need the government to implement expansionary policy in order to bring output back to
Q1.Q _ { 1 } .
D) need the government to implement contractionary policy in order to bring output back to
Q1. \mathrm { Q } _ { 1 } \text {. }

E) B) and C)
F) None of the above

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A) A D _ { 1 } \text { would shift to } A D _ { 2 } \text {. } B) A D _ { 1 } \text { would shift to } A D _ { 3 } \text {. } C) A D _ { 1 } \text { would shift to } A D _ { 4 } \text {. } D) \mathrm { AS } _ { 2 } \text { would shift to } \mathrm { AS } _ { 1 } \text {. }


A) AD1 would shift to AD2. A D _ { 1 } \text { would shift to } A D _ { 2 } \text {. }
B) AD1 would shift to AD3. A D _ { 1 } \text { would shift to } A D _ { 3 } \text {. }
C) AD1 would shift to AD4. A D _ { 1 } \text { would shift to } A D _ { 4 } \text {. }
D) AS2 would shift to AS1. \mathrm { AS } _ { 2 } \text { would shift to } \mathrm { AS } _ { 1 } \text {. }

E) B) and C)
F) A) and D)

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The "real" factors in the real-business-cycle theory include resource availability and technology.

A) True
B) False

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The mainstream view is that macro instability is caused by the volatility of the money supply, which constantly shifts the aggregate demand curve around.

A) True
B) False

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The equation of exchange indicates that


A) MQ equals VP. M Q \text { equals } V P \text {. }
B) the velocity of money and the supply of money vary proportionately with one another.
C) other things being equal, an increase in V will increase P and/or Q. P \text { and/or } Q \text {. }
D) other things being equal, M and P are inversely related.

E) B) and D)
F) All of the above

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


A) real GDP.
B) population.
C) the level of prices.
D) the velocity of money.

E) B) and D)
F) C) and D)

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The traditional monetary rule is the idea that


A) the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP.
B) the annual rate of increase in the money supply should be equal to the long-term increase in the price level.
C) an expansionary fiscal policy should always be accompanied by an easy monetary policy.
D) monetary policy only affects the economy 6 to 9 months after the money supply is changed.

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

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Most mainstream macroeconomists oppose a strict requirement to balance the federal budget annually because they conclude that such a requirement would


A) increase real interest rates and drive out investment spending.
B) eliminate monetary policy as a stabilization tool.
C) force government to undertake expansionary fiscal policy during inflation and contractionary fiscal policy during recession.
D) expand the size of the federal government.

E) B) and D)
F) B) and C)

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