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Q: 1. In the classical model, it is thought that the long-run: A. and short-run aggregate supply curves are both upward sloping. B. aggregate supply curve

1.


In the classical model, it is thought that the long-run:

A.

and short-run aggregate supply curves are both upward sloping.

B.

aggregate supply curve is vertical and the short-run aggregate supply curve is upward sloping.

C.

and short-run aggregate supply curves are both vertical.

D.

aggregate supply curve is upward sloping and the short-run aggregate supply curve is vertical.

E.

aggregate supply curve is upward sloping and the short-run aggregate supply curve is downward sloping.

2.


Politicians have an incentive to push the unemployment rate below the natural rate of unemployment right before their re-election because:

A.

the expansionary monetary policy is used to finance the political campaigns.

B.

the political benefits are immediate and the economic costs are delayed.

C.

the Phillips curve is horizontal in the long run.

D.

the opportunistic seignorage gains are very large.

E.

the contractionary fiscal policy increases political contributions.

3.


Politicians may like moderate inflation in an election year since the:

A.

increase in aggregate supply serves to increase employment.

B.

decrease in aggregate supply serves to decrease employment.

C.

decrease in aggregate demand serves to decrease output.

D.

increase in aggregate demand serves to increase employment.

E.

increase in aggregate demand serves to decrease output.

4.


Which of the following years is often described as the worst year of the Great Depression?

A.

1913

B.

1933

C.

1953

D.

1973

E.

1863

5.


Adam is an economist who believes that in the long run, all prices are flexible and that any increase in the money supply will lead only to inflation, not an increase in aggregate output. Because the economy would self-correct to long-run equilibrium output, there is no role for either fiscal or monetary policy. Adam is best described as a _____.

A.

supply-side economist

B.

Keynesian economist

C.

classical economist

D.

Monetarist

E.

rational expectations economist

6.


According to the classical model:

A.

the aggregate supply curve is horizontal.

B.

increases in the money supply lead to proportional increases in the price level, but no change in real output.

C.

increases in the money supply lead to proportional changes in output, but no change in the price level.

D.

the long run is best described by the saying, “we are all dead in the long run”.

E.

the aggregate supply curve is upward sloping in the long run.

7.


In the classical model of the price level, prices are _________, and the short-run aggregate supply curve is vertical. As a result, a decrease in the money supply leads to _________ in the aggregate price level.

A.

sticky; a more than proportional decrease

B.

flexible; an equal proportional decrease

C.

sticky; a more than proportional increase

D.

flexible; an equal proportional increase

E.

flexible; a less than proportional decrease

8.


Classical macroeconomics was based largely on the foundation of:

A.

flexible wages and prices.

B.

persistent unemployment.

C.

government intervention in the market.

D.

Adam Smith's model of imperfectly competitive markets.

E.

sticky wages and prices.

9.


The theory that dominated economic thinking up to the 1930s was:

A.

monetarism.

B.

classical economics.

C.

Keynesian economics.

D.

rational expectations theory.

E.

real business cycle theory.

10.


The school of economics that dominated economic thinking prior to the Great Depression was the:

A.

business cycle theorists.

B.

classical school.

C.

post-Keynesian school.

D.

Marxists.

E.

monetarists.

11.


Which of the following is a characteristic of the classical school of economics?

A.

It emphasizes the short run.

B.

It emphasizes the flexibility of wages and prices.

C.

Potential output is a problem since the economy cannot achieve it on its own.

D.

It advocates the use of discretionary fiscal policy.

E.

It advocates that recessionary gaps can be quickly fixed with government intervention.

12.


If wages and prices are perfectly flexible, a decrease in aggregate demand will cause a(n):

A.

increase in the price level and unemployment.

B.

decrease in the price level and employment.

C.

increase in the price level and no change in employment.

D.

decrease in the price level and no change in employment.

E.

decrease in the price level and decrease in unemployment

13.


In the classical model, an increase in the money supply leads, other things equal:

A.

to an equal proportional rise in the aggregate output, with no effect on the aggregate price level.

B.

to an equal proportional fall in the aggregate price level, with no effect on aggregate output.

C.

to an equal proportional rise in the aggregate price level, with no effect on aggregate output.

D.

to an equal proportional fall in the aggregate output, with no effect on aggregate price level.

E.

to an equal proportional rise in the aggregate price level, with an equal proportional rise on aggregate output.

14.


In the classical model, an increase in the money supply will result:

A.

in inflation only, without affecting the aggregate output.

B.

in economic expansion as the aggregate output will increase.

C.

in higher interest rates and lower investment and ultimately lower aggregate output.

D.

in recession only without affecting the aggregate price level.

E.

in inflation and an increase in aggregate output.

15.


The aggregate supply curve:

A.

is vertical in the short run, according to the classical economists, but according to Keynesian theory it is upward rising in the short run.

B.

is upward rising in the short run, according to the classical economists, but according to Keynesian theory it is vertical in the short run.

C.

is horizontal in the short run, according to Keynesian theory, but according to classical economists it is upward rising in the short run.

D.

is always vertical, according to Keynesian theory, but the classical economists believed it to be downward sloping in the long run.

E.

is vertical in the short run, according to Keynesian theory, but according to classical economists it is horizontal in the short run.

16.


Classical economic theory describes agricultural economies fairly well because:

A.

early agricultural economies used barter rather than money.

B.

the short-run aggregate supply curve in an agricultural economy is vertical.

C.

agricultural economies are immune to recessions.

D.

agricultural economies don't need fiscal policy.

E.

agricultural economies cannot be described with the tools of supply and demand analysis.

17.


The beginning of a recession is determined by the:

A.

National Bureau of Economic Research.

B.

Treasury Department.

C.

Federal Reserve.

D.

President.

E.

Council of Economic Advisors.

18.


The General Theory of Employment, Interest, and Money was written by:

A.

Adam Smith.

B.

Paul Samuelson.

C.

Joseph Schumpeter.

D.

John Maynard Keynes.

E.

Karl Marx

19.


According to Keynesian theory:

A.

the long-run and short-run aggregate supply curves are identical.

B.

a decrease in aggregate demand leads to decreases in output and prices.

C.

a decrease in aggregate demand will decrease prices, but not output.

D.

the short run is relatively unimportant.

E.

an economic recession will self-correct without policy intervention.

20.


Keynesian economics emphasizes ______ shifts in aggregate ______.

A.

long-run; demand

B.

long-run; supply

C.

short-run; demand

D.

short-run; supply

E.

long-run; supply and demand

21.


Keynesian economics emphasized that economic downturns could be due to:

A.

inflation.

B.

technological shocks.

C.

a decline in business confidence.

D.

deflation.

E.

lower interest rates.

22.


Keynes suggested:

A.

money is the prime factor affecting aggregate supply.

B.

money is the prime factor affecting aggregate demand.

C.

a variety of factors affect aggregate supply.

D.

a variety of factors affect aggregate demand.

E.

net exports is the prime factor affecting aggregate demand.

Figure 35-1: Classical Versus Keynesian Macroeconomics


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23.


Use the “Classical Versus Keynesian Macroeconomics” Figure 35-1. According to the classical view, if this economy shifts from AD2 to AD1, let's say due to a large increase in government spending, then:

A.

the price level will increase, but real GDP will decrease.

B.

the price level will increase, but real GDP will not change.

C.

the GDP will increase, but the price level will not change.

D.

both the GDP and the price level will decrease.

E.

the price level will decrease, but real GDP will not change.

24.


Which one of the following statements is TRUE?

A.

Keynes treated short-run macroeconomics as a minor issue.

B.

Keynes emphasized the short-run effects of shifts in aggregate demand on aggregate output, employment, and prices whereas the classical economists focused on the long-run determination of the aggregate price level.

C.

The classical economists believed that the short-run aggregate supply curve was upward sloping.

D.

The classical economists emphasized the short-run effects of shifts in aggregate demand on aggregate output, whereas Keynes focused on the long-run determination of the aggregate price level.

E.

Keynes saw no role for the government in affecting the business cycle.

25.


The groundbreaking book The General Theory of Employment, Money, and Interest was written by famed economist:

A.

Milton Friedman.

B.

John Maynard Keynes.

C.

Adam Smith.

D.

Alan Greenspan.

E.

Karl Marx

26.


According to a Keynesian economist, a recessionary gap should be fixed with:

A.

a monetary rule.

B.

supply-side tax cuts to stimulate investment and work.

C.

decreases in government spending.

D.

expansionary fiscal policy.

E.

Patience and a balanced budget.

27.


Christina is an economist who believes that shifts in aggregate demand cause both a change in real output and the price level. She believes that an economic recession will not necessarily self-correct in the long run, and therefore she believes that active fiscal and monetary policy is justified to smooth out the business cycle. Christina is best described as a _____.

A.

classical economist.

B.

Keynesian economist.

C.

supply-side economist.

D.

monetarist.

E.

rational expectations economist.

28.


According to Keynes, the remedy for a recessionary gap was straightforward. The solution was to:

A.

increase aggregate supply.

B.

increase aggregate demand.

C.

control big business.

D.

decrease government involvement.

E.

wait for the economy to self-correct.

29.


Keynes argued that the surest way to bring the economy out of the Great Depression was to:

A.

keep the economy in a liquidity trap until antitrust policy could be enforced.

B.

use expansionary fiscal policy.

C.

increase taxes and spend less.

D.

leave the economy alone, and flexible wages and prices would eventually lead to increases in income and employment.

E.

decrease the money supply to decrease interest rates and spur business investment.

30.


Macroeconomic policy activism:

A.

is the use of monetary and fiscal policy to smooth out the business cycle.

B.

is the primary theory of classical economics.

C.

gives Congress and the President sole responsibility for economic policy.

D.

advocates that all the people in a democracy should decide what type of economic policy is appropriate.

E.

advocates a strict monetary rule for slow growth of the money supply and output.

31.


Economic historians tend to agree that the main reason that the Great Depression ended was:

A.

effective monetary policy by the Fed under the leadership of Paul Volcker.

B.

the rise of Adolf Hitler in Germany in the 1930s.

C.

Winston Churchill's foreign policy.

D.

deficit spending in the United States to finance World War II.

E.

the population growth from the “baby boom”.

32.


Because Keynes's theory mostly stressed the short run, it:

A.

perceived the economy as being mostly self-adjusting.

B.

favored the use of monetary policy over fiscal policy.

C.

considered technological progress the answer to any economic slump.

D.

favored the use of fiscal policy over monetary policy.

E.

was very similar to the classical economic theories.

33.


Friedman and Schwartz's work A Monetary History of the United States 1867–1960 showed that the business cycle had historically been associated with fluctuations in:

A.

prices.

B.

interest rates.

C.

the money supply.

D.

business investment.

E.

income tax rates.

34.


A liquidity trap is a situation in which:

A.

fiscal policy becomes ineffective because of the high budget deficit.

B.

monetary policy becomes ineffective because the nominal interest rate is down against zero bond.

C.

the aggregate price level becomes downwardly sticky.

D.

increase in government spending drives out planned investment spending.

E.

high budget deficits crowd out exports to foreign consumers.

Scenario 35-1: The Velocity Equation

Suppose that real GDP equals 10 trillion dollars, that nominal GDP equals 20 trillion dollars, and that the aggregate price level equals 2.

35.


Use Scenario 35-1. Refer to the information provided. If the velocity of money is 2, the money supply is:

A.

$20 trillion.

B.

$10 trillion.

C.

$5 trillion.

D.

$40 trillion.

E.

$25 trillion.

Scenario 35-2: The Quantity Theory of Money

Suppose the money supply is equal to $10 billion and the velocity of money is 6.

36.


Use Scenario 35-2. Refer to the information provided. If the aggregate price level is 4, then the nominal GDP is:

A.

$15 billion.

B.

$60 billion.

C.

$20 billion.

D.

$10 billion.

E.

$40 billion.

37.


According to monetarism:

A.

Congress and the President should be responsible for controlling the money supply.

B.

output will grow steadily if the money supply grows at a steady rate.

C.

the Fed should vary the growth rate of the money supply on a monthly basis.

D.

changes in the money supply only affect the real output in the long run.

E.

if the money supply grows at a steady rate, potential GDP will grow at the same rate.

38.


Monetarism asserted that GDP will grow steadily if the:

A.

government keeps the deficit low.

B.

government runs a small budget surplus.

C.

money supply grows steadily.

D.

money supply grows faster than the growth rate of the economy.

E.

government spending grows at a steady rate.

39.


Monetarism suggests that:

A.

money should be backed by gold.

B.

the economy is unstable.

C.

monetary policy should be used to offset economic fluctuations.

D.

discretionary monetary policy does more harm than good.

E.

Congress and the President are most effective at conducting economic policy.

Figure 35-2: Fiscal Policy with a Fixed Money Supply


nar004-1.jpg

40.


Use the “Fiscal Policy with a Fixed Money Supply” Figure 35-2. Assume that this economy is at E1. Now government deficit spending is increased, but the Federal Reserve does NOT expand the money supply. According to this model:

A.

real GDP will expand just as much as if the Federal Reserve had expanded the money supply.

B.

real GDP will decrease because the Federal Reserve did not expand the money supply.

C.

real GDP will expand, but not as much as if the Federal Reserve had expanded the money supply.

D.

interest rates will decrease.

E.

real GDP will expand by more than it would have, if the Federal Reserve had expanded the money supply.

41.


Use the “Fiscal Policy with a Fixed Money Supply” Figure 35-2. Assume that this economy is at E2. Now government deficit spending is decreased, but the Federal Reserve expands the money supply. According to this model:

A.

real GDP will decrease just as much as it would if the Federal Reserve had not expanded the money supply.

B.

real GDP will decrease, but not as much as it would if the Federal Reserve had failed to expand the money supply.

C.

real GDP will expand, but not as much as it would if the Federal Reserve had not expanded the money supply.

D.

interest rates will increase.

E.

this combination of fiscal and monetary policy will crowd out private investment spending.

42.


Friedman argued that with a ______ money supply, velocity is so ______ that there's not much point in using monetary policy.

A.

steady increase in the; large

B.

constant; small

C.

steady increase in the; constant

D.

constant; large

E.

steady increase in the; volatile

43.


Friedman favored which of the following?

A.

activist monetary policy to stabilize the economy

B.

activist fiscal policy but coupled with a neutral monetary policy

C.

a monetary policy rule

D.

interest rate targeting

E.

a complete absence of activist monetary policy.

44.


The Fed moved away from a monetary growth rule because:

A.

the economy was unstable.

B.

the money supply was unstable.

C.

the velocity of money was unstable.

D.

interest rates were unstable.

E.

government spending was unstable.

45.


Monetarists argue that:

A.

the impact lag for monetary policy is short and predictable.

B.

stabilization policies may actually be destabilizing.

C.

the Federal Reserve System should use active monetary policy.

D.

active monetary policy should be used to reinforce active fiscal policy.

E.

the money supply should be fixed in the long run.

46.


Milton Friedman was a leader and major proponent of:

A.

monetarism.

B.

classical economics.

C.

Keynesian economics.

D.

rational expectations theory.

E.

real business cycle theory.

47.


A policy implication of monetarism is that:

A.

full employment will always be maintained.

B.

countercyclical policies have no effect on the economy.

C.

the growth of the money supply is caused by economic fluctuations.

D.

constant growth of the money supply is better than discretionary policies.

E.

the money supply is fixed in the short run and the long run.

48.


Monetarists argue that:

A.

the Federal Reserve System should allow the money supply to increase at a slow, steady annual rate.

B.

since velocity is unstable, a fixed annual increase in the money supply will exacerbate inflation in the long run.

C.

self-correction is less effective than activist monetary policy.

D.

fiscal policy should always be used before monetary policy.

E.

the economy will self-correct without activist monetary policy.

49.


Monetarists believe that:

A.

full employment will be the norm.

B.

countercyclical policies do not affect the economy.

C.

a fixed increase in the growth rate of the money supply is better than activist policies.

D.

discretionary monetary policy is better than a fixed growth rate of the money supply.

E.

a constant money supply will allow the economy to self-correct and smooth the business cycle.

50.


Ricardo is an economist who believes that short-run changes in aggregate demand affect aggregate output as well as the price level. He believes that there is a role for monetary policy in managing the economy, but he advocates a simple monetary rule that would increase the money supply at a constant rate to grow the economy. Ricardo is best described as a _____.

A.

Keynesian economist

B.

new classical economist

C.

supply-side economist

D.

monetarist

E.

rational expectations economist.

51.


The _____ hypothesis has been almost universally accepted among modern economists. This hypothesis is that macroeconomic policy should used be to stabilize the economy, as opposed to any attempt to permanently decrease the unemployment rate.

A.

natural rate

B.

political business cycle

C.

rational expectations

D.

real business cycle

E.

Phillips

52.


The Friedman–Phelps hypothesis claimed that the apparent trade-off between unemployment and inflation would NOT survive an extended period of:

A.

rising unemployment.

B.

rising prices.

C.

rising interest rates.

D.

increases in the money supply.

E.

rising national debt.

53.


The natural rate hypothesis:

A.

is now generally discredited.

B.

implies sharp limits on what macroeconomic policy can achieve.

C.

implies there is a long-run trade-off between inflation and unemployment.

D.

implies that there is no liquidity trap.

E.

implies that there an increase in government spending can permanently lower the unemployment rate.

54.


The political business cycle refers to:

A.

slowing down the economy in election years.

B.

keeping the economy on a constant growth path.

C.

speeding the economy up in election years.

D.

running surpluses in election years.

E.

contracting the money supply in election years.

55.


The Friedman–Phelps (natural rate. hypothesis made a strong prediction:

A.

that once inflation gets embedded in people's expectation, the unemployment and inflation will have a trade-off.

B.

that the unemployment and inflation trade-off will not exist once inflation gets embedded in people's expectation.

C.

that there will always be an unemployment and inflation trade-off.

D.

that the unemployment and inflation trade-off is a myth.

E.

that there is a trade-off between unemployment and inflation during recessions, but not during expansions.

56.


Fiscal policy can:

A.

be more political than monetary policy.

B.

be less political than monetary policy.

C.

be neutral like monetary policy.

D.

have the same impact on all citizens.

E.

be coordinated with monetary policy to avoid political influence.

57.


Which of the following is the BEST explanation for why the Fed flirted with monetarism but then gave up?

A.

The natural rate hypothesis failed to predict a worsening of the trade-off between inflation and unemployment.

B.

A sharp rise in inflation had the effect of discrediting traditional economic policies.

C.

Inflation started dropping off sharply in the 1980s, and this helped bolster the view that targeting the money supply no longer made sense.

D.

It finally became evident that there was no longer a trade-off between inflation and unemployment.

E.

The velocity of money was thought to be volatile, but it was discovered to be quite stable.

58.


Which of the following theories is consistent with the notion that the short-run aggregate supply curve may be vertical after all?

A.

Keynesian theory

B.

new classical economics

C.

new Keynesian theory

D.

real business cycle theory

E.

monetarism

59.


New classical economics:

A.

focused on short-run economic fluctuations.

B.

returned to the view that shifts in aggregate demand only affect the price level.

C.

argued that the business cycle is caused by “animal spirits.”

D.

focused on the trade-off between unemployment and inflation.

E.

concluded that the long-run aggregate supply curve is upward sloping.

60.


Under rational expectations, government policy can be effective:

A.

if it is rationally thought out before implementation.

B.

if it is anticipated, so people can make realistic preparations.

C.

if it surprises people when it occurs.

D.

whenever the economy reacts rationally to the decision.

E.

if it is announced well in advance.

61.


According to rational expectations, monetary policy is:

A.

always effective.

B.

effective only if it is unexpected.

C.

ineffective compared to fiscal policy.

D.

effective only when fiscal policy accommodates it.

E.

never effective.

62.


Rational expectations suggest people and firms:

A.

base their expectations on the recent past.

B.

base their expectations on government announcements.

C.

base their expectations on “animal spirits.”

D.

take all available information into account when forming their expectations.

E.

can never behave rationally because they will never possess all available information.

63.


“A consistent countercyclical policy has no effect on employment and output, since individuals will recognize those policies as systematic and will anticipate them correctly.” This statement is most closely associated with:

A.

classical theory.

B.

Keynesian theory.

C.

rational expectations theory.

D.

monetarist theory.

E.

real business cycle theory.

64.


Rational expectations theory asserts that, because people have rational expectations, if a policy of reducing the money supply is used:

A.

it might affect both AD and potential real GDP.

B.

consumers and firms observe the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly.

C.

participants in economic activity react in such a way that shifts in aggregate supply will reinforce shifts in aggregate demand, and real GDP will shift inevitably into inflationary or recessionary gaps.

D.

periods of unemployment will be very short.

E.

consumers and firms anticipate that interest rates will fall and rationally increase spending and borrowing.

65.


Proponents of the theory of rational expectations contend that:

A.

people make rational forecasts using existing information.

B.

business cycles are generally caused by shifts in aggregate demand.

C.

full employment is rarely achieved.

D.

stickiness of prices is the primary cause of inflation.

E.

prices are flexible downward, but sticky upward.

66.


Proponents of rational expectations believe that:

A.

changes in AD cause business cycles.

B.

people will not be surprised by systematic monetary and fiscal policies.

C.

the economy will have to experience long periods of unemployment during recessions.

D.

the velocity of money does not exist.

E.

monetary policies announced far in advance can still be effective in influencing real output.

67.


Joseph is an economist who believes that changes in the business cycle can be attributed to shifts in the vertical aggregate supply curve. These shifts are caused by faster or slower increases in economic productivity. Joseph is best described as an economist who supports the _____ theory.

A.

rational expectations

B.

supply-side

C.

real business cycle

D.

new Keynesian

E.

classical

68.


The real business cycle theorists said that changes in total factor productivity are totally the result of:

A.

depressions.

B.

shifts in aggregate supply.

C.

shifts in aggregate demand.

D.

uneven technological progress.

E.

fiscal policy.

69.


According to the real business cycle theory, fluctuations in output are caused by:

A.

fluctuations in the growth rate of total factor productivity.

B.

changes in aggregate demand.

C.

changes in the money supply.

D.

discretionary fiscal policy.

E.

a monetary growth rule.

70.


According to the real business cycle theory, the only source of fluctuations in real output are changes in the:

A.

level of investment spending by manufacturing firms.

B.

rate of growth of total factor productivity

C.

rate of growth of the aggregate price level.

D.

level of spending on durable goods by households.

E.

government budget deficit.

71.


Real business cycle theory suggests that changes in:

A.

aggregate demand cause business cycles.

B.

the growth of factor productivity cause business cycles.

C.

fiscal policy cause business cycles.

D.

monetary policy cause business cycles.

E.

the national debt cause business cycles.

72.


The economic view that reducing tax rates will increase the incentives to work and invest, and will ensure a high growth rate of the potential output, is known as:

A.

supply-side economics.

B.

demand-side economics.

C.

new classical economics.

D.

new Keynesian economics.

E.

monetarist economics.

73.


According to supply-side economics, tax cuts:

A.

cause dangerous budget deficits.

B.

unfairly sacrifice equity in favor of efficiency.

C.

increase incentives to work and save and cause increases in potential output.

D.

increase output by directly increasing aggregate demand.

E.

cause aggregate demand to increase and cause short-run aggregate supply to decrease.

74.


Nancy is an economist who believes that the best way to grow the economy is through tax cuts to increase the incentive to work and invest. Though these tax cuts might initially increase the budget deficit, Nancy is convinced that the economic growth that results will actually increase government tax revenue. Nancy is best described as a _____.

A.

monetarist

B.

classical economist

C.

new Keynesian economist

D.

supply-side economist

E.

rational expectations economist.

75.


A more modern perspective on total factor productivity argues that:

A.

downturns in the business cycle decrease productivity.

B.

upswings in the business cycle lead to decreases in productivity.

C.

business cycles are irrelevant to productivity.

D.

rational expectations lead to swings in productivity.

E.

during recessions productivity actually increases.

76.


Classical economists believed that:

A.

wages and prices were inflexible, and as a result, the aggregate supply curve was vertical.

B.

wages and prices were inflexible, and as a result, the aggregate demand curve was vertical.

C.

wages and prices were flexible, and as a result, the aggregate demand curve was vertical.

D.

wages and prices were flexible and as a result, the aggregate supply curve was vertical.

E.

wages and prices were flexible and as a result, the aggregate supply curve was upward sloping.

77.


Classical economists believe:

A.

that the long-run aggregate supply curve is vertical, but the short-run aggregate supply curve is horizontal.

B.

fiscal policy changes are best at controlling the business cycle.

C.

increases in the money supply will increase output.

D.

prices are flexible.

E.

that inflation is caused by contractionary fiscal policy.

78.


For Keynes, changes in aggregate demand had their greatest impact:

A.

on the aggregate price level.

B.

in the long run.

C.

on the aggregate output level.

D.

equally on the aggregate output level and the aggregate price level.

E.

on the real interest rate.

79.


Someone who believes in macroeconomic policy activism would suggest that:

A.

changes in the money supply or changes in fiscal policy are ineffective in keeping inflation low.

B.

balancing the government deficit is more important than current economic problems.

C.

keeping the money supply growing at a constant rate would help the economy.

D.

changes in monetary or fiscal policy would smooth out the business cycle.

E.

the economy will self-correct in the long run.

80.


A monetary policy rule:

A.

occurs when the central bank pursues a formula that determines its actions.

B.

results in the introduction of political impacts into the monetary policy process.

C.

is the same as discretionary monetary policy.

D.

is likely to be advocated by Keynesians.

E.

is likely to be advocated by classical economists.

81.


According to the natural rate hypothesis:

A.

once inflation is built into expectations, a policy aimed at lowering unemployment below the natural rate would lead to accelerating inflation.

B.

the natural rate of unemployment is above the NAIRU.

C.

once inflation is embedded in the public's expectations, then inflation will stop accelerating.

D.

changes in discretionary policy aimed at increasing GDP will have no impact on inflation expectations.

E.

changes in discretionary policy aimed at decreasing GDP will have an upward impact on inflation expectations.

82.


The belief that individuals and firms make their decisions optimally using all available information:

A.

is an assumption made by Keynesian economists.

B.

is referred to as rational expectations.

C.

leads to the conclusion by some new classical economists that discretionary policies work best.

D.

is known as the real business cycle.

E.

is an assumption fundamental to the supply-side economists.

83.


An economist who believes that fluctuations in the rate of growth of factor productivity cause the business cycle is referring to:

A.

new classicalism.

B.

monetarism.

C.

Keynesianism.

D.

the real business cycle theory.

E.

supply-side economics.

84.


Which of the following statements is broadly agreed upon by modern macroeconomists?

A.

A monetary rule can effectively increase real GDP.

B.

Discretionary fiscal policy is typically more effective than monetary policy in fighting recessions.

C.

A nation's central bank should be managed by elected officials.

D.

Discretionary monetary and fiscal policy cannot affect the long-run level of unemployment.

E.

There is no such thing as a political business cycle.

85.


Which of the following statements is broadly agreed upon by modern macroeconomists?

A.

Monetary and fiscal policy can both be effective at decreasing unemployment in the short run, but not in the long run.

B.

Discretionary fiscal policy is typically an effective remedy for a recessionary gap, except in special circumstances.

C.

The central bank should pursue a policy of a specific target rate of inflation.

D.

A monetary rule should be pursued by the central bank.

E.

A nation's central bank should be managed by elected officials.

86.


Nearly all economists agree that increases in money supply can ______ aggregate ______.

A.

increase; supply

B.

decrease; supply

C.

decrease; demand

D.

increase; demand

E.

have no impact on; demand

87.


Nearly all economists agree that decreases in money supply can ______ aggregate ______.

A.

increase; supply

B.

decrease; supply

C.

decrease; demand

D.

increase; demand

E.

have no impact on; demand

88.


The belief that expansionary monetary policy is NOT at all helpful to the economy in fighting recessions is attributed to:

A.

classical macroeconomics.

B.

Keynesian macroeconomics.

C.

monetarism.

D.

the modern consensus.

E.

real business cycle

89.


The belief that neither monetary nor fiscal policy can reduce unemployment is consistent with which of the following schools of thought?

A.

Keynesian

B.

classical

C.

rational expectations

D.

modern consensus

E.

game theory

90.


The modern consensus regarding the use of monetary or fiscal policy to reduce unemployment in the long run is that:

A.

unemployment can be constantly decreased as long as inflation expectations are kept low.

B.

the natural rate of unemployment serves as a limit to what monetary and fiscal policy can accomplish.

C.

the concept of the non accelerating-inflation rate of unemployment, or NAIRU, was a mistake.

D.

the only effective policy is to maintain a constant growth rate of the money supply.

E.

unemployment can be reduced to zero if budgets are balanced.

91.


To close an inflationary gap, the modern consensus on macroeconomics suggests that:

A.

a close coordination of fiscal and monetary policy is crucial.

B.

the automatic fiscal stabilizers are powerful enough to bring the economy back to equilibrium.

C.

policy-makers should wait until a negative productivity shock brings the economy back to equilibrium.

D.

monetary policy should take the leading role in economic stabilization.

E.

supply-side fiscal policies should take the leading role in economic stabilization.

92.


According to the broad macroeconomic consensus today, an unemployment rate of 6% when the natural rate is 4.5%, should be countered by:

A.

decreases in government spending.

B.

increases in tax rates.

C.

increases in the rate of growth of the money supply.

D.

decreases in the rate of growth of the money supply.

E.

the central bank increasing the discount rate.

93.


Nearly all economists agree that central banks need to:

A.

be subject to political control.

B.

be elected by voters.

C.

play a leading role in fiscal policy.

D.

play a minor role in the economy.

E.

be independent.

94.


The broad consensus about macroeconomic policy is that monetary policy:

A.

is effective at increasing aggregate demand in a recession.

B.

can reduce the natural rate of unemployment.

C.

makes the economy unstable.

D.

should follow a policy rule.

E.

is best conducted by elected officials in Congress.

95.


The following recommendation is consistent with which view of the macroeconomy? “Since the long-run growth of real GDP is 3%, the money supply should grow at 3%.”

A.

classical

B.

Keynesian

C.

monetarist

D.

the modern consensus

E.

rational expectations.

96.


The following recommendation is consistent with which view of the macroeconomy? “A decrease in the money supply will reduce inflationary pressure.”

A.

classical

B.

Keynesian

C.

monetarist

D.

rational expectations

E.

real business cycle

97.


The following recommendation is consistent with which view of the macroeconomy? “A decrease in taxes will alleviate a recessionary gap.”

A.

classical

B.

Keynesian

C.

monetarist

D.

modern consensus

E.

rational expectations

98.


The following recommendation is consistent with which view of the macroeconomy? “The government should avoid deficit spending because of the crowding-out effect on investment spending.”

A.

classical

B.

Keynesian

C.

monetarist

D.

modern consensus

E.

supply-side

99.


The modern consensus is that:

A.

fiscal policy should play the main role in stabilization policy.

B.

monetary policy should play the main role in stabilization policy.

C.

automatic stabilizers should be the only type of policy used.

D.

government budgets should always be balanced.

E.

unemployment can be reduced to zero.

100.


The modern consensus in macroeconomics believes that:

A.

prices are sticky in the long run, but flexible in the short run.

B.

decreases in aggregate output can be traced to poor monetary policy.

C.

in the long run, the economy will produce at the full employment level of output.

D.

both monetary and fiscal policies are equally effective at curing recessions.

E.

inflation is caused by persistent government surpluses.

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