Question 1

In the early 1990s, although the U.S. economy was in a recession, Congress rejected the idea of using an expansionary fiscal policy to close the recessionary gap. What was the reason?

Accepted Answer

A)   Policymakers believed that contractionary fiscal policies are more likely to increase employment because inflation would be lower and therefore producers could pay lower wages.
B)   Congress recognized that fiscal policy lags rendered fiscal policy ineffective.
C)   Congress was concerned that expansionary policies would increase the government budget deficit.
D)   Congress believed that the economy's self-correcting mechanism was better able to eliminate output gaps than fiscal policies. C

Question 2

The classical school focused on the long-run forces that determined an economy's potential level of output.

Accepted Answer

A) True 
 B)False

Question 3

In the late 1970s, oil prices rose sharply and at the same time, U.S. policymakers pursued expansionary fiscal and monetary policies. As a result, real GDP stayed at potential output, while the implicit price deflator jumped 8.1%. If the Fed's goal was to reduce inflation, which of the following would also occur?

Accepted Answer

A)   An increase in unemployment and a decrease in interest rates
B)   A decrease in unemployment and an increase in interest rates
C)   An increase in unemployment and an increase in interest rates
D)   A decrease in unemployment and a decrease in interest rates

Question 4

The rational expectations hypothesis assumes that individuals form expectations about the future based on the information available to them and that they act on those expectations.

Accepted Answer

A) True 
 B)False

Question 5

New classical economists believe that the potential output of the economy is stable.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following are reasons why monetarists oppose activist stabilization policies?
I. Monetary policy lags are so long and variable that trying to stabilize the economy using
Monetary policy can be destabilizing.
II. Monetary policy affects a nation's currency exchange rate and affects the nation's competitiveness in the global market.
III. Because of crowding-out effects, fiscal policy has no effect on GDP.
IV. Fiscal policies must be financed by government borrowing or tax increases, both of which affect aggregate demand negatively.

Accepted Answer

A)   I only
B)   I and II only
C)   I and III only
D)   I, II, III, and IV C

Question 7

Suppose the U.S. economy experiences stagflation. An expansionary fiscal policy

Accepted Answer

A)   increases real GDP and lowers inflation.
B)   has no effect on real GDP but raises inflation.
C)   increases real GDP and aggravates inflation.
D)   increases real GDP and has no effect on inflation.

Question 8

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

Accepted Answer

A)   it might affect both aggregate demand and potential real GDP.
B)   consumers and firms observe that the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly.
C)   market participants 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)   All of the above are true.

Question 9

According to early classical macroeconomics, unemployment

Accepted Answer

A)   can persist for long periods of time, because wages are inflexible.
B)   could not prevail for long periods of time, because wages are flexible.
C)   can never occur.
D)   could not prevail for long, because the government intervenes to eliminate unemployment.

Question 10

According to the monetarists, after an initial increase in aggregate demand,

Accepted Answer

A)   short-run aggregate supply curve will tend to shift leftward, reflecting the effect of higher wages adjusting in the long run.
B)   short-run aggregate supply curve will tend to shift leftward, reflecting the effect of lower wages adjusting in the long run.
C)   aggregate demand curve will tend to shift rightward, reflecting the effect of income adjusting in the long run.
D)   aggregate demand curve will tend to shift lower, reflecting the effect of price level adjusting in the long run.

Question 11

The Smoot-Hawley Tariff Act of 1930 contributed to the collapse of global trade

Accepted Answer

A)   by raising tariffs on products imported into the U.S., which in turn led to retaliatory trade-restricting legislation around the world.
B)   by imposing economic sanctions against third-world countries.
C)   by banning foreign consumer products.
D)   by raising tariffs on exports, which deterred domestic producers from selling in foreign markets.

Question 12

The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

Accepted Answer

A) True 
 B)False

Question 13

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Accepted Answer

A) True 
 B)False

Question 14

Use the following to answer questions .
Exhibit: Responses to a Decrease in Aggregate Demand 2. The below potential output level of Y2 will exist as long as A)  policymakers refrain from using discretionary policies. B)  workers fail to recognize that their real wages have increased and that they need to accept lower nominal wages. C)  economic agents do not respond to falling prices by increasing aggregate demand back to AD1. D)  producers do not increase the price of their output. " class="answers-bank-image d-inline" rel="preload" >
-(Exhibit: Responses to a Decrease in Aggregate Demand)  The economy is initially in equilibrium at point (1) . Now suppose a reduction in the money supply causes aggregate demand to fall to AD2. The below potential output level of Y2 will exist as long as

Accepted Answer

A)   policymakers refrain from using discretionary policies.
B)   workers fail to recognize that their real wages have increased and that they need to accept lower nominal wages.
C)   economic agents do not respond to falling prices by increasing aggregate demand back to AD1.
D)   producers do not increase the price of their output.

Question 15

David Ricardo's work is associated with _______ economics.

Accepted Answer

A)   Keynesian
B)   new Keynesian
C)   classical
D)   monetarist

Question 16

Which of the following statements is true about Keynes' macroeconomic theory?

Accepted Answer

A)   Keynes agreed that the notion that the economy would achieve the potential level of output in the long run is crucial to explaining prolonged recessions.
B)   Keynes dismissed the notion that the economy would achieve full employment in the long run as irrelevant in explaining prolonged recessions.
C)   Keynes stressed the notion that the economy would achieve price stability in the long run only if expansionary fiscal and monetary policies were used to address recessions.
D)   Keynes argued that the economy would achieve full employment in the long run because of wage and price flexibility.

Question 17

When consumers and producers operate under rational expectations,

Accepted Answer

A)   stabilization policy affects only the short-run aggregate supply curve.
B)   stabilization policy affects only the long-run aggregate supply curve.
C)   shifts in aggregate demand are perfectly anticipated by market participants, negating any attempt by policymakers to shift aggregate demand.
D)   stabilization policy does not affect the short-run aggregate supply curve.

Question 18

In 2009, the Obama administration advocated and Congress passed a massive spending and tax relief package of about $800 billion to stimulate aggregate demand. This policy would be favored by

Accepted Answer

A)   Keynesian economists but not new Keynesian economists.
B)   monetarists but not new classical economists.
C)   Keynesian and new Keynesian economists.
D)   monetarists and new Keynesian economists.

Question 19

Which of the following groups of economists perceive the economy as essentially stable and self-correcting?

Accepted Answer

A)   Keynesians, monetarists, and classical economists
B)   Classical economists, monetarists, and new classical economists.
C)   Monetarists, classical economists, and socialists
D)   Classical economists, Keynesians, monetarists, and new classical economists. B

Question 20

The body of economic thought associated with 19th century economist

Accepted Answer

A)   David Ricardo is called Ricardian economics.
B)   Adam Smith is called Smithian economics.
C)   David Ricardo is called classical economics.
D)   Adam Smith is called classical economics.

Exam 17: A Brief History of Macroeconomic Thought and Policy

In the early 1990s, although the U.S. economy was in a recession, Congress rejected the idea of using an expansionary fiscal policy to close the recessionary gap. What was the reason?

Correct Answer
verified
C

The classical school focused on the long-run forces that determined an economy's potential level of output.

Correct Answer
verified

Correct Answer
verified

The rational expectations hypothesis assumes that individuals form expectations about the future based on the information available to them and that they act on those expectations.

Correct Answer
verified

New classical economists believe that the potential output of the economy is stable.

Correct Answer
verified

Correct Answer
verified
C

Suppose the U.S. economy experiences stagflation. An expansionary fiscal policy

Correct Answer
verified

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

Correct Answer
verified

According to early classical macroeconomics, unemployment

Correct Answer
verified

According to the monetarists, after an initial increase in aggregate demand,

Correct Answer
verified

The Smoot-Hawley Tariff Act of 1930 contributed to the collapse of global trade

Correct Answer
verified

The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

Correct Answer
verified

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Correct Answer
verified

Correct Answer
verified

David Ricardo's work is associated with _______ economics.

Correct Answer
verified

Which of the following statements is true about Keynes' macroeconomic theory?

Correct Answer
verified

When consumers and producers operate under rational expectations,

Correct Answer
verified

In 2009, the Obama administration advocated and Congress passed a massive spending and tax relief package of about $800 billion to stimulate aggregate demand. This policy would be favored by

Correct Answer
verified

Which of the following groups of economists perceive the economy as essentially stable and self-correcting?

Correct Answer
verified
B

The body of economic thought associated with 19th century economist

Correct Answer
verified

Exam 17: A Brief History of Macroeconomic Thought and Policy

In the early 1990s, although the U.S. economy was in a recession, Congress rejected the idea of using an expansionary fiscal policy to close the recessionary gap. What was the reason?

Correct AnswerverifiedC

The classical school focused on the long-run forces that determined an economy's potential level of output.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The rational expectations hypothesis assumes that individuals form expectations about the future based on the information available to them and that they act on those expectations.

Correct AnswerverifiedShow Answer

New classical economists believe that the potential output of the economy is stable.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

Suppose the U.S. economy experiences stagflation. An expansionary fiscal policy

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to early classical macroeconomics, unemployment

Correct AnswerverifiedShow Answer

According to the monetarists, after an initial increase in aggregate demand,

Correct AnswerverifiedShow Answer

The Smoot-Hawley Tariff Act of 1930 contributed to the collapse of global trade

Correct AnswerverifiedShow Answer

The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

Correct AnswerverifiedShow Answer

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

David Ricardo's work is associated with _______ economics.

Correct AnswerverifiedShow Answer

Which of the following statements is true about Keynes' macroeconomic theory?

Correct AnswerverifiedShow Answer

When consumers and producers operate under rational expectations,

Correct AnswerverifiedShow Answer

In 2009, the Obama administration advocated and Congress passed a massive spending and tax relief package of about $800 billion to stimulate aggregate demand. This policy would be favored by

Correct AnswerverifiedShow Answer

Which of the following groups of economists perceive the economy as essentially stable and self-correcting?

Correct AnswerverifiedB

The body of economic thought associated with 19th century economist

Correct AnswerverifiedShow Answer

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C

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C

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B

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