Question 1

According to mainstream economists, the basic determinant of real output, employment, and the price level is

Accepted Answer

A)  information and people's expectations.
B)  the level of aggregate expenditures.
C)  the incentive to work, save, and invest.
D)  the supply of money.

Question 2

Which of the following economic perspectives would be most opposed to a balanced-budget rule?

Accepted Answer

A)  monetarism
B)  mainstream economics
C)  rational expectations
D)  new classical economics

Question 3

Monetarists argue that government policy interference in the economy is the primary cause of macroeconomic instability.

Accepted Answer

A) True 
 B)False

Question 4

If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, then the

Accepted Answer

A)  velocity of money is 5.
B)  money supply is $40 billion.
C)  level of the price index is 320.
D)  equilibrium level of GDP is $320 billion.

Question 5

Assume monetary equilibrium exists; that is, the desired and actual supply of money are equal.Also assume that nominal GDP equals $960 billion and the money supply is $160 billion.From a strict monetarist view, an increase in the money supply by $12 billion will increase nominal GDP by

Accepted Answer

A)  $13 billion.
B)  $24 billion.
C)  $72 billion.
D)  $80 billion.

Question 6

The velocity of money is equal to

Accepted Answer

A)  1/MPS.
B)  1/reserve ratio.
C)  M/GDP.
D)  none of these.

Question 7

A coordination failure

Accepted Answer

A)  is a real-business-cycle event.
B)  is a self-fulfilling prophesy.
C)  results from the spending-income multiplier.
D)  is a direct outcome of inappropriate fiscal policy.

Question 8

The real-business-cycle theory

Accepted Answer

A)  is a monetarist view of the business cycle.
B)  is the mainstream view of the business cycle.
C)  assumes that the supply of money is constant.
D)  says that macro instability results from shifts in the long-run aggregate supply curve.

Question 9

Which of the following ideas is associated with mainstream economics?

Accepted Answer

A)  Capitalist economies tend to be stable.
B)  Monetary policy rules are desirable.
C)  Fiscal policy is a useful stabilization tool.
D)  Crowding-out of investment makes fiscal policy ineffective.

Question 10

Monetarists argue that the amount of money the public will want to hold depends primarily on the level of

Accepted Answer

A)  nominal GDP.
B)  investment.
C)  consumption.
D)  prices.

Question 11

New classical economists say that an unanticipated decrease in aggregate demand first

Accepted Answer

A)  decreases the price level and real output, and then decreases long-run aggregate supply.
B)  decreases long-run aggregate supply, and then decreases the price level and real output.
C)  reduces short-run aggregate supply, and then reduces long-run aggregate supply.
D)  decreases the price level and real output, and then increases short-run aggregate supply such that the economy returns to the full-employment level of output.

Question 12

From a monetarist perspective, instability in the macroeconomy arises from

Accepted Answer

A)  secular trends in the economy.
B)  the instability of velocity as a policy tool.
C)  discretionary changes in monetary policy.
D)  the use of a monetary rule for monetary policy.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Monetarists say that fiscal policy, such as a tax cut, will only affect the level of real GDP if it entails a change in the supply of money.

Accepted Answer

A) True 
 B)False

Question 15

In rational expectations theory, a fully anticipated change in aggregate demand or in the price level results in no change in real output.

Accepted Answer

A) True 
 B)False

Question 16

Monetarists would argue that the severe recession of 2007-2009 was primarily caused by

Accepted Answer

A)  adverse aggregate-supply shocks causing tremendous unemployment.
B)  wide swings in investment expenditures driving erratic fluctuations in aggregate demand.
C)  excessive money supply creating a bubble in some sectors of the economy.
D)  too much deregulation of the financial sector in previous years.

Question 17

Monetarists believe the private economy is inherently

Accepted Answer

A)  unstable and the public sector should be small.
B)  unstable and the public sector should be large.
C)  stable but that the public sector should be large.
D)  stable and that the government sector should be small.

Question 18

New classical economists say that a fully anticipated increase in aggregate demand

Accepted Answer

A)  shifts the long-run aggregate supply curve to the right.
B)  shifts the long-run aggregate supply curve to the left.
C)  moves the economy up along its vertical long-run aggregate supply curve.
D)  eventually results in a self-correcting decrease in aggregate demand.

Question 19

Mainstream economists support

Accepted Answer

A)  adoption of a monetary rule for increases in the money supply.
B)  elimination of efficiency wages and insider-outsider relationships.
C)  the requirement that the government annually balance its budget.
D)  the use of discretionary monetary and fiscal policy for achieving major economic goals.

Question 20

In the mainstream view, the severe recession of 2007-2009 was caused by

Accepted Answer

A)  an aggregate-supply shock, which caused the AS curve to shift left.
B)  a financial crisis that caused a shrinkage in investment and consumption spending, thereby reducing aggregate demand.
C)  monetary factors, specifically the excessive expansion of money supply brought about by the Federal Reserve, starting in the recession of 2001.
D)  a huge and sudden drop in the velocity of money, causing a significant reduction in both nominal and real GDP.

Exam 39: Current Issues in Macro Theory and Policy

Which of the following ideas is associated with mainstream economics?

Correct AnswerverifiedShow Answer

The real-business-cycle theory

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In rational expectations theory, a fully anticipated change in aggregate demand or in the price level results in no change in real output.

Correct AnswerverifiedShow Answer

Assume monetary equilibrium exists; that is, the desired and actual supply of money are equal.Also assume that nominal GDP equals $960 billion and the money supply is $160 billion.From a strict monetarist view, an increase in the money supply by $12 billion will increase nominal GDP by

Correct AnswerverifiedShow Answer

New classical economists say that a fully anticipated increase in aggregate demand

Correct AnswerverifiedShow Answer

Monetarists argue that government policy interference in the economy is the primary cause of macroeconomic instability.

Correct AnswerverifiedShow Answer

Monetarists argue that the amount of money the public will want to hold depends primarily on the level of

Correct AnswerverifiedShow Answer

The velocity of money is equal to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Monetarists say that fiscal policy, such as a tax cut, will only affect the level of real GDP if it entails a change in the supply of money.

Correct AnswerverifiedShow Answer

Which of the following economic perspectives would be most opposed to a balanced-budget rule?

Correct AnswerverifiedShow Answer

A coordination failure

Correct AnswerverifiedShow Answer

Monetarists would argue that the severe recession of 2007-2009 was primarily caused by

Correct AnswerverifiedShow Answer

New classical economists say that an unanticipated decrease in aggregate demand first

Correct AnswerverifiedShow Answer

Mainstream economists support

Correct AnswerverifiedShow Answer

In the mainstream view, the severe recession of 2007-2009 was caused by

Correct AnswerverifiedShow Answer

If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, then the

Correct AnswerverifiedShow Answer

Monetarists believe the private economy is inherently

Correct AnswerverifiedShow Answer

According to mainstream economists, the basic determinant of real output, employment, and the price level is

Correct AnswerverifiedShow Answer

From a monetarist perspective, instability in the macroeconomy arises from

Correct AnswerverifiedShow Answer

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