Question 1

According to the Taylor rule, if real GDP rises by 1 percent above potential GDP, the Fed should raise:

Accepted Answer

A)   The supply of money by 10 percent
B)   The velocity of money by 10 percent
C)   The natural rate of unemployment from 4 percent to 5 percent
D)   The Federal funds rate, relative to the current inflation rate, by 0.5 percentE) B) and D)
F) A) and B)

Question 2

One of the basic assumptions of rational expectations theory is that:

Accepted Answer

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 very quickly to changes in demand and supply
D)   People expect government to solve the major unemployment and inflation problems facing the nation and behave accordinglyE) None of the above
F) B) and C)

Question 3

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 moneyE) B) and D)
F) B) and C)

Question 4

1 intersects AS1. If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices and wages are not flexible, this will result in an equilibrium at point: A)  E B)  B C)  C D)  D" class="answers-bank-image d-inline" rel="preload" > Refer to the above graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices and wages are not flexible, this will result in an equilibrium at point:

Accepted Answer

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

Question 5

If the velocity of money remains unchanged and the economy is at full employment, then the equation of exchange predicts that a rise in the money supply will:

Accepted Answer

A)   Increase prices
B)   Increase interest rates
C)   Increase real output
D)   Decrease nominal GDPE) B) and C)
F) A) and C)

Question 6

Monetarists believe that a monetary policy rule will tend to lead to inflation.

Accepted Answer

A) True 
 B)False

Question 7

New classical economists see the economy as incapable of self-correction when disturbed and pushed away from its full-employment level of real output.

Accepted Answer

A) True 
 B)False

Question 8

An efficiency wage is an above-market wage that spurs greater work effort and gives the firm more profits because of lower wage costs per unit of output.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Real-business-cycle theory focuses on factors affecting:

Accepted Answer

A)   Aggregate demand
B)   Aggregate supply
C)   The velocity of money
D)   Consumer spendingE) A) and B)
F) B) and D)

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The theory of rational expectations calls for monetary policy rules because:

Accepted Answer

A)   Of past policy errors
B)   Policy tends to be countercyclical
C)   Of the inability to time policy decisions
D)   Of the reaction of the public to the expected effects of policyE) B) and C)
F) A) and D)

Question 13

Dividing nominal gross domestic product (GDP)  by the money supply (M)  is a way to obtain the:

Accepted Answer

A)   Velocity of money
B)   Monetary multiplier
C)   Equation of exchange
D)   Monetary ruleE) A) and B)
F) All of the above

Question 14

Monetarists base their assessment of the speed of adjustment for self-correction in the economy on:

Accepted Answer

A)   Adaptive expectations
B)   Rational expectations
C)   Coordination failures
D)   Efficiency wagesE) None of the above
F) A) and D)

Question 15

The notion that the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP best describes the:

Accepted Answer

A)   Monetary rule
B)   Velocity of money
C)   Equation of exchange
D)   Crowding-out effectE) A) and D)
F) A) and C)

Question 16

Which of the following is the basic equation underlying aggregate expenditures?

Accepted Answer

A)   MV = PQ
B)   AS = AD
C)   Saving = Income - Consumption
D)   Ca + Ig + Xn + G = GDPE) A) and B)
F) B) and C)

Question 17

Mainstream economists identify wage-price rigidities as one cause of economic instability.

Accepted Answer

A) True 
 B)False

Question 18

If the economy's real output is growing by 2.5 percent a year, then in order to maintain price stability a monetarist would most likely recommend that money supply should be:

Accepted Answer

A)   Held constant
B)   Decreased by 1 percent a year
C)   Increased by 2.5 percent a year
D)   Increased by 7.5 percent a yearE) B) and D)
F) B) and C)

Question 19

According to rational expectations theory, the cause of observed instability in the private economy would most likely be due to:

Accepted Answer

A)   Changes in aggregate supply
B)   Inappropriate monetary policy
C)   The instability of investment spending in the economy
D)   Unanticipated aggregate demand and aggregate supply shocks in the short runE) A) and C)
F) None of the above

Question 20

The key implication for macroeconomic instability is that insider-outside relationships in the labor market:

Accepted Answer

A)   Contribute to the downward inflexibility of wages
B)   Help reduce the downward inflexibility of wages
C)   Increase the velocity of money
D)   Reduce the velocity of moneyE) A) and C)
F) B) and D)

Exam 19: Current Issues in Macro Theory and Policy

The theory of rational expectations calls for monetary policy rules because:

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New classical economists see the economy as incapable of self-correction when disturbed and pushed away from its full-employment level of real output.

Correct AnswerverifiedShow Answer

Monetarists believe that a monetary policy rule will tend to lead to inflation.

Correct AnswerverifiedShow Answer

Refer to the above graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices and wages are not flexible, this will result in an equilibrium at point:

Correct AnswerverifiedShow Answer

Monetarists base their assessment of the speed of adjustment for self-correction in the economy on:

Correct AnswerverifiedShow Answer

Which of the following is the basic equation underlying aggregate expenditures?

Correct AnswerverifiedShow Answer

Real-business-cycle theory focuses on factors affecting:

Correct AnswerverifiedShow Answer

An efficiency wage is an above-market wage that spurs greater work effort and gives the firm more profits because of lower wage costs per unit of output.

Correct AnswerverifiedShow Answer

According to rational expectations theory, the cause of observed instability in the private economy would most likely be due to:

Correct AnswerverifiedShow Answer

The key implication for macroeconomic instability is that insider-outside relationships in the labor market:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Mainstream economists identify wage-price rigidities as one cause of economic instability.

Correct AnswerverifiedShow Answer

If the economy's real output is growing by 2.5 percent a year, then in order to maintain price stability a monetarist would most likely recommend that money supply should be:

Correct AnswerverifiedShow Answer

One of the basic assumptions of rational expectations theory is that:

Correct AnswerverifiedShow Answer

Dividing nominal gross domestic product (GDP) by the money supply (M) is a way to obtain the:

Correct AnswerverifiedShow Answer

The notion that the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP best describes the:

Correct AnswerverifiedShow Answer

If the velocity of money remains unchanged and the economy is at full employment, then the equation of exchange predicts that a rise in the money supply will:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to the Taylor rule, if real GDP rises by 1 percent above potential GDP, the Fed should raise:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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Refer to the above graph. Assume that the economy is in initial equilibrium where AD₁ intersects AS₁. If there is a decrease in aggregate demand to AD₂, then according to mainstream economists, if prices and wages are not flexible, this will result in an equilibrium at point:

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