978-1259723223 Test Bank TBChap039 Part 3

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D. outsiders are laid-off workers and other qualified unemployed workers.

AACSB: Knowledge Application

A c c e s s i b i l i t y :

Keyboard Navigation

Blooms: Understand

Difficulty:

02 Medium

Learning Objective: 39–01 Describe alternative perspectives on the causes of

macroeconomic instability, including the views of mainstream economists, monetarists,

real-business-cycle advocates, and proponents of coordination failures.

Learning Objective: 39–02 Discuss why new classical economists believe the economy

will ” self-correct” from aggregate demand and aggregate supply shocks.

Test Bank: I

Topic:

Does the Economy Self-Correct?

To p i c :

What Causes Macro Instability?

84. Suppose laid-off workers and other qualified unemployed workers offer to work for less

than the wages being paid existing employed workers, but employers do not hire these workers

for fear that existing workers

will refuse to cooperate with them. This situation best describes

the

85. The insider-outsider theory implies that

86. Which of the following pairs helps explain why self-correction from a decline in aggregate

demand in the economy may be slow rather than rapid?

87. The traditional monetary rule is the idea that

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Dif f ic u l t y :

01 Easy

Learning Objective: 39-03 Identify and describe the variations of the debate over “ rules”

versus ” discretion” in conducting stabilization policy.

Test Bank: I

Topic:

Rules or Discretion?

88. Adherents of the traditional monetary rule advocate that the

89. Adherents of the traditional monetary rule say that the supply of money should be

90.

Answer this question on the basis of the diagram and the equation of exchange. Assume that the

velocity of money is constant at 4. Suppose that the increase of aggregate supply from AS1 to

AS2 indicates the economy’s

average increase in real output per year. According to

monetarists, the proper monetary rule for price stability would be to increase the money supply

by

91. Monetarists and rational expectations theorists generally agree that

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B. the rate of interest and the price of bonds are positively or directly related.

C. the money supply cannot be measured and therefore cannot be controlled by the Federal

Reserve.

D. prices and wages are inflexible downward.

92. According to monetarists, an expansionary fiscal policy

93. The crowding-out effect refers to the possibility that

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Test Bank: I

Topic:

Rules or Discretion?

94. According to monetarists, an expansionary fiscal policy is a weak stabilization tool because

95. Assume there is an increase in government spending and a reduction in net taxes. With a

specific money supply, the consequent

96. According to monetarists, a fiscal deficit will be associated with an increase in real output

97. The rational expectations perspective suggests that

98. The theory of rational expectations concludes that

39–48

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Test Bank: I

Topic:

Rules or Discretion?

99. In comparing monetarism and rational expectations theory, we find that

100. In recent years, economists holding monetarist views have replaced their call for a

monetary rule with a call for

101. Proponents of inflation targeting generally think that

39–49

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A c c e s s i b i l i t y :

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Blooms: Remember

Dif f ic u l t y :

01 Easy

Learning Objective: 39-03 Identify and describe the variations of the debate over ” rules”

versus ” discretion” in conducting stabilization policy.

Test Bank: I

Topic:

Rules or Discretion?

102. In 2012, the Fed

103. Which of the following groups of economists is most likely to favor annually balanced

federal budgets?

104. According to mainstream economists, the Fed’s adherence to a traditional monetary rule

rather than to discretionary monetary policy is likely to

105. According to mainstream economists, a restrictive monetary policy might be frustrated,

wholly or in part, by

106. Mainstream economists favor

39–51

written consent of McGraw-Hill Education.

versus ” discretion” in conducting stabilization policy.

Test Bank: I

Topic:

Rules or Discretion?

107. Mainstream economists contend that, as stabilization tools,

108. Most mainstream macroeconomists oppose a strict requirement to balance the federal

budget annually because they conclude that such a requirement would

109. Which of the following ideas of the rational expectations theory has been absorbed into

mainstream macroeconomics?

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B.

the idea that “money doesn’t matter”

C.

the monetary multiplier

D. the idea that “expectations are important”

110. The view that excessive growth of the money supply over long periods leads to inflation

111. Mainstream macroeconomics has embraced the

39–53

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Test Bank: I

Topic:

Rules or Discretion?

112. Modern mainstream macroeconomists agree with the monetarists that

113. Which of the following perspectives believes that both wages and prices are stuck in the

immediate short run and that prices are inflexible downward but flexible upward?

114. Which of the following groups of economists believe that cost-push inflation is impossible

in the long run without excessive monetary growth?

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A c c e s s i b i l i t y :

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Blooms: Understand

Difficulty:

02 Medium

Learning Objective: 39–04 Summarize the fundamental ideas and policy implications

of mainstream macroeconomics, monetarism, and rational expectations theory.

Test Bank: I

Topic:

Summary of Alternative Views

115. (Consider This) The 2007–2009 recession began with reductions in investment and

consumption spending, precipitated by a financial crisis. This explanation for the recession is

consistent with

116. (Consider This) Monetarists claim that the financial crisis and resulting 2007–2009

recession were caused largely by

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Topic:

What Causes Macro Instability?

117. (Consider This) According to economist Abba Lerner (1903-1982), fiscal and monetary

policy is analogous to

118. (Consider This) According to economist Milton Friedman (1912–2006), the source of

instability in the economy could be thought of as a

119. (Last Word) “Market monetarists” believe that the Fed should

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D. use inflation targeting to adjust monetary policy.

120. (Last Word) Market monetarists believe that to inform changes in monetary policy, the Fed

should set up a prediction market for

121. (Last Word) Suppose that a prediction market for nominal GDP is predicting 6 percent

growth in nominal GDP, but the Fed’s desired rate of nominal GDP growth is 5 percent.

According to the market monetarist view, the Fed should

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versus ” discretion” in conducting stabilization policy.

Test Bank: I

Topic:

Rules or Discretion?

122. (Last Word) Market monetarists advocate that the Fed “target the forecast” (of the

predicted nominal GDP growth rate), claiming primarily that it will

123. Monetarists say the velocity of money is highly variable and there is no close link between

the money supply and the level of economic activity.

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

economic instability.

39–58

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AACSB: Knowledge Application

A c c e s s i b i l i t y :

Keyboard Navigation

Blooms: Understand

Difficulty:

02 Medium

Learning Objective: 39–01 Describe alternative perspectives on the causes of

macroeconomic instability, including the views of mainstream economists, monetarists,

real-business-cycle advocates, and proponents of coordination failures.

Test Bank: I

Topic:

What Causes Macro Instability?

125. The equation of exchange is MV = PQ.

126. Mainstream macroeconomists see two main sources of macroeconomic instability:

changes in investment spending and, occasionally, adverse aggregate supply shocks.

127. In the theory of coordination failures, shifts of the nation’s long-run aggregate supply curve

are the main cause of business cycles.

39–59

written consent of McGraw-Hill Education.

AACSB: Knowledge Application

A c c e s s i b i l i t y :

Keyboard Navigation

Blooms: Understand

Difficulty:

02 Medium

Learning Objective: 39-01 Describe alternative perspectives on the causes of

macroeconomic instability, including the views of mainstream economists, monetarists,

real-business-cycle advocates, and proponents of coordination failures.

Test Bank: I

Topic:

What Causes Macro Instability?

128. The real-business-cycle theorists see aggregate supply as the “active” factor in causing

business cycles and aggregate demand as a “passive” factor.

129. The “real” factors in the real-business-cycle theory include resource availability and

technology.

130. The idea of coordination failures suggests the possibility of less than desirable price-level

and real-output equilibriums in the economy.

131. The idea that the economy will self-correct when confronted with changes in aggregate

demand is associated with new classical economics.

132. In the new classical theory, a fully anticipated change in aggregate demand and the price

level will temporarily change real output, but an unanticipated change will not.

133. Mainstream economists say that recessions are unlikely to occur today because prices and

wages are highly flexible downward.