Page 54
289.
The economy is in a recession. The head of the President’s Council of Economic
Advisers is an ardent proponent of the real business cycle theory. What will this real
business cycle economist recommend or not recommend? Explain.
290.
The economy is in a recession. The head of the President’s Council of Economic
Advisers is a student of economic history, and his philosophy tends to follow the Great
Moderation consensus. What will this economist recommend or not recommend?
Explain.
291.
The economy is booming and under inflationary pressure. There is also a budget
surplus. The head of the President’s Council of Economic Advisers is a proponent of
classical economics. What will this classical economist recommend or not recommend?
Will she advocate balancing the budget? Explain.
292.
The economy is in a recession. The head of the President’s Council of Economic
Advisers is an ardent proponent of classical economics. What would this classical
economist recommend or not recommend? Explain.
293.
The economy is in a recession. The head economist at the central bank is concerned
about the growing possibility of a liquidity trap. The head of the President’s Council of
Economic Advisers is an ardent Keynesian. What will this Keynesian economist
recommend or not recommend? Explain.
294.
The economy is under inflationary pressure. The head of the President’s Council of
Economic Advisers is a staunch Keynesian. What will this Keynesian recommend or not
recommend? Explain.
295.
The economy is in a recession. The head of the President’s Council of Economic
Advisers is an ardent monetarist. What will this monetarist recommend or not
recommend? Explain.
296.
Classical economists believed that wages and prices were _____, and as a result, the
aggregate _____ curve was vertical.
A)
inflexible; supply
B)
inflexible; demand
C)
flexible; demand
D)
flexible; supply
Page 55
297.
Prior to the Great Depression, many policy makers:
A)
believed activist policies were important to the well-being of an economy.
B)
focused on short-run economic problems.
C)
believed that long-run economic performance was the most important goal.
D)
believed economies always performed below their potential output level.
298.
Classical economists believe that:
A)
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.
299.
Classical economists believe that:
A)
monetary policy is not useful in fighting recessions.
B)
discretionary fiscal policies are useful for dampening business cycle fluctuations.
C)
rational expectations are held by most of the public.
D)
short-run goals are more important than long-run goals.
300.
Those who believe in the classical model suggest that expansionary policies would
result in increases in:
A)
output and the aggregate price level.
B)
output with no change in the aggregate price level.
C)
the aggregate price level with no change in output.
D)
unemployment and the output level.
301.
“Animal spirits” refers to _____ confidence.
A)
consumer
B)
business
C)
financial
D)
government
302.
_____ emphasized the importance of short-run effects of changes in aggregate demand
on aggregate output, unlike _____, who focused exclusively on the long-run
determination of the aggregate price level.
A)
Keynes; the classicists
B)
Monetarists; the classicists
C)
classicists; Keynes
D)
Monetarists; Keynes
Page 56
303.
Keynes believed that:
A)
monetary policies had the greatest impact on the economy.
B)
long-run effects were most important and activist policies were most likely to be
detrimental.
C)
business decisions could be understood if policy makers did not use activist
policies.
D)
short-run effects were important and changes in aggregate demand could affect
output and price levels.
304.
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.
305.
Keynes believed that “animal spirits,” or confidence levels, had their greatest impact on:
A)
investment spending.
B)
government spending.
C)
monetary policy officials.
D)
the foreign sector.
306.
Someone who believes in macroeconomic policy activism is likely to suggest that:
A)
changes in the money supply or changes in fiscal policy will most likely destabilize
the economy.
B)
balancing the government budget 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.
307.
Keynesians believed that the economy could get out of the Great Depression if:
A)
monetary policy focused on the use of a monetary rule.
B)
fiscal authorities worked at balancing the budget.
C)
government spent enough to offset the drop in both consumption and investment
spending.
D)
expansionary monetary policy was used.
Page 57
308.
For the most part, Keynesians believe that:
A)
monetary policy is best at fighting recessions.
B)
fiscal policy is best at fighting recessions.
C)
a monetary rule is best for evening out the business cycle.
D)
balancing the budget is the best policy for fighting a recession.
309.
Monetary policy:
A)
can be made more effective with the presence of a liquidity trap.
B)
is less hampered by the political process than fiscal policy.
C)
has been proven to be an ineffective tool in controlling business cycles.
D)
works well only if it is well coordinated with fiscal policy efforts.
310.
Monetarists believe that:
A)
short-run problems are not likely.
B)
GDP fluctuations will be less pronounced if the Federal Reserve uses discretionary
monetary policy.
C)
price fluctuations are likely in the short or long run.
D)
GDP will grow steadily if the money supply grows steadily.
311.
A monetary policy rule:
A)
occurs when the central bank pursues a formula that determines its actions.
B)
brings politics into the monetary policy process.
C)
is the same as discretionary monetary policy.
D)
is likely to be advocated by Keynesians.
312.
The belief that government spending will crowd out private spending is part of:
A)
new Keynesian economics.
B)
Keynesian economics.
C)
monetary policy.
D)
monetarism.
313.
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, it will stop accelerating.
D)
changes in discretionary policy aimed at increasing GDP will have no impact on
inflation expectations.
Page 58
314.
A policy maker who aims at maintaining unemployment at 5% while the NAIRU for
this economy is 4% will most likely find the economy running into:
A)
deflation.
B)
inflation.
C)
a much higher output level.
D)
a much lower unemployment level.
315.
The political business cycle is MOST often found when:
A)
monetary policy is used.
B)
monetary rule is implemented.
C)
activist macroeconomic policy is followed.
D)
macroeconomic policies are based on technical findings such as those reported by
Friedman and Schwartz.
316.
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.
317.
Rational expectations theory suggests that:
A)
monetary policy that is expected will have the greatest impact on changing output
levels.
B)
policies that are expected will have no effect on output or unemployment.
C)
economic agents take into account past actions only to make their current
decisions.
D)
discretionary policies are best at bringing about changes in output.
318.
The belief that fluctuations in the rate of growth of factor productivity cause the
business cycle is:
A)
new classicalism.
B)
monetarism.
C)
Keynesianism.
D)
the real business cycle theory.
Page 59
319.
According to the Great Moderation consensus, expansionary fiscal policy will shift the
aggregate demand curve to the _____ and lead to a _____ level of output and a _____
level of employment in the short run.
A)
right; higher; higher
B)
left; lower; lower
C)
right; higher; lower
D)
left; lower; higher
320.
The Great Moderation consensus in macroeconomics is 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, neither monetary nor fiscal policy can reduce unemployment below
the natural rate.
D)
monetary and fiscal policies are equally effective at curing recessions.
321.
Many economists believe that:
A)
fiscal policy can be used effectively to reduce unemployment below its natural rate.
B)
monetary policy can be used effectively to reduce unemployment below its natural
rate.
C)
discretionary fiscal policy should be used sparingly because political influence may
manipulate its implementation and use.
D)
monetary rules are best.
322.
Discretionary fiscal policy:
A)
is not subject to lags and therefore is effective at controlling business cycles.
B)
refers to changes in the money supply used to smooth out the economy’s ups and
downs.
C)
is favored by monetarists.
D)
is favored by Keynesians.
Answer Key
Page 61
45.
C
46.
C
47.
C
48.
B
49.
B
50.
C
51.
B
52.
D
53.
C
54.
B
55.
A
56.
D
57.
C
58.
B
59.
B
60.
A
61.
B
62.
C
63.
D
64.
C
65.
D
66.
D
67.
A
68.
B
69.
A
70.
B
71.
D
72.
D
73.
A
74.
C
75.
C
76.
A
77.
D
78.
B
79.
D
80.
C
81.
B
82.
D
83.
B
84.
A
85.
A
86.
B
87.
C
88.
D
89.
C
90.
C
Page 62
91.
C
92.
D
93.
C
94.
B
95.
A
96.
C
97.
C
98.
A
99.
D
100.
D
101.
A
102.
D
103.
C
104.
B
105.
A
106.
D
107.
A
108.
C
109.
A
110.
A
111.
C
112.
B
113.
B
114.
B
115.
D
116.
C
117.
B
118.
A
119.
A
120.
A
121.
A
122.
B
123.
B
124.
D
125.
D
126.
B
127.
B
128.
A
129.
C
130.
B
131.
B
132.
B
133.
C
134.
C
135.
D
136.
B
Page 63
137.
B
138.
C
139.
B
140.
A
141.
B
142.
D
143.
D
144.
A
145.
B
146.
B
147.
B
148.
B
149.
D
150.
A
151.
A
152.
C
153.
D
154.
A
155.
B
156.
C
157.
D
158.
A
159.
B
160.
D
161.
B
162.
A
163.
A
164.
B
165.
D
166.
B
167.
C
168.
B
169.
A
170.
D
171.
B
172.
B
173.
C
174.
D
175.
C
176.
D
177.
C
178.
D
179.
D
180.
A
181.
B
182.
A
Page 64
183.
B
184.
C
185.
D
186.
A
187.
B
188.
C
189.
D
190.
A
191.
B
192.
C
193.
D
194.
A
195.
B
196.
C
197.
D
198.
B
199.
D
200.
A
201.
A
202.
B
203.
D
204.
C
205.
D
206.
C
207.
A
208.
D
209.
B
210.
C
211.
D
212.
A
213.
C
214.
B
215.
B
216.
C
217.
D
218.
C
219.
B
220.
A
221.
C
222.
A
223.
D
224.
B
225.
B
226.
C
227.
B
228.
C
Page 65
229.
D
230.
B
231.
A
232.
B
233.
A
234.
B
235.
A
236.
A
237.
A
238.
B
239.
A
240.
A
241.
B
242.
B
243.
A
244.
A
245.
A
246.
A
247.
A
248.
B
249.
A
250.
B
251.
A
252.
B
253.
A
254.
B
255.
A
256.
B
257.
A
258.
A
259.
B
260.
A
261.
B
262.
A
263.
B
264.
A
265.
B
266.
A
267.
B
268.
A
269.
A
270.
B
271.
A
272.
B
273.
A
274.
A
Page 66
275.
B
276.
A
277.
B
278.
A
279.
A
280.
B
281.
A
282.
B
283.
A
284.
B
285.
A
286.
287.
288.
289.
290.
291.
292.
293.
294.
295.
296.
D
297.
C
298.
D
299.
A
300.
C
301.
B
302.
A
303.
D
304.
C
305.
A
306.
D
307.
C
308.
B
309.
B
310.
D
311.
A
312.
D
313.
A
314.
A
315.
C
316.
B
317.
B
318.
D
319.
A
320.
C
Page 67
321.
C
322.
D