Page 1
1.
Which of the following years is often described as the worst year of the Great
Depression?
A)
1913
B)
1933
C)
1953
D)
1973
2.
Prior to the 1930s, the _____ model dominated thinking about how the economy
worked.
A)
Keynesian
B)
classical
C)
monetarist
D)
real business cycle
3.
Adam believes that in the long run all prices are flexible and that any increase in the
money supply will lead only to inflation, not to an increase in aggregate output. Because
the economy would self-correct to long-run equilibrium output, there is no role for
either fiscal or monetary policy. Adam is best described as a:
A)
supply-sider.
B)
Keynesian.
C)
classical economist.
D)
monetarist.
4.
According to the classical model:
A)
the aggregate supply curve is horizontal.
B)
increases in the money supply lead to proportional increases in the price level but
not to change in real output.
C)
increases in the money supply lead to proportional changes in output but no change
in the price level.
D)
we are all dead in the long run.
5.
In the classical model of the price level, prices are _____, the short-run aggregate supply
curve is vertical, and as a result, a decrease in the money supply leads to _____ in the
aggregate price level.
A)
sticky; a more than proportional decrease
B)
flexible; a proportional decrease
C)
sticky; a more than proportional increase
D)
flexible; a proportional increase
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6.
Because classical economists stressed the long run, they:
A)
perceived the economy as being mostly self-adjusting.
B)
favored the use of fiscal policy over monetary policy.
C)
expected the government to purge the rot from the system.
D)
favored the use of monetary policy over fiscal policy.
7.
Classical economists focused mainly on:
A)
unemployment.
B)
the short run.
C)
the long run.
D)
government economic policy.
8.
Classical economists point out that:
A)
there is a trade-off between unemployment and inflation.
B)
an increase in the money supply leads to a proportional rise in the price level.
C)
government spending can affect aggregate demand.
D)
there is a possibility of a liquidity trap.
9.
According to the classical model of the price level, the short-run aggregate supply curve
is:
A)
flat.
B)
negatively sloped.
C)
vertical.
D)
unstable.
10.
Classical macroeconomics was based largely on the foundation of:
A)
flexible wages and prices.
B)
persistent unemployment.
C)
government intervention in the market.
D)
Adam Smith’s model of imperfectly competitive markets.
11.
The predominant economic thinking up to the 1930s was:
A)
monetarism.
B)
classical economics.
C)
Keynesian economics.
D)
rational expectations theory.
Page 3
12.
The school of economics that predominated prior to the Great Depression was the:
A)
business cycle theorists.
B)
classical school.
C)
post-Keynesian school.
D)
Marxists.
13.
The classical school of economics:
A)
emphasizes the short run.
B)
emphasizes the flexibility of wages and prices.
C)
has a problem with potential output, since potential output cannot be achieved
without active policy.
D)
advocates the use of discretionary fiscal policy.
14.
If wages and prices are perfectly flexible, a decrease in aggregate demand will cause
a(n) _____ in the price level and _____ in unemployment.
A)
increase; an increase
B)
decrease; a decrease
C)
increase; no change
D)
decrease; no change
15.
According to the classical model, prices are _____, making the aggregate supply curve
_____ in the short run.
A)
sticky; upward sloping
B)
flexible; vertical
C)
flexible; downward sloping
D)
sticky; vertical
16.
When other things are equal and using the classical model, an increase in the money
supply leads to an equal proportional _____ in the aggregate _____, with no effect on
aggregate_____.
A)
rise; output; price level
B)
fall; price level; output
C)
rise; price level; output
D)
fall; output; price level
17.
In the classical model, an increase in the money supply will result in:
A)
inflation only, without affecting aggregate output.
B)
economic expansion, as aggregate output will increase.
C)
higher interest rates, lower investment, and ultimately lower aggregate output.
D)
recession only, without affecting the aggregate price level.
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18.
Policy makers before the Great Depression were:
A)
uncertain about the appropriate measure to use against a recession in the absence of
any clear theory about the cause of business cycles.
B)
using both fiscal and monetary policies to combat the harmful effects of recession
on output and employment.
C)
against using monetary policies to fight the economic downturns caused by
business cycles.
D)
in favor of using only fiscal policies to fight the economic booms caused by
business cycles.
19.
The measurement of business cycles was pioneered by:
A)
Ragnar Frisch.
B)
John Maynard Keynes.
C)
Wesley Mitchell.
D)
Andrew Mellon.
20.
In response to the Great Depression, the classical economists:
A)
stressed the use of monetary policy over fiscal policy.
B)
tried to tame the “animal spirits” that caused the recession in the first place.
C)
stressed the use of fiscal policy over monetary policy.
D)
did not advocate any action because of the lack of consensus about the
consequences of policy.
21.
The beginning of a recession is declared by the:
A)
National Bureau of Economic Research.
B)
Treasury Department.
C)
Fed.
D)
president.
22.
The start of an expansion is determined by the:
A)
Treasury Department.
B)
Federal Reserve.
C)
president.
D)
National Bureau of Economic Research.
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23.
At the time of the Great Depression, there was:
A)
general agreement that monetary policy could help in the short run.
B)
no widely accepted theory of the causes of depressions.
C)
general agreement that fiscal policy could help in the short run.
D)
a consensus about what economic policies to adopt.
24.
Which of the following is FALSE? At the time of the Great Depression:
A)
the measurement of the business cycle was well advanced.
B)
there was no widely accepted theory of the causes of depressions.
C)
economists recognized that the economy did not always grow smoothly.
D)
the U.S. economy was substantially agricultural.
25.
There may NOT have been business cycles in the United States before 1854 because:
A)
the country was growing too rapidly to have a recession.
B)
the banking system established by Alexander Hamilton prevented business cycles.
C)
monetary policy conducted by the Fed was very successful.
D)
the economy was agricultural.
26.
Which of the following does NOT explain why the official chronology of past U.S.
business cycles maintained by the National Bureau of Economic Research goes back
only to 1854?
A)
The further back in time you go, the fewer economic data are available.
B)
There may not have been business cycles in the modern sense much before 1854.
C)
Before 1854 the U.S. economy was mostly agricultural, and therefore the short-run
aggregate supply curve was probably close to vertical.
D)
There were no banks before 1854.
27.
Classical economic theory describes agricultural economies fairly well because:
A)
early agricultural economies used barter rather than money.
B)
the short-run aggregate supply curve in an agricultural economy is vertical.
C)
agricultural economies are immune to recessions.
D)
agricultural economies don’t need fiscal policy.
28.
Classical economists believed all of the following EXCEPT that:
A)
there could be temporary periods of unemployment.
B)
emphasis should be on the long run, and in the long run all would be set right
because of the smooth functioning of the price system.
C)
the Great Depression would be a short-run aberration.
D)
monetary policy could tame the business cycle.
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29.
A fundamental feature of early classical macroeconomics is that:
A)
aggregate demand and aggregate income are usually unequal.
B)
prices of inputs and outputs are usually relatively rigid.
C)
the economy’s level of employment can remain substantially below its natural level
over a long period.
D)
the economy can achieve full employment on its own, though there may be short
periods in which employment falls below the natural level.
30.
The General Theory of Employment, Interest, and Money was written by:
A)
Adam Smith.
B)
Paul Samuelson.
C)
Joseph Schumpeter.
D)
John Maynard Keynes.
31.
According to Keynesian theory:
A)
the long-run and short-run aggregate supply curves are identical.
B)
a decrease in aggregate demand leads to decreases in output and prices in the short
run.
C)
a decrease in aggregate demand will decrease prices but not output in the short run.
D)
the short run is relatively unimportant.
32.
Which of the following statements is FALSE? Keynesian economics:
A)
emphasizes the effects of shifts in aggregate demand on aggregate output.
B)
focuses the attention of economists on situations in which the short-run aggregate
supply curve slopes upward.
C)
holds “animal spirits” mainly responsible for business cycles.
D)
holds that changes in business confidence have no effect on either the aggregate
price level or aggregate output.
33.
In the Keynesian model, prices and nominal wages are _____, the short-run aggregate
supply curve is upward sloping, and as a result, an increase in the money supply leads to
_____ in the aggregate price level.
A)
sticky; a less than proportional decrease
B)
flexible; a proportional decrease
C)
sticky; a less than proportional increase
D)
flexible; a proportional increase
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34.
According to Keynes, changes in “animal spirits” will affect actual output through
changes in:
A)
business investment spending.
B)
government expenditure and taxes.
C)
money supply and interest rates.
D)
labor productivity and technological progress.
35.
Keynesian economics emphasizes _____ shifts in aggregate _____.
A)
long-run; demand
B)
long-run; supply
C)
short-run; demand
D)
short-run; supply
36.
Keynesian economics emphasized that economic downturns could be due to:
A)
inflation.
B)
technological shocks.
C)
a decline in business confidence.
D)
deflation.
37.
Keynes suggested that money is:
A)
the most important factor affecting aggregate supply.
B)
the most important factor affecting aggregate demand.
C)
only one of a variety of factors affecting aggregate supply.
D)
only one of a variety of factors affecting aggregate demand.
Use the following to answer questions 38-41:
Figure: Classical Versus Keynesian Macroeconomics
Page 8
38.
(Figure: Classical Versus Keynesian Macroeconomics) Look at the figure Classical
Versus Keynesian Macroeconomics. According to the Keynesian view, if this economy
shifts from AD1 to AD2 because of a large decline in investment spending by businesses,
the price level will _____, but real GDP will _____.
A)
increase; decrease
B)
not change; increase
C)
increase; not change
D)
decrease; decrease
39.
(Figure: Classical Versus Keynesian Macroeconomics) Look at the figure Classical
Versus Keynesian Macroeconomics. According to the Keynesian view, if this economy
shifts from AD2 to AD1, perhaps because of a large increase in government spending, the
price level will _____ and real GDP will _____.
A)
rise; fall
B)
not change; rise
C)
rise; not change
D)
rise; rise
40.
(Figure: Classical Versus Keynesian Macroeconomics) Look at the figure Classical
Versus Keynesian Macroeconomics. According to the classical view, if this economy
shifts from AD1 to AD2, perhaps because of a large decline in investment spending by
businesses, the price level will _____ and real GDP will _____.
A)
rise; fall
B)
not change; increase
C)
fall; not change
D)
fall; fall
41.
(Figure: Classical Versus Keynesian Macroeconomics) Look at the figure Classical
Versus Keynesian Macroeconomics. According to the classical view, if this economy
shifts from AD2 to AD1, perhaps because of a large increase in government spending, the
price level will _____ and real GDP will _____.
A)
rise; fall
B)
rise; not change
C)
not change; rise
D)
fall; fall
Page 9
42.
The General Theory of Employment, Interest, and Money, written by _____ and
published in _____, transformed the way economists thought about macroeconomics.
A)
Milton Friedman; 1946
B)
Paul Samuelson; 1940
C)
John Maynard Keynes; 1936
D)
Paul Lucas; 1966
43.
The General Theory of Employment, Interest, and Money is:
A)
the first economics textbook of the 1980s.
B)
a defense of fiscal policy written by Milton Friedman.
C)
an analysis of the Great Depression.
D)
an explanation of globalization.
44.
Keynesian economics stresses the role of:
A)
aggregate demand.
B)
aggregate supply.
C)
the long run.
D)
both aggregate demand and the long run.
45.
_____ was a _____ economist who believed that _____ in wages and prices could block
adjustments to full employment.
A)
Adam Smith; British; flexibility
B)
Milton Friedman; U.S.; inflexibility
C)
John Maynard Keynes; British; stickiness
D)
Robert Lucas; U.S.; stickiness
46.
The idea of sticky wages and prices is most closely associated with:
A)
monetarism.
B)
classical economics.
C)
Keynesian economics.
D)
rational expectations theory.
47.
Keynesian economics emphasized the:
A)
role of money.
B)
long run.
C)
impact of changes in aggregate demand.
D)
impact of changes in aggregate supply.
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48.
Which one of the following statements is TRUE?
A)
Keynes treated short-run macroeconomics as a minor issue.
B)
Keynes emphasized the short-run effects of shifts in aggregate demand on
aggregate output, employment, and prices, whereas the classical economists
focused on the long-run determination of the aggregate price level.
C)
The classical economists believed that the short-run aggregate supply curve was
upward sloping.
D)
The classical economists emphasized the short-run effects of shifts in aggregate
demand on aggregate output, whereas Keynes focused on the long-run
determination of the aggregate price level.
49.
We now typically refer to the Keynesian term “animal spirits” as:
A)
rational expectation.
B)
business confidence.
C)
adaptive expectation.
D)
irrational exuberance.
50.
The main ideas of Keynesian economics are the importance of the _____ and emphasis
on _____.
A)
long run over the short run; a vertical SRAS curve
B)
long run over the short run; the AD curve and the SRAS curve
C)
short run over the long run; the AD curve and a rising SRAS curve
D)
free market with no government intervention; monetary policy in the long run
51.
The groundbreaking book The General Theory of Employment, Money, and Interest was
written by famed economist:
A)
Ronald Reagan.
B)
John Maynard Keynes.
C)
Adam Smith.
D)
Barack Obama.
52.
Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the
aggregate demand curve would cause a(n):
A)
decrease in the level of income.
B)
increase in the unemployment level.
C)
change in the long-run aggregate supply curve.
D)
increase in employment, production, and income.
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53.
According to Keynesian economics, a tax cut will _____ aggregate demand and output
by _____.
A)
increase; decreasing exports
B)
decrease; decreasing incentives to work and save
C)
increase; increasing income and consumption
D)
increase; decreasing government spending
54.
Keynes believed that to end the Great Depression:
A)
only a government takeover of industry could save the economy.
B)
the capitalist system needed only a narrow technical fix.
C)
a decrease in government spending would increase the budget deficit.
D)
a decrease in the money supply would cause inflation.
55.
During the 1940s, 1950s, and 1960s:
A)
the role of the government in the economy increased.
B)
the role of the government in the economy decreased.
C)
Keynes’s ideas were constantly challenged by free-market policies.
D)
Keynes’s views were accepted only by left-wing socialist economists.
56.
According to a Keynesian economist, a recessionary gap should be fixed with:
A)
a monetary rule.
B)
supply-side tax increases to balance the budget.
C)
decreases in government spending.
D)
discretionary fiscal policy.
57.
Macroeconomic policy activism:
A)
is the use of political activism made popular by liberal economists.
B)
mandates a balanced government budget.
C)
is the use of monetary and fiscal policy to smooth out the business cycle.
D)
was the tool used by classical economists.
58.
According to Keynes, the remedy for a recessionary gap was straightforward. The
solution was to:
A)
increase aggregate supply.
B)
increase aggregate demand.
C)
control big business.
D)
decrease government involvement.
Page 12
59.
Keynes argued that the surest way to bring the economy out of the Great Depression
was to:
A)
keep the economy in a liquidity trap until antitrust policy could be enforced.
B)
use expansionary fiscal policy.
C)
increase taxes and spend less.
D)
leave the economy alone, and flexible wages and prices would eventually lead to
increases in income and employment.
60.
Macroeconomic policy activism:
A)
is the use of monetary and fiscal policy to smooth out the business cycle.
B)
is the primary theory of classical economics.
C)
gives the Federal Reserve the sole responsibility for economic policy.
D)
advocates that all of the people in a democracy should decide what type of
economic policy is appropriate.
61.
The main consequence of Keynesian economics is:
A)
the development of economic policy rules.
B)
the rationale for macroeconomic policy activism.
C)
a consensus that fiscal policy is ineffective.
D)
a consensus that monetary policy is always effective.
62.
Keynes’s ideas were:
A)
quickly adopted in the 1930s to end the Great Depression.
B)
slowly but consistently used in 2008 to end the Great Recession.
C)
used somewhat to help reduce the Great Depression.
D)
ignored in the Great Depression.
63.
The main reason that the Great Depression ended was:
A)
effective monetary policy by the Fed under the leadership of Paul Volcker.
B)
the defeat of Adolf Hitler in Germany in the 1930s.
C)
Winston Churchill’s foreign policy.
D)
deficit spending in the United States to finance World War II.
Page 13
64.
The historical validation of Keynes’s theory came through the:
A)
expansion in aggregate demand resulting from drastic interest rate cuts in the early
1940s.
B)
successful application of his theories in the United States during the Great
Depression in the early 1930s.
C)
expansion in aggregate demand resulting from massive military spending in the
early 1940s.
D)
successful application of his theories in the United Kingdom during the mid 1930s.
65.
The consensus is that the Great Depression was ended by:
A)
imposing fiscal discipline and reducing budget deficits.
B)
following Keynes’s analysis regarding the “animal spirits.”
C)
increasing the money supply and lowering the interest rate.
D)
applying expansionary fiscal policy on a large scale.
66.
The Great Depression was ended in the United States by:
A)
the government running budget surpluses throughout the 1930s.
B)
the government increasing the money supply throughout the 1930s.
C)
central planning of the economy by the government.
D)
the huge amounts of government spending required to fight WWII during the early
1940s.
Use the following to answer questions 67-69:
Figure: Fiscal Policy and the End of the Great Depression
Page 14
67.
(Figure: Fiscal Policy and the End of the Great Depression) Look at the figure Fiscal
Policy and the End of the Great Depression. The period from 1933 through 1936 would
seem to indicate that in the short run a moderate level of government deficit spending
can _____ the unemployment rate.
A)
reduce
B)
increase
C)
not affect
D)
eliminate
68.
(Figure: Fiscal Policy and the End of the Great Depression) Look at the figure Fiscal
Policy and the End of the Great Depression. The period from 1936 to 1938 would seem
to indicate that in the short run a decrease in government deficit spending can _____ the
unemployment rate.
A)
reduce
B)
increase
C)
not affect
D)
eliminate
69.
(Figure: Fiscal Policy and the End of the Great Depression) Look at the figure Fiscal
Policy and the End of the Great Depression. The period from 1939 through 1943 would
seem to indicate that in the short run a large increase in government deficit spending can
_____ the unemployment rate.
A)
reduce
B)
increase
C)
not affect
D)
reduce or increase
70.
Christina believes that shifts in aggregate demand cause a change in both real output and
the price level. She believes that an economic recession will not necessarily self-correct
in the long run, and therefore she believes that active fiscal and monetary policy is
justified to smooth out the business cycle. Christina is best described as a:
A)
classical economist.
B)
Keynesian.
C)
supply-sider.
D)
monetarist.
Page 15
71.
Which of the following is FALSE? Keynesian economics:
A)
emphasizes that factors other than the money supply can affect aggregate demand.
B)
provides the rationale for macroeconomic policy activism.
C)
emphasizes short-run economic fluctuations.
D)
emphasizes long-run fluctuations.
72.
Because Keynes’s theory recognized the problem of interest rates being at the zero
bound (the liquidity trap), it:
A)
perceived the economy as being mostly self-adjusting.
B)
favored the use of monetary policy over fiscal policy.
C)
considered technological progress the answer to any economic slump.
D)
favored the use of fiscal policy over monetary policy.
73.
Keynesians argued that monetary policy would NOT be effective if:
A)
there was a liquidity trap.
B)
the Fed was independent of political pressure.
C)
other countries did not follow monetary policy similar to that of the United States.
D)
no one bought bonds when the Fed conducted open-market operations.
74.
In A Monetary History of the United States, 1867–1960, Milton Friedman and Anna
Schwartz argued that:
A)
only fiscal policy could be effective in managing the economy.
B)
the Depression was caused by irresponsible government spending.
C)
monetary policy should play a key role in stabilizing the economy.
D)
the Federal Reserve should be abolished.
75.
Friedman and Schwartz’s work A Monetary History of the United States, 1867–1960
showed that the business cycle historically was associated with fluctuations in:
A)
prices.
B)
interest rates.
C)
the money supply.
D)
business investment.
76.
Keynes’s theory did not endorse the use of monetary policy during the Great Depression
because:
A)
at the time, the nominal interest rate was very close to zero.
B)
during WWII, the convertibility of the pound sterling into gold was suspended.
C)
under the gold standard, the zero bound on nominal interest rates did not exist.
D)
monetary expansions were impossible under a gold standard.
Page 16
77.
Milton Friedman and Anna Schwartz wrote:
A)
The Great Depression.
B)
The General Theory of Employment, Interest, and Money.
C)
The Wealth of Nations.
D)
A Monetary History of the United States, 1867–1960.
78.
In a liquidity trap:
A)
fiscal policy becomes ineffective because of the high budget deficit.
B)
monetary policy becomes ineffective because the nominal interest rate is close to
the zero bound.
C)
the aggregate price level becomes downwardly sticky.
D)
any increase in government spending drives out planned investment spending.
79.
The main idea behind monetarism is that:
A)
the aggregate output will be even greater than potential output if the money supply
grows at a constant rate.
B)
the aggregate price level will increase proportionally if the money supply grows at
a constant rate.
C)
the government budget will have a deficit if the government spending grows at a
constant rate.
D)
the aggregate output will grow steadily at a constant rate if the money supply also
grows at a constant rate.
Use the following to answer questions 80-81:
Scenario: The Velocity Equation
Suppose that real GDP equals $10 trillion, nominal GDP equals $20 trillion, and the aggregate
price level equals 2.
80.
(Scenario: The Velocity Equation) Look at the scenario The Velocity Equation. If the
money supply is $5 trillion, then the velocity of money is:
A)
5.
B)
8.
C)
4.
D)
10.
Page 17
81.
(Scenario: The Velocity Equation) Look at the scenario The Velocity Equation. If the
velocity of money is 2, the money supply is:
A)
$20 trillion.
B)
$10 trillion.
C)
$5 trillion.
D)
$40 trillion.
Use the following to answer questions 82-83:
Scenario: The Quantity Theory of Money
Suppose the money supply is equal to $10 billion and the velocity of money is 6.
82.
(Scenario: The Quantity Theory of Money) Look at the scenario The Quantity Theory of
Money. If the aggregate price level is 4, then the real GDP is:
A)
$60 billion.
B)
$30 billion.
C)
$20 billion.
D)
$15 billion.
83.
(Scenario: The Quantity Theory of Money) Look at the scenario The Quantity Theory of
Money. If the aggregate price level is 4, then the nominal GDP is:
A)
$15 billion.
B)
$60 billion.
C)
$20 billion.
D)
$10 billion.
84.
The velocity of money is equal to:
A)
nominal GDP divided by the money supply.
B)
real GDP divided by the aggregate price level.
C)
nominal wages divided by the aggregate price level.
D)
real GDP divided by the money supply.
85.
Milton Friedman’s argument was that the Fed should follow a monetary policy rule so
that the money supply would:
A)
grow at a slow and steady rate.
B)
remain constant.
C)
grow proportionally with the price level.
D)
grow at the same rate as the GDP growth rate.
Page 18
86.
According to monetarism:
A)
Congress and the president should be responsible for controlling the money supply.
B)
output will grow steadily if the money supply grows at a steady rate.
C)
the Fed should vary the growth rate of the money supply on a monthly basis.
D)
changes in the money supply affect the real output only in the long run.
87.
Monetarism asserts that GDP will grow steadily if the:
A)
government keeps its budget deficit high.
B)
government engages in crowding out.
C)
money supply grows steadily.
D)
money supply grows faster than the economy.
88.
If the money supply is growing at a constant rate of 2% and the economy undergoes a
negative demand shock, the theory of monetarism recommends:
A)
coordinating a monetary expansion with a fiscal expansion to increase aggregate
demand.
B)
raising the growth rate of money supply to 3% to lower the interest rate.
C)
lowering the growth rate of money supply to 1% to increase saving.
D)
maintaining the growth rate of money supply at 2% and letting the aggregate price
level fall.
89.
Milton Friedman was the leading figure in the movement called:
A)
Keynesianism.
B)
fiscalism.
C)
monetarism.
D)
big government.
90.
If crowding out occurs:
A)
increases in consumption are offset by decreases in government spending.
B)
increases in the money supply are offset by dollar outflows in foreign trade.
C)
increases in government spending cause higher interest rates and decreased
investment spending.
D)
decreases in government spending cause lower interest rates and decreased
investment spending.
91.
Crowding out is MOST likely when expansionary fiscal policy is accompanied by:
A)
expansionary monetary policy.
B)
open-market purchases.
C)
slow growth of the money supply.
D)
an investment tax credit.
Page 19
92.
Monetarism suggests that:
A)
money should be backed by gold.
B)
the economy is unstable.
C)
monetary policy should be used to offset economic fluctuations.
D)
discretionary monetary policy does more harm than good.
Use the following to answer questions 93-95:
Figure: Fiscal Policy with a Fixed Money Supply
93.
(Figure: Fiscal Policy with a Fixed Money Supply) Look at the figure Fiscal Policy with
a Fixed Money Supply. Assume that this economy is at E1. Now government deficit
spending is increased, but the Federal Reserve does NOT expand the money supply.
According to this model:
A)
real GDP will expand just as much as if the Federal Reserve had expanded the
money supply.
B)
real GDP will decrease because the Federal Reserve did not expand the money
supply.
C)
real GDP will expand, but not as much as if the Federal Reserve had expanded the
money supply.
D)
interest rates will decrease.
Page 20
94.
(Figure: Fiscal Policy with a Fixed Money Supply) Look at the figure Fiscal Policy with
a Fixed Money Supply. Assume that this economy is at E2. Now government deficit
spending is decreased, but the Federal Reserve expands the money supply. According to
this model:
A)
real GDP will decrease just as much as it would if the Federal Reserve had not
expanded the money supply.
B)
real GDP will decrease, but not as much as it would if the Federal Reserve had
failed to expand the money supply.
C)
real GDP will expand, but not as much as it would if the Federal Reserve had not
expanded the money supply.
D)
interest rates will increase.
95.
(Figure: Fiscal Policy with a Fixed Money Supply) Look at the figure Fiscal Policy with
a Fixed Money Supply. Assume that this economy is at E1. Now government deficit
spending increases and the Federal Reserve expands the money supply. According to
this model:
A)
real GDP might increase in the short run, but inflation can lead to a return to the
original level of real GDP in the long run.
B)
real GDP will decrease because the government expanded deficit spending.
C)
real GDP will decrease, but not as much as if the Federal Reserve had contracted
the money supply.
D)
interest rates will decrease.
96.
Friedman argued that with a _____ money supply, velocity is so _____ that there’s not
much point in using monetary policy.
A)
steady increase in the; large
B)
constant; small
C)
steady increase in the; constant
D)
constant; large
97.
Friedman favored:
A)
activist monetary policy to stabilize the economy.
B)
activist fiscal policy coupled with a neutral monetary policy.
C)
a monetary policy rule.
D)
interest rate targeting.
98.
During the 1960s and 1970s, most monetarists believed that the velocity of money:
A)
was stable.
B)
was inversely related to the money stock.
C)
moved in tandem with the money stock.
D)
was irrelevant to the price level.
Page 21
99.
After 1980 the velocity of money began to:
A)
stabilize.
B)
drift upward.
C)
drift downward.
D)
shift erratically.
100.
The concept of the monetary policy rule is based on the assumption that:
A)
discretionary fiscal policy crowds out investment spending.
B)
the natural rate of unemployment is constant in the long run.
C)
monetary policy lags are shorter than fiscal policy lags.
D)
the velocity of money is constant in the short run.
101.
Challenges to Keynesian economics were based on:
A)
the fact that lags in fiscal policy make it relatively ineffective.
B)
the liquidity trap, which makes fiscal policy ineffective.
C)
the possibility of a trade-off between inflation and unemployment.
D)
the usefulness of discretionary fiscal policy.
102.
The monetary policy rule suggests that:
A)
we should follow the rules set by the Fed.
B)
the Fed should follow the rules set by Congress.
C)
the interest rate should grow at a slow and steady pace.
D)
the money supply should grow at a slow and steady pace.
103.
The Fed moved away from a monetary growth rule because _____ was (were) unstable.
A)
the economy
B)
the money supply
C)
the velocity of money
D)
interest rates
104.
Monetarists argue that:
A)
the impact lag for monetary policy is short and predictable.
B)
stabilization policies may actually be destabilizing.
C)
the Federal Reserve System should use active monetary policy.
D)
active monetary policy should be used to reinforce active fiscal policy.
Page 22
105.
Milton Friedman was a leader and major proponent of:
A)
monetarism.
B)
classical economics.
C)
Keynesian economics.
D)
rational expectations theory.
106.
A policy implication of monetarism is that:
A)
full employment will always be maintained.
B)
countercyclical policies have no effect on the economy.
C)
the growth of the money supply is caused by economic fluctuations.
D)
constant growth of the money supply is better than discretionary policies.
107.
Monetarists argue that:
A)
the Federal Reserve System should allow the money supply to increase at a slow,
steady annual rate.
B)
since the velocity of money is unstable, a fixed annual increase in the money
supply will exacerbate inflation in the long run.
C)
self-correction is less effective than activist monetary policy.
D)
fiscal policy should always be used before monetary policy.
108.
Monetarists believe that:
A)
full employment is the norm.
B)
countercyclical policies do not affect the economy.
C)
a fixed increase in the rate of growth of the money supply is better than
discretionary policies.
D)
discretionary monetary policy is better than a fixed growth rate of the money
supply.
109.
The money velocity equation is stated as:
A)
M × V = P × Y.
B)
M × P = V × Y.
C)
M × Y = V × P.
D)
M × Y × P = V.
110.
The _____ hypothesis is that macroeconomic policy should be used to stabilize the
economy rather than to permanently decrease the unemployment rate.
A)
natural rate
B)
political business cycle
C)
rational expectations
D)
real business cycle
Page 23
111.
Under which conditions do some macroeconomists believe the natural rate hypothesis
does NOT work?
A)
periods of rapidly rising inflation
B)
high but constant inflation
C)
low or negative inflation
D)
high economic growth
112.
The Friedman–Phelps hypothesis claimed that the apparent trade-off between
unemployment and inflation would NOT survive an extended period of:
A)
rising unemployment.
B)
rising prices.
C)
rising interest rates.
D)
increases in the money supply.
113.
The natural rate hypothesis:
A)
is now generally discredited.
B)
implies sharp limits on what macroeconomic policy can achieve.
C)
implies there is a long-run trade-off between inflation and unemployment.
D)
implies that there is no liquidity trap.
114.
The Friedman–Phelps (natural rate) hypothesis made the strong prediction that:
A)
once inflation gets embedded in people’s expectations, unemployment and inflation
will have a trade-off.
B)
the unemployment and inflation trade-off will not survive if inflation gets
embedded in people’s expectations.
C)
there will always be an unemployment and inflation trade-off.
D)
the unemployment and inflation trade-off is a myth.
115.
The political business cycle implies all of the following EXCEPT that:
A)
central banks should be independent of politics.
B)
discretionary fiscal policy should be avoided.
C)
politicians pumping up the economy in an election year make the economy less
stable.
D)
monetary policy is ineffective if inflation is high.
Page 24
116.
The political business cycle refers to policies that:
A)
slow down the economy in election years.
B)
keep the economy on a constant growth path.
C)
speed the economy up in election years.
D)
run surpluses in election years.
117.
Use of activist fiscal and monetary policy can bring rapid growth, as was the case in the
United States before the 1972 election. One consequence of an activist policy is:
A)
use of macroeconomic policy that stabilizes the economy.
B)
a political business cycle caused by the use of macroeconomic policy to serve
political ends.
C)
countercyclical macroeconomic policy designed to help the economy.
D)
crowding out as decreases in government spending push out the private business
spending.
118.
Since fiscal policy can be manipulated by partisan political interests:
A)
the political business cycle may drive the economic business cycle.
B)
we may see lower interest rates before elections and higher interest rates after
elections.
C)
the economic business cycle may lead the political business cycle.
D)
we may see lower inflation and higher unemployment before elections.
119.
Fiscal policy is usually:
A)
more political than monetary policy.
B)
less political than monetary policy.
C)
neutral like monetary policy.
D)
having the same impact on all citizens.
120.
From 1979 to 1982, the Federal Reserve System:
A)
followed monetarist policy suggestions.
B)
initiated a sharply expansionary monetary policy.
C)
pursued a policy that shifted AD to the right.
D)
fell into the liquidity trap.
121.
In the late 1970s and early 1980s, the Federal Reserve:
A)
began targeting the money supply.
B)
began targeting interest rates.
C)
stopped targeting the money supply.
D)
began targeting both the interest rate and the money supply.
Page 25
122.
Since 1982, the Federal Reserve has:
A)
pursued a passive monetary policy.
B)
pursued a discretionary monetary policy, which has led to large swings in the
money supply.
C)
pursued a discretionary monetary policy, which has stabilized interest rates.
D)
abandoned interest rate targeting.
123.
Which of the following BEST explains why the Fed flirted with monetarism but then
gave up?
A)
The natural rate hypothesis failed to predict a worsening of the trade-off between
inflation and unemployment.
B)
A sharp rise in inflation during the 1970s broke the perceived trade-off between
inflation and unemployment and discredited traditional Keynesianism.
C)
Inflation started dropping off sharply in the 1980s, and this helped bolster the view
that targeting the money supply no longer made sense.
D)
It finally became evident that there was no longer a trade-off between inflation and
unemployment.
124.
Which of the following statements is FALSE?
A)
Early Keynesianism downplayed the effectiveness of monetary as opposed to fiscal
policy.
B)
Monetarism argued that discretionary monetary policy does more harm than good.
C)
The natural rate hypothesis places sharp limits on what macroeconomic policy can
achieve.
D)
Concerns about a political business cycle suggest that the central bank should not
be independent and argue for a strong discretionary fiscal and monetary policy.
125.
Which of the following about new classical macroeconomics is FALSE?
A)
It returned to the classical view that shifts in the aggregate demand curve affect
only the aggregate price level, not aggregate output.
B)
It challenged traditional arguments about the slope of the short-run aggregate
supply curve based on the concept of rational expectations.
C)
It suggested that changes in productivity cause economic fluctuations.
D)
It embraced the Keynesian notion that changes in aggregate demand may affect
aggregate output in the short run.
Page 26
126.
According to the theory of new classical economics, if business sentiment and
investment spending decrease, the aggregate demand curve _____ and the price level
falls, while aggregate output_____.
A)
shifts right; increases
B)
shifts left; remains constant
C)
shifts right; decreases
D)
shifts left; decreases
127.
New classical economics:
A)
focuses on short-run economic fluctuations.
B)
returns to the view that shifts in aggregate demand affect only the price level.
C)
argues that the business cycle is caused by “animal spirits.”
D)
focuses on the trade-off between unemployment and inflation.
128.
New classical macroeconomists believe that the short-run aggregate:
A)
supply curve is vertical.
B)
demand curve is vertical.
C)
demand curve has a positive slope.
D)
supply curve is horizontal.
129.
Under rational expectations, government policy can be effective:
A)
if it is rationally thought out before implementation.
B)
if it is anticipated, so people can make realistic preparations.
C)
if it surprises people.
D)
whenever the economy reacts rationally to the decision.
130.
The set of ideas known as the new Keynesian economics states that:
A)
markets clear in the short run because prices adjust whenever there are surpluses or
shortages.
B)
market imperfections tend to make prices sticky in the short run.
C)
markets tend to be in equilibrium because of the inherent forces in the economy.
D)
wage and price inflation is the main problem that most economies face in the short
run.
Page 27
131.
The rational expectations theory states that when individuals and firms make decisions,
they take everything into account. Thus:
A)
if it’s clear that the government intends to trade off higher inflation for lower
unemployment, the public will understand this and help the government achieve its
goal.
B)
if it’s clear that the government intends to trade off higher inflation for lower
unemployment, the public will understand this and inflation expectations will
immediately rise.
C)
a government attempt to trade off higher inflation for lower unemployment would
not work in the short run but would be fine in the long run.
D)
even if people are not expecting inflation and are unaware of government policies,
inflation expectations are still going to be embedded.
132.
According to rational expectations, monetary policy is:
A)
always effective.
B)
effective only if it is unexpected.
C)
ineffective compared to fiscal policy.
D)
effective only when fiscal policy accommodates it.
133.
The theory of rational expectations is CONSISTENT with which of the following
statements?
A)
It takes into account only current information about inflation.
B)
It takes into account only past information about inflation.
C)
It takes into account past rates of inflation and available information about
monetary and fiscal policy.
D)
A government attempt to trade off higher inflation for lower unemployment would
work in the short run but would eventually fail because higher inflation would get
built into expectations.
134.
The theory of rational expectations states that:
A)
people make decisions optimally as often as they make decisions less than
optimally.
B)
expectations about future real wages are often irrational.
C)
people make decisions using all available information.
D)
designing effective economic policy is very difficult because of the shortage of
information.
Page 28
135.
Rational expectations theory suggests that people and firms base their expectations on:
A)
the recent past.
B)
government announcements.
C)
“animal spirits.”
D)
all available information.
136.
According to the theory of rational expectations, individuals will respond to
expansionary monetary policy by predicting:
A)
a lower rate of inflation.
B)
a higher rate of inflation.
C)
no change in the rate of inflation.
D)
incorrectly what will happen to the price level and employment.
137.
The theory of rational expectations contends that policy activism is:
A)
not warranted, because we don’t know enough about the workings of the economy
to stabilize it.
B)
not warranted; the public defeats discretionary policies because everyone expects
them and therefore their effectiveness is thwarted.
C)
warranted, because discretionary policies have a strong effect on real output.
D)
warranted, because expectations are rational only in the short run.
138.
An hypothesis that individuals base their expectations on available information and act
on that information is called the:
A)
irrational forecasts hypothesis.
B)
rational information theory hypothesis.
C)
rational expectations hypothesis.
D)
rational abstention hypothesis.
139.
Rational expectations theory asserts that because people have rational expectations, if a
policy of reducing the money supply is used:
A)
it might affect both AD 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)
participants in economic activity 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)
periods of unemployment will be very short.
Page 29
140.
Proponents of the theory of rational expectations contend that:
A)
people make rational forecasts using all existing information.
B)
business cycles are generally caused by shifts in aggregate demand.
C)
full employment is rarely achieved.
D)
stickiness of prices is the primary cause of inflation.
141.
Proponents of rational expectations believe that:
A)
changes in AD cause business cycles.
B)
people will not be surprised by systematic monetary and fiscal policies.
C)
the economy will have to undergo long periods of unemployment during
recessions.
D)
the velocity of money does not exist.
142.
According to the theory of new classical economics, if productivity decreases, the
aggregate supply curve shifts _____ and the price level rises, while aggregate
output_____.
A)
right; increases
B)
left; remains constant
C)
right; decreases
D)
left; decreases
143.
The real business cycle theorists say that changes in total factor productivity are totally
the result of:
A)
depressions.
B)
shifts in aggregate supply.
C)
shifts in aggregate demand.
D)
uneven technological progress.
144.
According to the real business cycle theory, fluctuations in output are caused by:
A)
fluctuations in the growth rate of total factor productivity.
B)
changes in aggregate demand.
C)
changes in the money supply.
D)
discretionary fiscal policy.
Page 30
145.
Real business cycle theory argues that:
A)
changes in inventories are the cause of the business cycle.
B)
fluctuations in the rate of growth of total factor productivity cause the business
cycle.
C)
aggregate demand is more important than aggregate supply in identifying the
causes of the business cycle.
D)
changes in the money supply are the primary cause of the business cycle.
146.
According to the real business cycle theory, the primary source of fluctuations in real
output is changes in the:
A)
level of investment spending by manufacturing firms.
B)
rate of growth of total factor productivity.
C)
rate of growth of the aggregate price level.
D)
level of spending on durable goods by households.
147.
Real business cycle theory suggests the business cycle is caused by:
A)
discretionary monetary policy.
B)
fluctuations in the rate of productivity.
C)
“animal spirits.”
D)
protectionism.
148.
Real business cycle theory suggests that changes in _____ are the primary cause of
business cycles.
A)
aggregate demand
B)
the growth of factor productivity
C)
fiscal policy
D)
monetary policy
149.
If real business cycle theory uses an upward-sloping aggregate _____ curve, aggregate
_____ is _____.
A)
demand; supply; relevant
B)
demand; supply; irrelevant
C)
supply; demand; irrelevant
D)
supply; demand; relevant
Page 31
150.
Real business cycle theory contends that the:
A)
aggregate supply curve is vertical, and it shifts to the left in a recession.
B)
aggregate demand curve is vertical, and it is the main factor that causes the
business cycle.
C)
aggregate supply curve is horizontal, indicating that business cycles have been
stabilized.
D)
aggregate demand curve is downward sloping, which shows that productivity
growth is slowing down, causing the business cycle.
151.
The economic view that reducing tax rates will increase the incentives to work and
invest and will ensure a high growth rate of the potential output is known as _____
economics.
A)
supply-side
B)
demand-side
C)
new classical
D)
new Keynesian
152.
According to supply-side economics, tax cuts:
A)
cause dangerous budget deficits.
B)
unfairly sacrifice equity to efficiency.
C)
increase incentives to work and save and cause increases in potential output.
D)
increase output by directly increasing aggregate demand.
153.
Which of the following was a proponent of supply-side economics?
A)
Herbert Hoover
B)
Franklin Roosevelt
C)
Jimmy Carter
D)
Ronald Reagan
154.
In the 1970s and first half of the 1980s the U.S. economy had _____ inflation and _____
unemployment.
A)
high; high
B)
high; low
C)
low; high
D)
low; low
Page 32
155.
The period of relative calm in the economy between 1985 and 2007 is called the:
A)
Great Depression
B)
Great Moderation.
C)
Great Recession.
D)
Great Modernization.
156.
The slump that followed the 2008 financial crisis is called the:
A)
Great Depression
B)
Great Moderation.
C)
Great Recession.
D)
Great Modernization.
157.
The school of thought that monetary policy should be the main tool of stabilization
policy, that is skeptical about the use of fiscal policy, and that recognizes constraints on
policy imposed by the natural rate of unemployment and the political business cycle is:
A)
classical macroeconomics.
B)
Keynesian macroeconomics.
C)
monetarism.
D)
the Great Moderation consensus.
158.
According to the Great Moderation consensus:
I. monetary policy should be the main stabilization tool.
II. the natural rate of unemployment doesn’t actually exist.
A)
I only
B)
II only
C)
I and II
D)
neither I nor II
159.
According to the Great Moderation consensus:
I. fiscal policy should be the main stabilization tool.
II. the effectiveness of economic policy is limited by the political business cycle.
A)
I only
B)
II only
C)
I and II
D)
neither I nor II
Page 33
160.
The Great Moderation consensus regarding the use of monetary policy to fight
recessions is that expansionary monetary policy:
A)
is ineffective because the public expects it.
B)
is harmful because it only increases the aggregate price level.
C)
has little impact on aggregate demand because of liquidity traps.
D)
can be used to increase aggregate demand but at the cost of higher aggregate
prices.
161.
Which of the following schools of thought believe that expansionary monetary policy is
effective in fighting recessions?
I. classical macroeconomics
II. Great Moderation consensus
A)
I only
B)
II only
C)
I and II
D)
neither I nor II
162.
Which of the following schools of thought believe that expansionary monetary policy
affects only prices, not output?
I. classical macroeconomics
II. Great Moderation consensus
A)
I only
B)
II only
C)
I and II
D)
Neither I nor II
163.
Which of the following schools of thought believe that expansionary monetary policy
has very little or no effect on output?
I. Keynesian macroeconomics
II. Great Moderation consensus
A)
I only
B)
II only
C)
I and II
D)
neither I nor II
Page 34
164.
Which of the following believes that fiscal policy should have the central role in
fighting recessions?
I. classical macroeconomics
II. Keynesian macroeconomics
III. monetarism
A)
I only
B)
II only
C)
III only
D)
I, II, and III
165.
Most economists today believe that:
A)
the Federal Reserve should be abolished.
B)
fiscal policy can decrease the unemployment rate below the natural rate of
unemployment.
C)
the federal government should always balance its budget.
D)
the federal government should not seek to balance the budget annually, but let it
function as an automatic stabilizer.
166.
Most economists now agree that:
A)
the government should seek to balance its budget.
B)
fiscal policy can shift aggregate demand.
C)
fiscal policy can change the natural rate of unemployment.
D)
fiscal policy should be conducted by the Federal Reserve.
167.
Which of the following is the consensus among most economists today with respect to
the management of unemployment?
A)
Government can’t do anything about it.
B)
Expansionary policy can be used to achieve permanently low unemployment.
C)
Unemployment cannot be kept below the natural rate.
D)
Unemployment cannot be kept anywhere near the natural rate.
168.
The Great Moderation consensus regarding the use of monetary or fiscal policy to
reduce unemployment in the long run is that:
A)
unemployment can be constantly decreased as long as expectations of inflation are
kept low.
B)
the natural rate of unemployment limits what monetary and fiscal policy can
accomplish.
C)
the concept of the nonaccelerating inflation rate of unemployment, or NAIRU, was
a mistake.
D)
the only effective policy is to maintain a constant growth rate of the money supply.
Page 35
169.
Nearly all economists agree that fiscal policy _____ keep the economy _____.
A)
cannot; below the natural rate of unemployment.
B)
cannot; above the natural rate of unemployment.
C)
can; at the natural rate of unemployment.
D)
can; on the production possibility curve.
170.
Which of the following does NOT represent the broad consensus among
macroeconomists?
A)
Monetary policy should play the main role in stabilization policy.
B)
The central bank should be independent, insulated from political pressures, to
avoid a political business cycle.
C)
Discretionary fiscal policy should be used sparingly because of policy lags and the
risks of the political business cycle.
D)
Discretionary fiscal policy can lower the natural rate of unemployment.
171.
Most economists believe that discretionary fiscal policy should be used sparingly
because of the risk of:
A)
budget deficits.
B)
lags in adjusting policy, so that policies designed to fight a recession may end up
intensifying an inflationary gap.
C)
budget surpluses.
D)
sacrificing equity for efficiency.
172.
The Great Moderation consensus among macroeconomists is that fiscal policy should be
used sparingly because:
A)
it cannot be effective.
B)
of policy lags.
C)
it always destabilizes the economy.
D)
of the risk of government waste.
173.
The Great Moderation consensus among macroeconomists is that fiscal policy should be
used sparingly because:
A)
monetary policy is always more effective.
B)
it always requires higher taxes.
C)
lags in adjusting to fiscal policy can make it counterproductive.
D)
of the risk of government waste.
Page 36
174.
Discretionary fiscal policy may be counterproductive because:
A)
the countercyclical nature of such policies sometimes reduces their effectiveness.
B)
in the short run, only monetary policy is effective.
C)
increases in the government budget deficit affect economic growth in the long run.
D)
the various lags in fiscal policy mean that it may take effect when the economy has
already recovered.
175.
According to the Great Moderation consensus today, an unemployment rate of 6% when
the natural rate is 4.5% should be countered by:
A)
decreases in government spending.
B)
increases in tax rates.
C)
increases in the rate of growth of the money supply.
D)
decreases in the rate of growth of the money supply.
176.
The Great Moderation consensus among macroeconomists is described by all of the
following EXCEPT that:
A)
monetary policy should play the main role in stabilization policy.
B)
the central bank should be independent of politics.
C)
discretionary fiscal policy should be used sparingly.
D)
monetary policy is the only way to get out of the liquidity trap.
177.
Nearly all economists agree that central banks should:
A)
be subject to political control.
B)
be elected by voters.
C)
be independent.
D)
play a minor role in the economy.
178.
Which of the following is a point of the Great Moderation consensus?
I. Monetary policy should be the main stabilization policy.
II. The central bank should be independent of political influence.
III. Discretionary fiscal policy should be used sparingly.
A)
I only
B)
II only
C)
III only
D)
I, II, and III
Page 37
179.
Which of the following statements is TRUE of the state of modern macroeconomics?
A)
There is much more consensus than disagreement among economists.
B)
Inflation targeting and asset price management are incompatible duties for a central
bank.
C)
Congress indirectly controls the Fed and monetary policy through its annual budget
allocations.
D)
The Great Recession heightened the areas of disagreement among
macroeconomists over key policy questions.
180.
A very low rate of inflation during a recession can lead to:
A)
a liquidity trap, which makes monetary policy ineffective.
B)
a liquidity trap, which makes monetary policy effective.
C)
government budget deficits.
D)
government budget surpluses.
181.
If the Fed funds rate is only 1%, the economy is dangerously close to:
A)
an inflationary spiral.
B)
a liquidity trap.
C)
very high unemployment.
D)
another recession.
182.
The Great Moderation consensus was shattered by:
A)
the Great Recession.
B)
the Great Depression.
C)
World War II.
D)
the Panic of 1907.
183.
The Great Moderation consensus agreement that a decrease in the interest rate was the
best policy for fighting a recession was ineffective in the Great Recession because:
A)
the Fed bought government securities, but interest rates did not fall.
B)
interest rates were already close to zero.
C)
financial institutions were engaging in maturity transformation.
D)
Congress increased taxes.
184.
Reduction of interest rates was ineffective in fighting the Great Recession because:
A)
Congress decreased government spending to balance the budget.
B)
crowding-out occurred.
C)
the economy was dangerously close to a liquidity trap.
D)
businesses and consumers borrowed and spent so much that it caused an
inflationary gap.
Page 38
185.
A policy of fiscal stimulus involves _____ taxes and _____ government spending.
A)
increasing; decreasing
B)
increasing; increasing
C)
decreasing; decreasing
D)
decreasing; increasing
186.
Which of the following was an argument in favor of using discretionary fiscal policy in
fighting the Great Recession?
A)
Monetary policy could not be effective, since interest rates were near zero.
B)
If taxes were increased, the budget could be balanced.
C)
If government spending decreased, the budget surplus would increase.
D)
The lags associated with monetary policy would be destabilizing.
187.
Which of the following was a justification for breaking with the normal presumption
against using discretionary fiscal policy during the Great Recession?
A)
Monetary policy would not be effective because interest rates were so high.
B)
Crowding-out was not likely to be a problem in a very depressed economy with
interest rates near zero.
C)
The economy was so depressed that a political business cycle was not likely to be a
problem.
D)
Ricardian equivalence was likely if monetary policy was used alone.
188.
During the Great Recession policy makers were not as worried as usual about the lags
associated with discretionary fiscal policy because:
A)
the severity of the recession led Congress to pledge to pass a bipartisan spending
package immediately.
B)
businesses had pledged to respond quickly to the lower interest rates.
C)
the economy was likely to depressed for a long time, so the lags were not likely to
be as destabilizing as usual.
D)
the financial sector of the economy was not affected by the recession and was
ready to make loans to consumers and businesses.
189.
The argument that households and firms view an increase in government spending as a
sign that taxes will rise in the future and decrease current spending in anticipation of
higher future taxes is called:
A)
debt overhang.
B)
the natural rate hypothesis.
C)
supply-side economics.
D)
Ricardian equivalence.
Page 39
190.
Cutting government spending to increase private-sector confidence, leading to increases
in output and employment, is called:
A)
expansionary austerity.
B)
expansionary monetary policy.
C)
Ricardian equivalence.
D)
new Keynesian economics.
191.
One of the impacts of the budget deficits that resulted from the fiscal stimulus of 2009
was that:
A)
the public debt decreased.
B)
interest rates remained very low.
C)
interest rates increased to record high levels.
D)
crowding-out occurred.
192.
The monetary policy in which the Fed purchased assets other than short-term
government securities is called:
A)
maturity transformation.
B)
shadow banking.
C)
quantitative easing.
D)
debt overhang.
193.
When the Fed pursues a policy of quantitative easing, it:
A)
is trying to increase interest rates.
B)
is trying to decrease inflation.
C)
purchases short-term government securities.
D)
purchases long-term debt whose interest rates are significantly above zero.
194.
One argument in favor of quantitative easing is that:
A)
long-term interest rates have more influence over private spending than short-term
interest rates.
B)
short-term interest rates have more influence over private spending than long-term
rates.
C)
the private sector, not the Federal Reserve, should determine interest rates.
D)
it decreases the budget deficit.
Page 40
195.
Opponents of quantitative easing argued that the _____ monetary policy would cause
_____.
A)
contractionary; unemployment
B)
expansionary; inflation
C)
contractionary; inflation
D)
expansionary; unemployment
196.
The claim that reducing deficits in an economy with high rates of unemployment will
help even in the short run by improving confidence is called:
A)
quantitative easing.
B)
fiscal stimulus.
C)
expansionary austerity.
D)
a credit crunch.
197.
Proponents of expansionary austerity cite the experience of _____ since 2005 as
evidence of its effectiveness.
A)
Japan
B)
China
C)
the United States
D)
Latvia
198.
Since 2005, Latvia has _____ government spending and had a sharp _____ in economic
growth.
A)
cut; increase
B)
increased; increase
C)
cut; decrease
D)
increased; decrease
199.
Which of the following statements do economists broadly consider to be TRUE?
A)
A monetary rule can increase real GDP.
B)
Discretionary fiscal policy is typically more effective than monetary policy in
fighting recessions.
C)
A nation’s central bank should be managed by elected officials.
D)
Discretionary monetary and fiscal policy cannot affect the long-run level of
unemployment.
Page 41
200.
Which of the following statements is broadly agreed upon by modern macroeconomists?
A)
Monetary and fiscal policy can both be effective at decreasing unemployment in
the short run but not in the long run.
B)
Discretionary fiscal policy is typically an effective remedy for a recessionary gap
except in special circumstances.
C)
The central bank should set a specific target rate of inflation.
D)
A monetary rule should be set by the central bank.
201.
_____ answers NO to all five key questions about whether macroeconomic policy,
either monetary or fiscal, can help fight recession, reduce unemployment, or should be
used in a discretionary way.
A)
Classical macroeconomics
B)
Keynesian economics
C)
Rational expectations theory
D)
Monetarism
202.
_____ is the MOST likely to advocate the use of fiscal policy in fighting recessions?
A)
Classical macroeconomics
B)
Keynesian economics
C)
Rational expectations theory
D)
Monetarism
203.
Nearly all economists agree that increases in money supply can _____ aggregate _____.
A)
increase; supply
B)
decrease; supply
C)
decrease; demand
D)
increase; demand
204.
Nearly all economists agree that decreases in money supply can _____ aggregate _____.
A)
increase; supply
B)
decrease; supply
C)
decrease; demand
D)
increase; demand
205.
Nearly all economists agree that increases in government spending can _____ aggregate
_____.
A)
increase; supply
B)
decrease; supply
C)
decrease; demand
D)
increase; demand
Page 42
206.
Nearly all economists agree that expansionary fiscal policy can _____ aggregate _____.
A)
increase; supply
B)
decrease; supply
C)
increase; demand
D)
decrease; demand
207.
The belief that expansionary monetary policy is NOT at all helpful to the economy in
fighting recessions is attributed to:
A)
classical macroeconomics.
B)
Keynesian macroeconomics.
C)
monetarism.
D)
Great Moderation consensus.
208.
Using increased government spending and tax cuts to fight a recession is consistent with
_____ economics.
A)
classical
B)
classical and monetarist
C)
classical and Keynesian
D)
Keynesian and Great Moderation consensus
209.
The belief that neither monetary nor fiscal policy can reduce unemployment is
consistent with _____ economics.
A)
Keynesian
B)
classical
C)
rational expectations
D)
Great Moderation consensus
210.
If a contraction in aggregate demand causes a recession, the Great Moderation
consensus on macroeconomics suggests that:
A)
fiscal discipline with a balanced budget eventually stimulates aggregate demand.
B)
fiscal policy should take the leading role in economic stabilization.
C)
the use of discretionary fiscal policy is counterproductive except in special
circumstances.
D)
monetary discipline with a reduction in the money supply eventually stimulates
aggregate demand.
Page 43
211.
To close an inflationary gap, the Great Moderation consensus on macroeconomics
suggests that:
A)
a close coordination of fiscal and monetary policy is crucial.
B)
the automatic fiscal stabilizers are powerful enough to bring the economy back to
equilibrium.
C)
policy makers should wait until a negative productivity shock brings the economy
back to equilibrium.
D)
monetary policy should take the leading role in economic stabilization.
212.
The Great Moderation consensus about macroeconomic policy is that monetary policy:
A)
is effective.
B)
can reduce the unemployment rate below the natural rate.
C)
makes the economy unstable.
D)
should follow a policy rule.
213.
Which view of the macro economy holds that since the long-run growth of real GDP is
3%, the money supply should grow at 3%?
A)
classical
B)
Keynesian
C)
monetarist
D)
Great Moderation consensus
214.
Which view of macroeconomics holds that a decrease in the money supply will reduce
inflationary pressure?
A)
classical
B)
Keynesian
C)
monetarist
D)
rational expectations
215.
The recommendation that a decrease in taxes will alleviate a recessionary gap is
consistent with _____ macroeconomics.
A)
classical
B)
Keynesian
C)
monetarist
D)
Great Moderation consensus
Page 44
216.
The recommendation that the government should avoid deficit spending because of the
crowding-out effect on investment spending is consistent with _____ macroeconomics.
A)
classical
B)
Keynesian
C)
monetarist
D)
Great Moderation consensus
217.
The recommendation to use monetary policy to stabilize the economy and use fiscal
policy only when monetary policy is ineffective is consistent with _____
macroeconomics.
A)
classical
B)
Keynesian
C)
monetarist
D)
Great Moderation consensus
218.
The Great Moderation consensus about macroeconomic policy is that:
A)
only monetary policy works against recessions, but fiscal policy is effective only in
the long run.
B)
expansionary monetary and fiscal policies can both reduce unemployment in the
long run.
C)
expansionary monetary and fiscal policies are both effective in the short run but not
in the long run.
D)
discretionary monetary and fiscal policies are effective in the short run and in the
long run.
219.
The Great Moderation consensus is that:
A)
fiscal policy should play the main role in stabilization policy.
B)
monetary policy should play the main role in stabilization policy.
C)
automatic stabilizers should be the only type of policy used.
D)
government budgets should always be balanced.
220.
According to classical economists, the short-run aggregate supply curve is _____, while
according to Keynesian economists, the short-run aggregate supply curve is _____.
A)
vertical; upward sloping
B)
downward sloping; vertical
C)
vertical; vertical
D)
upward sloping; horizontal
Page 45
221.
_____ macroeconomists focused on the _____ effects of _____ policy on the aggregate
price level, ignoring any _____ effects on aggregate output.
A)
Keynesian; long-run; monetary; short-run
B)
Classical; short-run; monetary; long-run
C)
Classical; long-run; monetary; short-run
D)
Keynesian; long-run; fiscal; short-run
222.
According to classical economists, the aggregate supply curve is _____, but according
to Keynes, it is _____.
A)
vertical in the short run; upward sloping in the short run
B)
upward sloping in the short run; vertical in the short run
C)
upward sloping in the short run; horizontal in the short run
D)
downward sloping in the long run; always vertical
223.
Pablo believed that short-run changes in aggregate demand affected aggregate output as
well as the price level. He believed that there was a role for monetary policy in
managing the economy, but he advocated a simple monetary rule that would increase
the money supply at a constant rate to grow the economy. Pablo was best described as a:
A)
Keynesian.
B)
new classical economist.
C)
supply-sider.
D)
monetarist.
224.
Which of the following group of economists DISAGREES with discretionary monetary
policy in favor of a monetary rule that prescribes a slow increase in the money supply?
A)
Keynesians
B)
monetarists
C)
supply-side economists
D)
classical economists
225.
Which of the following theories is consistent with the notion that the short-run
aggregate supply curve may be vertical after all?
A)
Keynesian theory
B)
new classical economics
C)
new Keynesian theory
D)
real business cycle theory
Page 46
226.
“A consistent countercyclical policy has no effect on employment and output, since
individuals will recognize those policies as systematic and will anticipate them
correctly.” This statement is most closely associated with _____ theory.
A)
classical
B)
Keynesian
C)
rational expectations
D)
monetarist
227.
The macroeconomic theory that because workers and firms take all information into
account, only unexpected changes in the money supply affect aggregate output is called
_____ theory.
A)
real business cycle
B)
rational expectations
C)
new classical
D)
supply-side
228.
Joseph believes that changes in the business cycle can be attributed to shifts in the
vertical aggregate supply curve. These shifts are caused by faster or slower increases in
economic productivity. Joseph is best described as supporting the _____ theory.
A)
rational expectations
B)
supply-side
C)
real business cycle
D)
new Keynesian
229.
Nancy believes that the best way to grow the economy is through tax cuts to increase the
incentive to work and invest. Though these tax cuts might initially increase the budget
deficit, Nancy is convinced that the economic growth that results will actually increase
government tax revenue. Nancy is best described as a:
A)
monetarist.
B)
classical economist.
C)
new Keynesian.
D)
supply-sider.
230.
Classical economists focused on short-run effects of monetary policy.
A)
True
B)
False
Page 47
231.
Classical macroeconomists focused on the long-run effects of monetary policy on the
aggregate price level and argued that it had no short-run or long-run effects on aggregate
output.
A)
True
B)
False
232.
Classical economics is based primarily on the works of John Maynard Keynes.
A)
True
B)
False
233.
If the unemployment rate rose, a classical economist would counsel the government to
do nothing.
A)
True
B)
False
234.
The experience of the Great Depression led to the widespread acceptance of classical
economics.
A)
True
B)
False
235.
Keynes emphasized short-run effects of aggregate demand on aggregate output.
A)
True
B)
False
236.
According to Keynes, changes in business confidence are often responsible for business
cycles.
A)
True
B)
False
237.
Keynesian economics was mostly concerned with the short run.
A)
True
B)
False
238.
Keynesian theory argued that monetary policy could be very effective during a
depression.
A)
True
B)
False
Page 48
239.
Monetarists argue that discretionary monetary policy does more harm than good.
A)
True
B)
False
240.
Monetarism asserts that GDP will grow steadily if the money supply grows steadily.
A)
True
B)
False
241.
A monetarist rule would be to vary the money growth rate between set limits, such as
3% to 5% annual growth.
A)
True
B)
False
242.
Most economists favor discretionary monetary policy because the velocity of money has
been very stable since the 1980s.
A)
True
B)
False
243.
The natural rate hypothesis suggests there are limits to what macroeconomic policy can
achieve.
A)
True
B)
False
244.
According to the natural rate hypothesis, attempts to keep unemployment below the
natural rate will lead to increasing inflation.
A)
True
B)
False
245.
Supply-side economics is the belief that tax cuts can be used to stimulate long-run
economic growth.
A)
True
B)
False
246.
Some economists believe that fluctuations in the growth rate of total factor productivity
cause business cycles.
A)
True
B)
False
Page 49
247.
In the 1970s and first half of the 1980s the U.S. economy had high inflation and high
unemployment.
A)
True
B)
False
248.
In the 1970s and first half of the 1980s the U.S. economy had low inflation and low
unemployment.
A)
True
B)
False
249.
The period of relative calm in the economy between 1985 and 2007 is called the Great
Moderation.
A)
True
B)
False
250.
The slump that followed the 2008 financial crisis is called the Great Modernization.
A)
True
B)
False
251.
The Great Moderation consensus is the school of thought that monetary policy should
be the main tool of stabilization policy and is skeptical about the use of fiscal policy.
A)
True
B)
False
252.
According to the Great Moderation consensus, fiscal policy should be the main
stabilization tool.
A)
True
B)
False
253.
According to the Great Moderation consensus, the effectiveness of economic policy is
limited by the political business cycle.
A)
True
B)
False
254.
Economists who agree with the Great Moderation consensus believe that monetary
policy can keep unemployment below the natural rate.
A)
True
B)
False
Page 50
255.
The Great Moderation consensus includes the belief that expansionary monetary policy
is effective in fighting recessions.
A)
True
B)
False
256.
The Great Moderation consensus is that expansionary monetary policy affects only
prices, not output.
A)
True
B)
False
257.
The Keynesian school of thought is that expansionary monetary policy has very little or
no effect on output.
A)
True
B)
False
258.
The classical macroeconomists believed that fiscal policy was even less effective than
monetary policy.
A)
True
B)
False
259.
Monetarists argued that fiscal policy was ineffective if the money supply increased.
A)
True
B)
False
260.
Most economists believe that the budget should not be balanced annually but should be
allowed to function as an automatic stabilizer.
A)
True
B)
False
261.
Classical macroeconomists believed that government could reduce the unemployment
rate to a permanently low rate.
A)
True
B)
False
Page 51
262.
Some Keynesian economists believed that at the cost of some inflation, the government
could reduce the unemployment rate to a permanently low rate.
A)
True
B)
False
263.
Most economists today believe that the appropriate monetary and/or fiscal policy can
permanently reduce the unemployment rate below the natural rate.
A)
True
B)
False
264.
Most economists today believe that effective monetary and fiscal policy can limit the
fluctuations of the actual unemployment rate around the natural rate, but they are unable
to keep unemployment permanently below the natural rate.
A)
True
B)
False
265.
Monetary and fiscal policy can be used to reduce the natural rate of unemployment.
A)
True
B)
False
266.
Discretionary fiscal policy may destabilize the economy because of lags in
implementing policy and lags in the effect of fiscal policy on the economy.
A)
True
B)
False
267.
The Great Moderation consensus is that fiscal policy has no effect on aggregate demand.
A)
True
B)
False
268.
The Great Moderation consensus is that discretionary fiscal policy can be destabilizing
because of lags in adjusting policy.
A)
True
B)
False
269.
The Great Moderation consensus is that discretionary fiscal policy can be destabilizing
because of the political business cycle.
A)
True
B)
False
Page 52
270.
Classical macroeconomists believed that monetary policy should be used to fight
recessions.
A)
True
B)
False
271.
Keynesian economists didn’t oppose monetary policy, but they felt that it was
ineffective in fighting a recession.
A)
True
B)
False
272.
The Great Moderation consensus is that the policy makers of the central bank should be
elected so that they are responsible to the voters.
A)
True
B)
False
273.
The Great Moderation consensus includes the idea that the central bank should be
independent of politics.
A)
True
B)
False
274.
Most economists today agree that the Federal Reserve should remain independent so
that it is insulated from political pressure.
A)
True
B)
False
275.
Economists today generally believe that fiscal policy should be the primary tool for
stabilizing the economy.
A)
True
B)
False
276.
Economists today generally believe that monetary policy can stabilize the economy but
not reduce unemployment below its natural rate.
A)
True
B)
False
Page 53
277.
When interest rates are very high, the economy is in a liquidity trap, and monetary
policy may be ineffective in fighting a recession.
A)
True
B)
False
278.
The policies that seemed to be effective during the Great Moderation seemed to be
inadequate to fight the Great Recession.
A)
True
B)
False
279.
A stimulus is an expansionary fiscal policy.
A)
True
B)
False
280.
Many economists argued against using discretionary fiscal policy during the Great
Recession because interest rates were very low and fiscal policy is ineffective when
interest rates are near zero.
A)
True
B)
False
281.
Many economists favored using discretionary fiscal policy during the Great Recession
because monetary policy could not be used when interest rates were near zero.
A)
True
B)
False
282.
A policy of expansionary austerity involves increasing government spending to increase
private-sector confidence, leading to an increase in output and employment.
A)
True
B)
False
283.
The Ricardian equivalence argument says that households and businesses view any
increase in government spending as a sign that tax burdens will increase in the future,
which will cause a decrease in private spending in anticipation of higher future taxes.
A)
True
B)
False
Page 54
284.
Purchases and sales of short-term Treasury bills by the Fed is called quantitative easing.
A)
True
B)
False
285.
The purpose of quantitative easing is to drive down long-term interest rates, which are
usually more important for private investment spending than short-term rates.
A)
True
B)
False
286.
Prior to the 1930s, classical economics was the predominant theory about the behavior
of the aggregate price level, aggregate output, and the appropriate role of monetary
policy. Describe how classical economists believed the economy would be affected by
an increase in the money supply.
287.
Why did the adoption of Keynesian economics come out of the Great Depression?
288.
Explain the rational expectations theory and how it predicts the usefulness of fiscal and
monetary policy.
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.
Page 55
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
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.
Page 56
300.
Those who believe in the classical model suggest that expansionary policies would
result in:
A)
increases in output and the aggregate price level.
B)
increases in output with no change in the aggregate price level.
C)
increases in the aggregate price level with no change in output.
D)
increases in unemployment and the output level.
301.
An economy that is primarily agricultural will have a _____ aggregate _____ curve.
A)
horizontal; supply
B)
nearly vertical; supply
C)
horizontal; demand
D)
nearly vertical; demand
302.
Prior to 1854, the United States was:
A)
dominated by the manufacturing sector and was subject to price inflexibility.
B)
dominated by the agricultural sector and was subject to price flexibility.
C)
plagued by recurrent recessions due to poor government policy.
D)
plagued by recurrent inflations due to poor central bank policy.
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.
Page 57
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.
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.
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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.
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.
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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.
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.
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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.
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Answer Key
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