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CHAPTER 13: MACROECONOMIC MODELS:
A SUMMARY
Additional Questions
Essay Questions and/or Problems:
1. Why are disagreements among the various schools of macroeconomic thought long-lasting
and difficult to resolve?
2. What do each of the major modern macroeconomic theories predict will happen to the price
level during recessions? What do they predict will happen to real wages during recessions?
Explain your answer for each model.
3. Compare theories of money demand across classically-based (classical, monetarist, new
classical, real business cycle) models and Keynesian-based (Keynesian, IS-LM, new
Keynesian) models.
4. Discuss the role of aggregate demand in business cycles in the monetarist, new classical,
and Keynesian models. Also discuss how each of these models view the potential
effectiveness of stabilization policy.
5. Discuss the slope of the aggregate supply curve in the majors models discussed in the
previous chapters. Why are they shaped as they are? What shifts aggregate supply in these
models?
6. What do each of the major modern macroeconomic theories predict will happen to the real
wages during recessions? Explain your answer for each model.
7. During the 1990s, investment expanded quite rapidly and stock prices rose dramatically.
How do you think a classical/real business cycle proponent would explain this boom? How
would a Keynesian/new Keynesian explain this boom?
8. What two theories argue that fluctuations in output are determined by aggregate supply?
Discuss the role of monetary policy in each of these models.
9. What theories argue that fluctuations in output are determined by aggregate demand?
Discuss the role of monetary policy in each of these models.
10. Will systematic and, therefore, predictable changes in aggregate demand affect the level of
real output in the new classical and monetarist models? How about in the Keynesian model.
Explain why or why not.
Additional Essay Questions and/or Problems:
10. Postwar recessions have been less frequent than prewar recessions. Provide an explanation
of this observation from the perspective of each of the following theories: (i) Keynesian
model, (ii) the monetarist model, (iii) the rational expectations model, (iv) the real business
cycle model.
11. Compare the role of monetary policy in each of the major macroeconomic systems
considered in Part II. In which is money most important? In which is it least important?
12. Compare the role of fiscal policy in each of the major macroeconomic systems considered
in Part II. In which is fiscal policy most effective? In which is it least effective?
13. Explain the role which aggregate demand plays in the determination of real output in each
of the major macroeconomic models we have considered.
14. Contrast the theories of aggregate supply within the four macroeconomic models we have
studied: the classical, Keynesian, monetarist, and new classical models.
Multiple-Choice Questions:
1. Which macroeconomic model dominated macroeconomic analysis from the early post-
World War II era until the late 1960s?
2. In which model does there not exist a tradeoff between higher inflation and lower
unemployment?
3. Which of the following statements is correct?
4. Which of the following models argue that active stabilization policy can be beneficial?
5. Aggregate supply is upward sloping in the
6. According to the monetarists and new classical economists,
7. The classically-based models (classical, new classical, monetarist, real business cycle) all
agree that
8. According to the new classical view, changes in aggregate demand
9. The assumption of constant velocity is a critical component of the
10. The Keynesian model agrees with monetarists and new classical models about the fact that
11. Both Keynesians and real business cycle proponents believe that tax cuts increase output
12. With respect to the demand side, the Keynesian model
13. Perfect flexible prices are a critical assumption in the
14. According to the new classical economics, predictable changes in aggregate demand
15. Imperfect information is a critical assumption in the
16. Which of the following schools of thought are policy interventionists favoring activist
aggregate demand management to stabilize output and employment?
17. Which of the following economic theories share(s) the noninterventionist policy
conclusions of the original classical theory?
18. Which of the following theories favor(s) a simple money growth rate rule?
19. Which of the following is the most likely cause of a recession according to the real business
cycle model?
20. In the real business cycle model, output and employment are
21. Which of the following models depicts the role of money as affecting only the price level in
the short run?
22. The aggregate supply curve
23. The degree to which monetary forces are the cause of aggregate demand instability is the
major controversy between
24. According to the new classical system,
25. With respect to the demand side, the classical model excludes
26. Which of the following statements is (are) correct?
27. The Keynesian revolution
28. Which of the following statements is (are) correct? In the classical system,
29. Which of the following is the most likely cause of most recessions according to the
Keynesian model?
30. Money is always neutral. This statement is most likely to be made by a proponent of the
31. Assuming that there is an excess supply of money in the classical model, then
32. According to the new classical system, an unanticipated increase in the money stock
33. Stable velocity of money is crucial component of the
34. In the new classical model, the aggregate supply schedule depends on
35. Which of the following is the most likely cause of most recessions according to the new
classical model?
36. Which of the following models do not believe that there exists a short run tradeoff between
higher inflation and lower unemployment?
37. Keynesians and monetarists share the belief that
38. The Keynesian aggregate supply schedule slopes upward because of
39. Which of the following statements is correct with respect to the debate between the
Keynesians and new classical economists?
40. Which of the following statements is (are) correct?
41. In which model does there exist a tradeoff between higher inflation and lower
unemployment?
42. The best argument against monetarists’ arguments that steady money growth would prevent
fluctuations in inflation and unemployment is that:
43. A falling price level in conjunction with rising output would be evidence in favor of which
model?
44. Which of the following could be described as an aggregate demand-driven model of
business cycles?
45. The classically-based models (classical, new classical, monetarist, real business cycle) all
agree that
46. The Keynesian model agrees with monetarists and new classical models about the fact that
47. According to the new classical economics, changes in monetary policy will only impact
GDP if:
48. The arguments against the use of active stabilization policy include all of the following
except:
49. Which of the following is the most likely cause of a recession according to classical and
new classical models?
50. Money neutrality is violated in which model?