Chapter 19 – Current Issues in Macro Theory and Policy
48. Refer to the above graph. Assume that the economy is in initial equilibrium where AD1
intersects AS1. If there is an anticipated decrease in aggregate demand to AD2, then according
to rational expectations theory, the path for adjustment runs from point:
49. Refer to the above graph. Assume that the economy is in initial equilibrium where AD1
intersects AS1. If there is a decrease in aggregate demand to AD2, then according to
mainstream economists, if prices are flexible and wages are not, this will result in an
equilibrium at point:
Chapter 19 – Current Issues in Macro Theory and Policy
50. Refer to the above graph. Assume that the economy is in initial equilibrium where AD1
intersects AS1. If there is a decrease in aggregate demand to AD2, then according to
mainstream economists, if prices are not flexible, this will result in an equilibrium at point:
51. Monetarists base their assessment of the speed of adjustment for self-correction in the
economy on:
52. Which view of the macro economy suggests that the speed of adjustment for self-
correction would be quick?
Chapter 19 – Current Issues in Macro Theory and Policy
53. In the view of rational expectations theory:
54. In the rational expectations theory, a temporary change in real output could result from:
Chapter 19 – Current Issues in Macro Theory and Policy
55. One of the basic assumptions of rational expectations theory is that:
56. From a rational expectations perspective, an easy money policy is likely to be completely:
57. Within the aggregate demand-aggregate supply framework, a strict interpretation of
rational expectations theory suggests that a change in aggregate:
Chapter 19 – Current Issues in Macro Theory and Policy
58. Rational expectations theory considers the aggregate:
59. Mainstream economists think that:
60. Which view of economics typically views the market system as less than fully
competitive, and therefore subject to macroeconomic instability?
Chapter 19 – Current Issues in Macro Theory and Policy
61. A mainstream criticism of rational expectations theory is that:
62. Which of the following contributes to the downward inflexibility of wages according to
mainstream economists?
63. An efficiency wage is one that:
Chapter 19 – Current Issues in Macro Theory and Policy
65. One reason why the lowest wage rate is not necessarily the same as the efficiency wage is
that workers might:
66. The key implication for macroeconomic instability is that efficiency wages:
Chapter 19 – Current Issues in Macro Theory and Policy
67. The key implication for macroeconomic instability is that insider-outside relationships:
68. According to mainstream economists, which of the following would contribute to the
downward inflexibility of wages when aggregate demand declines?
69. The notion that the annual rate of increase in the money supply should be equal to the
potential annual growth rate of real GDP best describes the:
Chapter 19 – Current Issues in Macro Theory and Policy
70. If the economy’s real output is growing by 2.5 percent a year, then in order to maintain
price stability a monetarist would most likely recommend that money supply should be:
71. The rule suggested by the monetarists is that the money supply should be increased at the
same rate as the potential growth in:
72. To stabilize the economy, monetarist and rational expectations economists:
Chapter 19 – Current Issues in Macro Theory and Policy
73. Monetarists take the position that monetary policy:
74. Refer to the above graph. Assume that the economy is initially in equilibrium at the
intersection of AD1 and AS1. Then there is economic growth in the economy that shifts AS1 to
AS2. With the shift from AS1 to AS2, the monetary rule would call for an increase in the
money supply such that:
Chapter 19 – Current Issues in Macro Theory and Policy
75. Refer to the above graph. Assume that the economy is initially in equilibrium at the
intersection of AD1 and AS1. Then there is economic growth in the economy that shifts AS1 to
AS2. Because of the shift from AS1 to AS2, a monetarist following a monetary rule would call
for an increase in aggregate demand such that the price level and quantity of real domestic
output would be:
76. Refer to the above graph. Assume that the economy is initially in equilibrium at the
intersection of AD1 and AS1. Then there is economic growth in the economy that shifts AS1 to
AS2. Mainstream economists would suggest that the application of a monetary rule to keep
prices constant might produce demand-pull inflation because the investment spending might:
Chapter 19 – Current Issues in Macro Theory and Policy
77. Refer to the above graph. Assume that the economy is initially in equilibrium at the
intersection of AD1 and AS1. Then there is economic growth in the economy that shifts AS1 to
AS2. If the application of a monetary rule is designed to shift AD1 to AD3, but because of
pessimistic business expectations AD1 only shifts to AD2, then mainstream economists would
suggest that the actions to be taken to avoid deflation would be to implement a(n):
78. Monetarists argue that when an expansionary fiscal policy is financed through deficit
spending:
79. Crowding-out results from:
Chapter 19 – Current Issues in Macro Theory and Policy
80. From a monetarist perspective, an expansionary fiscal policy would be offset by:
81. According to rational expectations theory, discretionary monetary and fiscal policy will be
ineffective primarily because of the:
82. The theory of rational expectations calls for monetary policy rules because:
Chapter 19 – Current Issues in Macro Theory and Policy
83. According to rational expectations theory, instantaneous market adjustments make:
84. From the rational expectations perspective:
85. In recent years, calls for monetary rules by the Federal Reserve have been replaced with
calls for:
Chapter 19 – Current Issues in Macro Theory and Policy
86. With inflation targeting, the Federal Reserve would be required to announce its targeted
band for:
87. Mainstream economists contend that the equation of exchange breaks down because:
88. From the mainstream perspective, the crowding-out effect from the use of fiscal policy is: