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Chapter 19 - Current Issues in Macro Theory and Policy
89. Which idea is associated with mainstream economics?
90. Which economics perspective would be most closely associated with the view that
discretionary monetary policy is an effective force for stabilizing the economy?
91. Mainstream economists support:
Chapter 19 - Current Issues in Macro Theory and Policy
92. An idea from monetarism which has been absorbed into mainstream macroeconomics
would be the:
93. Which idea has been absorbed into mainstream macroeconomics?
94. The rational expectations view that expectations are important to consider:
Chapter 19 - Current Issues in Macro Theory and Policy
95. According to rational expectations theory, the cause of observed instability in the private
economy would most likely be due to:
96. The most likely advocates for a monetary rule would be:
97. The policy position that the supply of money should be increased at a constant rate each
year is most closely associated with the views of:
Chapter 19 - Current Issues in Macro Theory and Policy
98. The view that anticipated changes in the money supply will have no effect on the
economy would most likely be a proposition of:
99. Mainstream macroeconomics would suggest that fiscal policy:
100. Economist Abba Lerner viewed the economy as needing:
Chapter 19 - Current Issues in Macro Theory and Policy
101. Economist Milton Friedman viewed the economy as needing:
102. According to economist Milton Friedman, a major reason for macroeconomic instability
is due to:
103. The Taylor rule is a:
Chapter 19 - Current Issues in Macro Theory and Policy
104. According to the Taylor rule, if real GDP rises by 1 percent above potential GDP, the
Fed should raise:
105. According to the Taylor rule, if inflation rises by 1 percent above its target of 2 percent,
the Fed should:
106. According to the Taylor rule, when real GDP is equal to potential GDP and inflation is
equal to its target rate of 2 percent, the Federal fund rate should:
Chapter 19 - Current Issues in Macro Theory and Policy
107. Mainstream economists focus on wage-price rigidities as one cause of economic
instability.
108. Mainstream economists believe that economic instability is primarily due to unexpected
changes in consumer spending.
109. The mainstream view is that macro instability is caused by the volatility of the money
supply which shifts the aggregate demand curve.
Chapter 19 - Current Issues in Macro Theory and Policy
110. Mainstream economists think that the best way to stimulate the economy is to increase
aggregate supply.
111. Monetarists argue that government policy interference in the economy is the primary
cause of macroeconomic instability.
112. In the monetarist view, the economy is inherently stable, but the mismanagement of
monetary policy creates instability.
113. Monetarists argue that V in the equation of exchange is stable and thus a change in M
will bring about a direct and proportional change in nominal GDP.
Chapter 19 - Current Issues in Macro Theory and Policy
114. If M is $1,000, P is $8, and Q is 500, then V must be 6.
115. The equation of exchange indicates that an increase in money supply will always lead
only to inflation.
116. Real-business cycle theory views changes in resource availability and technology as
shifting aggregate demand and causing macroeconomic instability.
117. In real-business-cycle theory, real output can change without a change in the price level.
Chapter 19 - Current Issues in Macro Theory and Policy
118. A coordination failure is said to occur when people do not reach a mutually beneficial
equilibrium because they lack some way to jointly coordinate their actions to achieve it.
119. People's expectations have significant influence on coordination failures because they
can lead to a self-fulfilling prophecy.
120. New classical economists see the economy as incapable of self-correction when
disturbed and pushed away from its full-employment level of real output.
121. Rational expectations theory assumes that both product and resource markets are
competitive and that wages and prices are flexible.
Chapter 19 - Current Issues in Macro Theory and Policy
122. In rational expectations theory, a fully anticipated change in aggregate demand or in the
price level results in no change in real output.
123. The theory of rational expectations suggests that people make consistent forecasting
errors.
124. Mainstream economists contend that monetary policy tends to be destabilizing, in
contrast to monetarists who believe that monetary policy is a stabilizing factor.
125. An efficiency wage is an above-market wage that spurs greater work effort and gives the
firm more profits because of lower wage costs per unit of output.
Chapter 19 - Current Issues in Macro Theory and Policy
126. Monetarists argue that the supply of money should be increased at a constant rate each
year, proportionate with the long-run growth of real output.
127. If the money supply growth is set at a slower pace than the growth of real GDP, then
inflation will occur.
128. Rational expectations theory suggests that changes in people's expectations in response
to changes in fiscal and monetary policy changes will make such policies ineffective.
129. Monetarists believe that discretionary monetary policy is an effective tool for stabilizing
the economy.
Chapter 19 - Current Issues in Macro Theory and Policy
130. The mainstream view of the economy since 1946 is that it has become more stable
because of the use of discretionary fiscal and monetary policy.
131. Most economists today would agree with the view that "money doesn't matter" in
macroeconomic theory.
132. Rational expectations theory allows for temporary changes in output due to expansionary
policy, whereas adaptive expectations theory holds that no such changes in output could
occur.
Chapter 19 - Current Issues in Macro Theory and Policy
133. Mainstream economists have adopted some ideas from RET and some rational
expectations assumptions are being incorporated into current macroeconomic models.
134. Monetarists and rational expectation theorists believe that cost-push inflation as
impossible in the long run in the absence of excessive money supply growth.
