Question 1

Suppose the economy experiences a recessionary gap. How does the new classical
Japproach to macroeconomic policy (to eliminate the gap) differ from the new Keynesian
Japproach? Illustrate your answer with an aggregate demand-aggregate supply graph.

Accepted Answer

The new classical approach to macroecono...

Question 2

Keynesian economics was mostly concerned with the short run.

Accepted Answer

A) True 
 B)False

Question 3

Figure 17-2 2. Which of the following explains the new classical view regarding economic agents' response to the decrease in money supply? A)  Consumers and firms observe that the money supply has fallen and that the price level has fallen to P2. Consumers respond by increasing their demand for output and firms in turn increase their supply to meet the rising demand. The economy moves back to point (1) . B)  Consumers and firms observe that the money supply has fallen and that the price level has fallen to P2. To prevent further reductions in the price level, firms increase output at the same time as consumers increase aggregate demand. The economy moves to point (4) , bypassing point (3) . C)  Consumers and firms observe that the money supply has fallen and anticipate the eventual reduction in the price level to P3. They adjust their expectations accordingly. Workers agree to lower nominal wages, and the short-run aggregate supply curve shifts to SRAS2 at the same time as aggregate demand falls, bypassing point (2) . D)  Consumers and firms observe that the money supply has fallen and anticipate the eventual reduction in the price level to P4. They adjust their expectations accordingly. Workers agree to lower nominal wages, and the short-run aggregate supply curve shifts to SRAS2 at the same time as aggregate demand rises, moving the economy to point (4) ." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 17-2. The economy is initially in equilibrium at point (1) . Now suppose a reduction in the money supply causes aggregate demand to fall to AD2. Which of the following explains the new classical view regarding economic agents' response to the decrease in money supply?

Accepted Answer

A)   Consumers and firms observe that the money supply has fallen and that the price level has fallen to P2. Consumers respond by increasing their demand for output and firms in turn increase their supply to meet the rising demand. The economy moves back to point (1) .
B)   Consumers and firms observe that the money supply has fallen and that the price level has fallen to P2. To prevent further reductions in the price level, firms increase output at the same time as consumers increase aggregate demand. The economy moves to point (4) , bypassing point (3) .
C)   Consumers and firms observe that the money supply has fallen and anticipate the eventual reduction in the price level to P3. They adjust their expectations accordingly. Workers agree to lower nominal wages, and the short-run aggregate supply curve shifts to SRAS2 at the same time as aggregate demand falls, bypassing point (2) .
D)   Consumers and firms observe that the money supply has fallen and anticipate the eventual reduction in the price level to P4. They adjust their expectations accordingly. Workers agree to lower nominal wages, and the short-run aggregate supply curve shifts to SRAS2 at the same time as aggregate demand rises, moving the economy to point (4) .E) A) and D)
F) None of the above

Question 4

Who was the economist who laid the foundations for classical economics?

Accepted Answer

A)   John Locke
B)   David Ricardo
C)   Adam Smith
D)   John Maynard KeynesE) C) and D)
F) A) and B)

Question 5

Monetarists argue that impact lags associated with changes in the money supply are long and variable.

Accepted Answer

A) True 
 B)False

Question 6

Monetarists argue that

Accepted Answer

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.E) All of the above
F) C) and D)

Question 7

The theory that argues most strongly for countercyclical policy activism is

Accepted Answer

A)   Keynesian economics.
B)   classical economics.
C)   monetarism.
D)   rational expectations theory.E) A) and D)
F) None of the above

Question 8

Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the Jaggregate demand curve would cause

Accepted Answer

A)   a decrease in the level of income.
B)   an increase in the unemployment level.
C)   a change in the long-run aggregate supply curve.
D)   an increase in employment, production, and income.E) C) and D)
F) None of the above

Question 9

Figure 17-2 2. The below potential output level of Y2 will exist as long as A)  policymakers refrain from using discretionary policies. B)  workers fail to recognize that their real wages have increased and that they need to accept lower nominal wages. C)  economic agents do not respond to falling prices by increasing aggregate demand back to AD1. D)  producers do not increase the price of their output." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 17-2. The economy is initially in equilibrium at point (1) . Now suppose a reduction in the money supply causes aggregate demand to fall to AD2. The below potential output level of Y2 will exist as long as

Accepted Answer

A)   policymakers refrain from using discretionary policies.
B)   workers fail to recognize that their real wages have increased and that they need to accept lower nominal wages.
C)   economic agents do not respond to falling prices by increasing aggregate demand back to AD1.
D)   producers do not increase the price of their output.E) B) and C)
F) C) and D)

Question 10

In 1965 during the Johnson administration, the U.S. economy was headed toward an inflationary gap. Which of the following policies would an economist recommend?

Accepted Answer

A)   An open market purchase
B)   A tax increase
C)   A tax cut
D)   Increase defense spendingE) A) and B)
F) A) and C)

Question 11

Figure 17-1 2 to AD1.  B)  AD1 to AD2 . C)  SRAS2 to SRAS1.  D)  YP to Yk." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 17-1. The Great Depression began with a shift of

Accepted Answer

A)   AD2 to AD1. 
B)   AD1 to AD2 .
C)   SRAS2 to SRAS1. 
D)   YP to Yk.E) A) and C)
F) B) and C)

Question 12

When consumers and producers operate under rational expectations,

Accepted Answer

A)   stabilization policy affects only the short-run aggregate supply curve.
B)   stabilization policy affects only the long-run aggregate supply curve.
C)   shifts in aggregate demand are perfectly anticipated by market participants, negating any attempt by policymakers to shift aggregate demand.
D)   stabilization policy does not affect the short-run aggregate supply curve.E) A) and D)
F) None of the above

Question 13

New classical theory asserts that, because people have rational expectations, if a policy of reducing the money supply is used

Accepted Answer

A)   it might affect both aggregate demand 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)   market participants 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)   All of the above are true.E) A) and C)
F) A) and B)

Question 14

Which of the following is true about the classical theory and the monetarist theory with Jregards to the impact of changes in the money supply on the economy?

Accepted Answer

A)   Both the classical theory and monetarism conclude that changes in money supply affect real GDP in the short run and in the long run.
B)   Both the classical theory and monetarism conclude that changes in money supply do not affect real GDP in the short run but will affect real GDP in the long run.
C)   Both the classical theory and monetarism conclude that changes in money supply affect nominal GDP in the long run.
D)   Both the classical theory and monetarism conclude that changes in money supply affect nominal GDP in the short run and real GDP in the long run.E) None of the above
F) B) and D)

Question 15

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Accepted Answer

A) True 
 B)False

Question 16

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point a. Assume that (1)  the public's expectations are completely rational; (2)  markets allocate resources instantaneously; and (3)  the economy is at its natural level of employment. The theoretical adjustment path resulting from an increase in aggregate demand according to the rational expectations hypothesis is

Accepted Answer

A)   a to c to d.
B)   a to b to d.
C)   a to d.
D)   a to b and back to a.E) C) and D)
F) A) and B)

Question 17

An important distinction between the classical and Keynesian view of the economy is that

Accepted Answer

A)   Keynes stressed the supply side of an economy while classical economists stressed the demand side of the economy.
B)   classical economists argued that output gaps were caused by shifts in the long-run aggregate supply while Keynes' maintained that output gaps were created by shifts in aggregate demand.
C)   Keynes stressed the demand side of an economy while classical economists stressed the supply side of the economy.
D)   classical economists argued that output gaps were caused by shifts in the long-run aggregate supply while Keynes' maintained that output gaps were created by wage and price rigidities.E) All of the above
F) A) and C)

Question 18

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from

Accepted Answer

A)   point a to point d whereas new Keynesian economics suggests that it will move point a to point b.
B)   point a to point d whereas new Keynesian economics suggests that it will move point a to point c.
C)   point a to point b whereas new Keynesian economics suggests that it will move point a to point d.
D)   point a to point c whereas new Keynesian economics suggests that it will move point a to point d.E) B) and C)
F) A) and B)

Question 19

Suppose the U.S. economy experiences stagflation. An expansionary fiscal policy

Accepted Answer

A)   increases real GDP and lowers inflation.
B)   has no effect on real GDP but raises inflation.
C)   increases real GDP and aggravates inflation.
D)   increases real GDP and has no effect on inflation.E) A) and B)
F) A) and C)

Question 20

Monetarists argue that

Accepted Answer

A)   the Federal Reserve System should institute a prescribed rate of growth in the money supply.
B)   since velocity 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)   policymakers should use monetary policy rather than fiscal policy to stabilize the economy.E) A) and D)
F) A) and C)

Exam 17: A Brief History of Macroeconomic Thought and Policy

In 1965 during the Johnson administration, the U.S. economy was headed toward an inflationary gap. Which of the following policies would an economist recommend?

Correct Answer
verified

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Correct Answer
verified

Correct Answer
verified

Keynesian economics was mostly concerned with the short run.

Correct Answer
verified

When consumers and producers operate under rational expectations,

Correct Answer
verified

The theory that argues most strongly for countercyclical policy activism is

Correct Answer
verified

Monetarists argue that impact lags associated with changes in the money supply are long and variable.

Correct Answer
verified

Monetarists argue that

Correct Answer
verified

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1) . Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. The below potential output level of Y₂ will exist as long as

Correct Answer
verified

Who was the economist who laid the foundations for classical economics?

Correct Answer
verified

Suppose the U.S. economy experiences stagflation. An expansionary fiscal policy

Correct Answer
verified

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1) . Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. Which of the following explains the new classical view regarding economic agents' response to the decrease in money supply?

Correct Answer
verified

An important distinction between the classical and Keynesian view of the economy is that

Correct Answer
verified

Monetarists argue that

Correct Answer
verified

New classical theory asserts that, because people have rational expectations, if a policy of reducing the money supply is used

Correct Answer
verified

Figure 17-3 -Refer to Figure 17-3. Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from

Correct Answer
verified

Suppose the economy experiences a recessionary gap. How does the new classical Japproach to macroeconomic policy (to eliminate the gap) differ from the new Keynesian Japproach? Illustrate your answer with an aggregate demand-aggregate supply graph.

Correct Answer
Answered by ExamLex AI
The new classical approach to macroecono...
View Answer

Which of the following is true about the classical theory and the monetarist theory with Jregards to the impact of changes in the money supply on the economy?

Correct Answer
verified

Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the Jaggregate demand curve would cause

Correct Answer
verified

Figure 17-1 -Refer to Figure 17-1. The Great Depression began with a shift of

Correct Answer
verified

Exam 17: A Brief History of Macroeconomic Thought and Policy

In 1965 during the Johnson administration, the U.S. economy was headed toward an inflationary gap. Which of the following policies would an economist recommend?

Correct AnswerverifiedShow Answer

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Keynesian economics was mostly concerned with the short run.

Correct AnswerverifiedShow Answer

When consumers and producers operate under rational expectations,

Correct AnswerverifiedShow Answer

The theory that argues most strongly for countercyclical policy activism is

Correct AnswerverifiedShow Answer

Monetarists argue that impact lags associated with changes in the money supply are long and variable.

Correct AnswerverifiedShow Answer

Monetarists argue that

Correct AnswerverifiedShow Answer

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1) . Now suppose a reduction in the money supply causes aggregate demand to fall to AD2. The below potential output level of Y2 will exist as long as

Correct AnswerverifiedShow Answer

Who was the economist who laid the foundations for classical economics?

Correct AnswerverifiedShow Answer

Suppose the U.S. economy experiences stagflation. An expansionary fiscal policy

Correct AnswerverifiedShow Answer

Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1) . Now suppose a reduction in the money supply causes aggregate demand to fall to AD2. Which of the following explains the new classical view regarding economic agents' response to the decrease in money supply?

Correct AnswerverifiedShow Answer

An important distinction between the classical and Keynesian view of the economy is that

Correct AnswerverifiedShow Answer

Monetarists argue that

Correct AnswerverifiedShow Answer

New classical theory asserts that, because people have rational expectations, if a policy of reducing the money supply is used

Correct AnswerverifiedShow Answer

Figure 17-3 -Refer to Figure 17-3. Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from

Correct AnswerverifiedShow Answer

Suppose the economy experiences a recessionary gap. How does the new classical Japproach to macroeconomic policy (to eliminate the gap) differ from the new Keynesian Japproach? Illustrate your answer with an aggregate demand-aggregate supply graph.

Correct AnswerAnswered by ExamLex AIThe new classical approach to macroecono...View AnswerShow Answer

Which of the following is true about the classical theory and the monetarist theory with Jregards to the impact of changes in the money supply on the economy?

Correct AnswerverifiedShow Answer

Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the Jaggregate demand curve would cause

Correct AnswerverifiedShow Answer

Figure 17-1 -Refer to Figure 17-1. The Great Depression began with a shift of

Correct AnswerverifiedShow Answer

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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1) . Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. The below potential output level of Y₂ will exist as long as

Correct Answer
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Correct Answer
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Correct Answer
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Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1) . Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. Which of the following explains the new classical view regarding economic agents' response to the decrease in money supply?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
Answered by ExamLex AI
The new classical approach to macroecono...
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