Question 1

Which of the following pairs help explain why self-correction from a decline in aggregate demand in the economy may be slow rather than rapid?

Accepted Answer

A)   Theory of compensation wage differentials;theory of derived demand for labor.
B)   Efficiency wage theory;insider-outsider theory.
C)   Insider-outsider theory;principle-agent problem.
D)   Externalities;efficiency wage theory.E) All of the above
F) A) and C) B

Question 2

A coordination failure:

Accepted Answer

A)   is a real-business-cycle event.
B)   is a self-fulfilling prophesy.
C)   results from the spending-income multiplier.
D)   is a direct outcome of inappropriate fiscal policy.E) All of the above
F) None of the above

Question 3

Suppose aggregate demand in the economy sharply declines.Mainstream economists say that the price level (at least for a time) will _______ and real output will _________.

Accepted Answer

A)   decrease;remain constant
B)   increase;remain constant
C)   remain constant;decrease
D)   remain constant;increaseE) A) and B)
F) A) and D)

Question 4

The view that inappropriate monetary policy was the main reason for the depth of the Great Depression in the United States is most closely associated with:

Accepted Answer

A)   monetarism.
B)   the mainstream view.
C)   the rational expectations theory.
D)   the real-business-cycle theory.E) A) and B)
F) A) and C)

Question 5

Mainstream economists contend that,as stabilization tools:

Accepted Answer

A)   discretionary fiscal policy is effective,but discretionary monetary policy is not.
B)   discretionary monetary policy is effective,but discretionary fiscal policy is not.
C)   both discretionary fiscal policy and discretionary monetary policy can be effective if appropriately used.
D)   discretionary fiscal policy and discretionary monetary policy cause more instability than they cure.E) A) and D)
F) None of the above

Question 6

The crowding-out effect refers to the possibility that:

Accepted Answer

A)   when used simultaneously,expansionary fiscal and monetary policies are counterproductive.
B)   the asset demand for money varies inversely with the interest rate.
C)   deficit financing will increase the interest rate and reduce investment.
D)   an increase in the supply of money will result in a decline in velocity.E) A) and C)
F) None of the above

Question 7

The velocity of money measures the:

Accepted Answer

A)   proportion of the money supply held as an asset.
B)   ratio of the transactions demand to the asset demand for money.
C)   average annual rate of increase in the money supply.
D)   number of times per year the average dollar is spent on final goods and services.E) A) and C)
F) All of the above

Question 8

Monetarists believe the private economy is inherently:

Accepted Answer

A)   unstable and the public sector should be small.
B)   unstable and the public sector should be large.
C)   stable but that the public sector should be large.
D)   stable and that the government sector should be small.E) A) and D)
F) None of the above

Question 9

Rational expectations theory implies that the:

Accepted Answer

A)   aggregate demand curve is vertical.
B)   long-run aggregate supply curve is vertical.
C)   long-run aggregate supply curve is horizontal.
D)   long-run aggregate supply curve is quite flat.E) C) and D)
F) A) and C)

Question 10

The real-business cycle theorists see aggregate supply as the "active" factor in causing business cycles and aggregate demand as a "passive" factor.

Accepted Answer

A) True 
 B)False

Question 11

According to the Taylor rule,if inflation rises 1 percent above a target rate of 2 percent,the Fed should raise the federal funds rate,relative to the current rate of inflation,by:

Accepted Answer

A)   0.5 percentage point.
B)   1 percentage point.
C)   1.5 percentage points.
D)   2 percentage points.E) C) and D)
F) B) and C)

Question 12

The velocity of money is equal to:

Accepted Answer

A)   1/MPS.
B)   nominal GDP/M.
C)   1/reserve ratio.
D)   nominal GDP/P.E) A) and B)
F) B) and D)

Question 13

According to real-business-cycle theory:

Accepted Answer

A)   monetary factors affecting aggregate demand cause macroeconomic instability.
B)   recessions result from declines in long-run aggregate supply,rather than decreases in aggregate demand.
C)   when real wages fall during recessions,"real" unemployment rates rise.
D)   the net long-run costs of business fluctuations are severe.E) A) and D)
F) A) and C)

Question 14

According to monetarists:

Accepted Answer

A)   changes in the money supply are the primary cause of changes in the price level.
B)   an expansionary fiscal policy will lower interest rates and overstimulate the economy.
C)   changes in the velocity of money are more important than changes in the money supply in causing the level of economic activity to change.
D)   the supply of money changes in response to changes in the levels of real output and prices.E) A) and B)
F) A) and C)

Question 15

Monetarists and rational expectations theorists generally agree that:

Accepted Answer

A)   the Federal Reserve should adhere to a monetary rule.
B)   the rate of interest and the price of bonds are positively or directly related.
C)   the money supply cannot be measured and therefore cannot be controlled by the Federal Reserve.
D)   prices and wages are inflexible downward.E) B) and C)
F) A) and B)

Question 16

If firms are paying efficiency wages,they:

Accepted Answer

A)   may be reluctant to increase nominal wages when aggregate demand increases.
B)   are highly vulnerable to import competition.
C)   may be targeted for takeover by firms paying market wages.
D)   may be reluctant to cut wages when aggregate demand declines.E) A) and D)
F) None of the above

Question 17

If M is $400,P is $4,and Q is 300,then V must be:

Accepted Answer

A)   1.33.
B)   3.
C)   5.33.
D)   100.E) All of the above
F) A) and D)

Question 18

Suppose laid-off workers and other qualified unemployed workers offer to work for less than the wages being paid existing employed workers,but employers do not hire these workers for fear that existing workers will refuse to cooperate with them.This situation best describes the:

Accepted Answer

A)   efficiency wage theory.
B)   theory of compensating wage differentials.
C)   insider-outsider theory.
D)   rational expectations theory.E) A) and D)
F) A) and C)

Question 19

The equation underlying the mainstream view of macroeconomics is:

Accepted Answer

A)   MV = PQ.
B)   Ca + Ig + Xn + G = GDP.
C)   S = a - bY.
D)   GDP = P × Q.E) A) and D)
F) None of the above B

Question 20

As monetarists view the equation of exchange:

Accepted Answer

A)   V changes erratically and unpredictably.
B)   V is quite stable.
C)   V usually changes in the same direction of any given change in M.
D)   V usually changes in the opposite direction of any given change in M.E) C) and D)
F) A) and C) B

Exam 38: Current Issues in Macro Theory and Policy

Which of the following pairs help explain why self-correction from a decline in aggregate demand in the economy may be slow rather than rapid?

Correct AnswerverifiedB

A coordination failure:

Correct AnswerverifiedShow Answer

Suppose aggregate demand in the economy sharply declines.Mainstream economists say that the price level (at least for a time) will _______ and real output will _________.

Correct AnswerverifiedShow Answer

The view that inappropriate monetary policy was the main reason for the depth of the Great Depression in the United States is most closely associated with:

Correct AnswerverifiedShow Answer

Mainstream economists contend that,as stabilization tools:

Correct AnswerverifiedShow Answer

The crowding-out effect refers to the possibility that:

Correct AnswerverifiedShow Answer

The velocity of money measures the:

Correct AnswerverifiedShow Answer

Monetarists believe the private economy is inherently:

Correct AnswerverifiedShow Answer

Rational expectations theory implies that the:

Correct AnswerverifiedShow Answer

The real-business cycle theorists see aggregate supply as the "active" factor in causing business cycles and aggregate demand as a "passive" factor.

Correct AnswerverifiedShow Answer

According to the Taylor rule,if inflation rises 1 percent above a target rate of 2 percent,the Fed should raise the federal funds rate,relative to the current rate of inflation,by:

Correct AnswerverifiedShow Answer

The velocity of money is equal to:

Correct AnswerverifiedShow Answer

According to real-business-cycle theory:

Correct AnswerverifiedShow Answer

According to monetarists:

Correct AnswerverifiedShow Answer

Monetarists and rational expectations theorists generally agree that:

Correct AnswerverifiedShow Answer

If firms are paying efficiency wages,they:

Correct AnswerverifiedShow Answer

If M is $400,P is $4,and Q is 300,then V must be:

Correct AnswerverifiedShow Answer

Suppose laid-off workers and other qualified unemployed workers offer to work for less than the wages being paid existing employed workers,but employers do not hire these workers for fear that existing workers will refuse to cooperate with them.This situation best describes the:

Correct AnswerverifiedShow Answer

The equation underlying the mainstream view of macroeconomics is:

Correct AnswerverifiedB

As monetarists view the equation of exchange:

Correct AnswerverifiedB

Correct Answer
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B

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Suppose aggregate demand in the economy sharply declines.Mainstream economists say that the price level (at least for a time) will _ and real output will ___.

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B

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B