Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

According to rational expectations theory, instantaneous market adjustments make:

Accepted Answer

A)   Expansionary economic policy more effective in increasing output
B)   Expansionary economic policy ineffective in increasing output
C)   Economic policy more rational and more stable
D)   Economic policy less rational and less stableE) A) and D)
F) All of the above

Question 3

According to economist Milton Friedman, a major reason for macroeconomic instability is due to:

Accepted Answer

A)   Tax changes by the Federal government
B)   Spending reductions by the Federal government
C)   The discretionary monetary policy of the Federal Reserve
D)   The issuance of bonds by the U.S. Treasury DepartmentE) A) and D)
F) C) and D)

Question 4

Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability?

Accepted Answer

A)   Monetarism
B)   Mainstream economics
C)   Real business cycle theory
D)   Rational expectations theoryE) B) and C)
F) A) and B)

Question 5

The most likely advocates for a monetary rule would be:

Accepted Answer

A)   Monetarists
B)   Real-business-cycle theorists
C)   Mainstream economists
D)   Supply-side economistsE) A) and B)
F) None of the above

Question 6

Mainstream economists think that:

Accepted Answer

A)   Market participants change their actions in response to anticipated price-level changes such that no change in real output occurs
B)   The economy self-corrects when unanticipated events divert it from its full-employment level of real output
C)   The downward inflexibility of wages and prices may leave the economy stuck in a costly recession for long periods
D)   Significant changes in technology and resource availability cause macroeconomic instabilityE) B) and D)
F) A) and B)

Question 7

In real-business-cycle theory, changes in the:

Accepted Answer

A)   Demand for money respond to changes in the supply of money
B)   Supply of money respond to changes in the demand for money
C)   Demand for money respond to changes in efficiency wages
D)   Supply of money respond to changes in coordination failuresE) C) and D)
F) B) and D)

Question 8

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:

Accepted Answer

A)   Be increased by 10 percent
B)   Be decreased by 10 percent
C)   Remain at about 4 percent
D)   Remain at about 8 percentE) A) and B)
F) A) and C)

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

The policy rule recommended by monetarists is that the money supply should be increased at the same rate as the potential growth in:

Accepted Answer

A)   Real GDP
B)   Population
C)   The level of prices
D)   The velocity of moneyE) A) and D)
F) A) and C)

Question 11

With inflation targeting, the Federal Reserve would be required to announce its targeted band for:

Accepted Answer

A)   Unemployment
B)   Economic growth
C)   Changes in the price level
D)   Changes in the rate of taxationE) All of the above
F) A) and C)

Question 12

Monetarists and rational-expectations theorists both favor policy rules and both argue against discretionary policy.

Accepted Answer

A) True 
 B)False

Question 13

To stabilize the economy, monetarists and rational-expectations economists:

Accepted Answer

A)   Would like a monetary rule to be adopted
B)   Would like to see coordination failures eliminated
C)   Recommend the use of discretionary fiscal policy
D)   Recommend the use of discretionary monetary policyE) B) and D)
F) B) and C)

Question 14

Given the equation of exchange, if V is stable, an increase in M will necessarily increase:

Accepted Answer

A)   The demand for money
B)   The price level
C)   Nominal GDP
D)   Real GDPE) A) and B)
F) A) and D)

Question 15

An efficiency wage is one that:

Accepted Answer

A)   Increases the velocity of money
B)   Minimizes the firm's labor cost per unit of output
C)   Results from significant changes in technology and labor
D)   Is imposed by government to guarantee workers a living wageE) All of the above
F) C) and D)

Question 16

1 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: A)  A to B to C B)  A to D to C C)  A directly to C D)  A directly to D" class="answers-bank-image d-inline" rel="preload" > Refer to the graph above. 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:

Accepted Answer

A)   A to B to C
B)   A to D to C
C)   A directly to C
D)   A directly to DE) B) and D)
F) B) and C)

Question 17

Economist Milton Friedman compared the economy to a car needing:

Accepted Answer

A)   An efficiency wage to make the labor markets work like an efficient engine
B)   Regular price-level surprises, like oil changes, to make it run smoothly
C)   A "steering wheel" that the government can use to guide it forward
D)   A monetary rule to prevent a "backseat driver" from making it go off courseE) None of the above
F) A) and D)

Question 18

In the mainstream view, the economic instability brought about by "oil shocks" works through changes in:

Accepted Answer

A)   Aggregate demand
B)   Wage and price inflexibility
C)   Money supply
D)   Aggregate supplyE) A) and C)
F) A) and D)

Question 19

Mainstream economists support:

Accepted Answer

A)   Adoption of a monetary rule for increases in the money supply
B)   Elimination of efficiency wages and insider-outsider relationships
C)   The requirement that the government annually balance its budget
D)   The use of discretionary monetary and fiscal policy for achieving major economic goalsE) B) and C)
F) A) and B)

Question 20

In the view of rational expectations theory:

Accepted Answer

A)   People make economic forecasts that are based on insider-outsider relationships and self-fulfilling prophecies
B)   People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur
C)   People form their expectations on present realities and only gradually change their expectations as experience unfolds
D)   The economy does not respond quickly to changes in prices, which causes a mis-allocation of economic resourcesE) A) and B)
F) A) and C)

Exam 19: Current Issues in Macro Theory and Policy

To stabilize the economy, monetarists and rational-expectations economists:

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Mainstream economists support:

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability?

Correct AnswerverifiedShow Answer

In the mainstream view, the economic instability brought about by "oil shocks" works through changes in:

Correct AnswerverifiedShow Answer

The policy rule recommended by monetarists is that the money supply should be increased at the same rate as the potential growth in:

Correct AnswerverifiedShow Answer

Economist Milton Friedman compared the economy to a car needing:

Correct AnswerverifiedShow Answer

Given the equation of exchange, if V is stable, an increase in M will necessarily increase:

Correct AnswerverifiedShow Answer

Refer to the graph above. 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:

Correct AnswerverifiedShow Answer

In real-business-cycle theory, changes in the:

Correct AnswerverifiedShow Answer

Mainstream economists think that:

Correct AnswerverifiedShow Answer

According to rational expectations theory, instantaneous market adjustments make:

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

In the view of rational expectations theory:

Correct AnswerverifiedShow Answer

The most likely advocates for a monetary rule would be:

Correct AnswerverifiedShow Answer

Monetarists and rational-expectations theorists both favor policy rules and both argue against discretionary policy.

Correct AnswerverifiedShow Answer

An efficiency wage is one that:

Correct AnswerverifiedShow Answer

According to economist Milton Friedman, a major reason for macroeconomic instability is due to:

Correct AnswerverifiedShow Answer

With inflation targeting, the Federal Reserve would be required to announce its targeted band for:

Correct AnswerverifiedShow Answer

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Refer to the graph above. 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:

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