Question 1

According to real business cycle models

Accepted Answer

A)   total real output does not change in response to changes in aggregate supply and demand; only price levels change.
B)   aggregate supply is horizontal so that fluctuations in real GDP result from changes in aggregate demand.
C)   changes in total real output vary inversely with changes in real GDP.
D)   real output cannot grow faster than the real rate of interest.
E)   real wages tend to fall when real GDP falls and rise when real GDP rises.

Question 2

Supply-side economics had its greatest influence on economic policy debate during the

Accepted Answer

A)   1920s.
B)   1930s.
C)   1940s and 1950s.
D)   1960s.
E)   1970s and 1980s.

Question 3

A contemporary economist closely associated with the hypothesis of rational expectations is

Accepted Answer

A)   Milton Friedman.
B)   John Muth.
C)   John Maynard Keynes.
D)   Franco Modigliani.
E)   Paul Samuelson.

Question 4

Fine-tuning the economy

Accepted Answer

A)   is made difficult because of the problem of forecasting the many destabilizing events that regularly occur.
B)   has rendered business fluctuations obsolete.
C)   became more effective since econometric models were replaced by the leading indicators.
D)   has increased the likelihood of recurring depressions.
E)   is now possible, but we lack the will to accomplish it.

Question 5

Workers and firms prefer to enter into long-term contracts because

Accepted Answer

A)   workers assume the rate of inflation is going to increase whereas employers believe it is likely to fall.
B)   wage negotiations are costly to each side in terms of both time and money.
C)   such contracts allow enough time for all labor markets to clear.
D)   seniority is more easily acquired by both employers and employees under such agreements.
E)   wages, profits, and employment are less affected by changes in aggregate demand under these conditions.

Question 6

Some argue that according to implicit contract theory,unemployment is really voluntary since

Accepted Answer

A)   workers enter freely into these agreements, recognizing that they are accepting the risk of unemployment.
B)   firms agree not to lay off anyone if the economy should turn down.
C)   under such contracts wages are tied to a firm's profits, minimizing involuntary unemployment.
D)   the importance of seniority in hiring practices is minimized.
E)   under such contracts wage rates are tied directly to the market demand and supply conditions.

Question 7

The view that business cycles are the natural (indeed efficient) response of the economy to changes in technology and the availability of resources is associated with the

Accepted Answer

A)   new Keynesians.
B)   traditional Keynesians.
C)   monetarists.
D)   adaptive demand siders.
E)   real business cycle theorists.

Question 8

Costs incurred by a firm when it changes its prices are called ________ costs.

Accepted Answer

A)   opportunity
B)   fixed
C)   menu
D)   variable
E)   advertising

Question 9

Critics of real business cycle models argue that

Accepted Answer

A)   the model works only under conditions of inflexible wages and prices.
B)   its proponents fail to identify supply shock events that could be used to explain most of the actual booms and recessions.
C)   the theory places too much emphasis on fluctuations in the money supply and its velocity of circulation.
D)   only the Great Depression of the 1930s fits the real business cycle theory closely.
E)   its assumption of a vertical long-run aggregate demand curve does not conform to either sound economic theory or empirical evidence.

Question 10

Proponents of real business cycle models argue that the correlation between changes in the money supply and changes in real GDP may reflect the fact that

Accepted Answer

A)   the velocity of money is unpredictable.
B)   the quantity of money demanded is relatively insensitive to changes in the interest rate.
C)   as real output increases, the demand for money increases, leading to an increase in the money supply.
D)   the free enterprise economy has strong self-regulating mechanisms promoting full employment.
E)   the equation of exchange varies considerably over the course of the business cycle.

Question 11

The new classical macroeconomists conclude that

Accepted Answer

A)   monetary and fiscal stabilization policies are most effective at countering supply-side shocks.
B)   the short-run aggregate supply curve is unaffected by expected changes in the price level.
C)   if firms and individuals formulate expectations rationally, they will frustrate activist government stabilization policy.
D)   real output will increase as long as wage increases exceed price increases, thus stimulating aggregate demand.
E)   firms and individuals can be counted on to make systematic errors in forecasting the future.

Question 12

With regard to the effectiveness of stabilization policies,the new classical macroeconomists conclude that

Accepted Answer

A)   the price level is fixed, so government stabilization efforts are unnecessary.
B)   only unexpected changes in the price level will induce changes in national output.
C)   traditional demand-based stabilization policies work effectively if the money supply is fixed.
D)   firms and individuals do not formulate expectations rationally, so government must step in.
E)   money wage adjustments lag behind nominal adjustments, requiring the Fed to expand credit.

Question 13

When a central bank is required to provide enough information for markets and the public to understand and evaluate what the monetary authorities are doing,the central bank must have adopted a monetary policy framework known as

Accepted Answer

A)   the cult of personality.
B)   time inconsistency.
C)   menu pricing.
D)   functional finance.
E)   inflation targeting.

Question 14

A basic assumption of the new classical macroeconomists is that

Accepted Answer

A)   fluctuations in aggregate demand are impossible in the short run.
B)   MQ is identical to real GDP.
C)   output is inversely related to the tax rate.
D)   markets work efficiently.
E)   most unemployment is involuntary.

Question 15

The effectiveness of a market economy's self-regulating mechanisms in stabilizing the economy is most closely associated with

Accepted Answer

A)   new Keynesians.
B)   Marxists.
C)   traditional Keynesians.
D)   socialists.
E)   new classical macroeconomists.

Question 16

Multiyear labor contracts slow the rate of adjustment of wages because

Accepted Answer

A)   people get used to the size of their paychecks and are reluctant to change them up or down.
B)   they are negotiated in real, not nominal, terms.
C)   firms set their prices in terms of wages and are not able to change them when labor costs vary frequently.
D)   such contracts are not all negotiated, and thus up for renewal on the same cycle, causing the economic impact of older contracts to linger.
E)   new labor contracts normally specify wage rates equal to the current national average wage rate.

Question 17

Until the Great Depression of the 1930s,the prevailing theory on the price level was the ________ theory.

Accepted Answer

A)   rational expectations/supply
B)   pendular
C)   crude quantity
D)   sunspot
E)   Keynesian

Question 18

The high rates of inflation in the late 1970s and early 1980s fell primarily because of

Accepted Answer

A)   a severe recession brought on by a tight monetary policy.
B)   an easy money policy tied to a large federal deficit.
C)   price and wage controls.
D)   incomes policies.
E)   sharp increases in federal tax rates.

Question 19

The monetarist view gained adherents in the late 1960s because

Accepted Answer

A)   of the obvious difficulty in using fiscal policy to restrain spending.
B)   the 1968 surtax was effective in reducing inflation.
C)   it was demonstrated empirically that MV = PQ.
D)   at the time the U.S. economy was stagnant.
E)   Keynesians and monetarists finally agreed on the line of causation between the money supply and GDP.

Question 20

Proponents of policy activism argue that the time period required for wages and prices to adjust during a severe recession would be

Accepted Answer

A)   intolerably long and entail great human cost.
B)   quite short and promote a quick recovery.
C)   unimportant given the relative stability of the components of private spending.
D)   shortened by balancing the federal budget.
E)   dependent on the ratio of nominal to real GDP.

Exam 26: Controversies Over Stabilization Policy

The high rates of inflation in the late 1970s and early 1980s fell primarily because of

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The new classical macroeconomists conclude that

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The view that business cycles are the natural (indeed efficient) response of the economy to changes in technology and the availability of resources is associated with the

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Costs incurred by a firm when it changes its prices are called ________ costs.

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Some argue that according to implicit contract theory,unemployment is really voluntary since

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The monetarist view gained adherents in the late 1960s because

Correct AnswerverifiedShow Answer

Supply-side economics had its greatest influence on economic policy debate during the

Correct AnswerverifiedShow Answer

Proponents of policy activism argue that the time period required for wages and prices to adjust during a severe recession would be

Correct AnswerverifiedShow Answer

Critics of real business cycle models argue that

Correct AnswerverifiedShow Answer

A basic assumption of the new classical macroeconomists is that

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Fine-tuning the economy

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Workers and firms prefer to enter into long-term contracts because

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When a central bank is required to provide enough information for markets and the public to understand and evaluate what the monetary authorities are doing,the central bank must have adopted a monetary policy framework known as

Correct AnswerverifiedShow Answer

Until the Great Depression of the 1930s,the prevailing theory on the price level was the ________ theory.

Correct AnswerverifiedShow Answer

Proponents of real business cycle models argue that the correlation between changes in the money supply and changes in real GDP may reflect the fact that

Correct AnswerverifiedShow Answer

A contemporary economist closely associated with the hypothesis of rational expectations is

Correct AnswerverifiedShow Answer

Multiyear labor contracts slow the rate of adjustment of wages because

Correct AnswerverifiedShow Answer

With regard to the effectiveness of stabilization policies,the new classical macroeconomists conclude that

Correct AnswerverifiedShow Answer

The effectiveness of a market economy's self-regulating mechanisms in stabilizing the economy is most closely associated with

Correct AnswerverifiedShow Answer

According to real business cycle models

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