question

If the velocity of money remains unchanged and with full employment in the economy, the equation of exchange predicts that a rise in the money supply will:

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Increase prices

question

The number of times per year the average dollar is spent on final goods and services is the:

answer

Velocity of money

question

According to rational expectations theory, instantaneous market adjustments make:

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Expansionary economic policy ineffective in increasing output

question

Refer to the above graph. It is given that the economy is at an initial equilibrium at point A. In mainstream economic view, the effect of a significant increase in productivity on the economy can best be represented by a shift from:

answer

ASLR1 to ASLR2

question

A mainstream criticism of rational expectations theory is that:

answer

Many markets are not purely competitive and do not adjust rapidly to changing market conditions

question

Refer to the above graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices are flexible and wages are not, this will result in an equilibrium at point:

answer

D

question

The equation of exchange indicates that:

answer

Other things being equal, an increase in V will increase P and/or Q

question

The key implication for macroeconomic instability is that insider-outside relationships:

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Decrease the downward inflexibility of wages

question

Assume that M is $200 billion and V is 6. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by:

answer

$180 billion

question

The notion that the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP best describes the:

answer

Monetary rule

question

New classical economics suggests that in the long-run changes in aggregate demand will produce:

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No change in output and employment

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Monetarists take the position that monetary policy:

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Should be based on rules rather than discretion

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If households and firms cut back on spending because they expect other household and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of:

answer

A coordination failure

question

If nominal GDP is $848 billion and the velocity of money is 4, the:

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Money supply is $212 billion

question

The equation of exchange is:

answer

MV = PQ

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In the view of rational expectations theory:

answer

People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur

question

According to real-business-cycle theory, recessions are caused by:

answer

Deviations of aggregate supply from long-term growth trends

question

According to rational expectations theory, the cause of observed instability in the private economy would most likely be due to:

answer

Unanticipated aggregate demand and aggregate supply shocks in the short run

question

Refer to the above graph. Assume that the economy was initially in equilibrium at point A. If there is a significant technological innovation in the economy, then according to real-business-cycle theory, aggregate:

answer

Supply will shift, which causes a corresponding shift in aggregate demand

question

Economist Milton Friedman viewed the economy as needing:

answer

A monetary rule to increase the money supply at a set, steady rate

question

Which idea has been absorbed into mainstream macroeconomics?

answer

Excessive growth in the money supply over long periods leads to inflation

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Refer to the above graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is an unanticipated decrease in aggregate demand to AD2, then in the view of new classical economics the economy will:

answer

Self-correct through a shift in AS, which brings output back to Q1

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Within the aggregate demand-aggregate supply framework, monetarists argue that a change in aggregate:

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Demand will have a large effect on the price level, but a temporary effect on output

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Which idea is associated with mainstream economics?

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Fiscal policy is a useful stabilization tool

question

The Taylor rule is a:

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Combined passive and activist approach to monetary policy

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Within the aggregate demand-aggregate supply framework, a strict interpretation of rational expectations theory suggests that a change in aggregate:

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Demand will have a large effect on the price level, but no effect on output

question

The view that changes in the money supply is the primary cause of change in real output and the price level is most closely associated with:

answer

Monetarism

question

Mainstream economists contend that the equation of exchange breaks down because:

answer

Velocity is more variable and unpredictable than expected

question

According to rational expectations theory, discretionary monetary and fiscal policy will be ineffective primarily because of the:

answer

Reaction of the public to the expected effects of policy changes

question

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

answer

Real GDP

question

In the view of real-business-cycle theory, an increase in the long-run aggregate supply would lead to a(n):

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Increase in aggregate demand by an equal amount, so real output would increase and the price level would be unchanged

question

Real-business-cycle theory focuses on factors affecting:

answer

Aggregate supply

question

From the mainstream perspective, the economic instability brought about by "oil shocks" work through changes in:

answer

Aggregate supply

question

If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, the:

answer

Velocity of money is 5

question

One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might

answer

Be more productive at a higher wage rate

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If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchanged at $4,800 billion, then the income velocity of money

answer

Falls from 8 to 6

question

Monetarists base their assessment of the speed of adjustment for self-correction in the economy on:

answer

Adaptive expectations

question

An efficiency wage is one that:

answer

Minimizes the firm's labor cost per unit of output

question

Refer to the above graph. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Then there is economic growth in the economy that shifts AS1 to AS2. If the application of a monetary rule is designed to shift AD1 to AD3, but because of pessimistic business expectations AD1 only shifts to AD2, then mainstream economists would suggest that the actions to be taken to avoid deflation would be to implement a(n):

answer

Expansionary fiscal policy and an easy money policy

question

From the strict monetarist perspective, a large increase in the money supply will have:

answer

No effect on the velocity of money and a large impact on nominal output

question

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:

answer

Monetarism

question

Crowding-out results from:

answer

Deficit financing which increases interest rates and reduces investment

question

In recent years, calls for monetary rules by the Federal Reserve have been replaced with calls for:

answer

Inflation targeting

question

According to the Taylor rule, if inflation rises by 1 percent above its target of 2 percent, the Fed should:

answer

Raise the real Federal funds rate by 0.5 percent

question

Monetarists argue that the amount of money the public will want to hold depends primarily on the level of:

answer

Nominal GDP

question

Mainstream economists support:

answer

The use of discretionary monetary and fiscal policy for achieving major economic goals

question

Refer to the above graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is an unanticipated increase in aggregate demand and the economy self-corrects, then the adaptive-expectations adjustment path would go from point:

answer

A to B to C

question

From the mainstream perspective, instability in the economy is due to:

answer

Flexible prices, and government policies and regulation

question

According to mainstream economists the basic determinant of real output, employment, and the price level is:

answer

The level of aggregate expenditures

question

Refer to the above graph. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Then there is economic growth in the economy that shifts AS1 to AS2. Because of the shift from AS1 to AS2, a monetarist following a monetary rule would call for an increase in aggregate demand such that the price level and quantity of real domestic output would be:

answer

P3 and Q2

question

Mainstream macroeconomics would suggest that fiscal policy:

answer

Changes aggregate demand and GDP through the multiplier process

ECO2013 Ch. 36 – Flashcards

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