Macro Ch 18 – Flashcards

According to the classical model: the aggregate supply curve is horizontal. increases in the money supply lead to proportional increases in the price level but not to change in real output. increases in the money supply lead to proportional changes in output but no change in the price level. we are all dead in the long run.

According to the classical model, prices are _____, making the aggregate supply curve _____ in the short run. sticky; upward sloping flexible; vertical flexible; downward sloping sticky; vertical

Which of the following is FALSE? At the time of the Great Depression: the measurement of the business cycle was well advanced. there was no widely accepted theory of the causes of depressions. economists recognized that the economy did not always grow smoothly. the U.S. economy was substantially agricultural.

Keynes suggested that money is: the most important factor affecting aggregate supply. the most important factor affecting aggregate demand. only one of a variety of factors affecting aggregate supply. only one of a variety of factors affecting aggregate demand.

Keynes believed that to end the Great Depression: only a government takeover of industry could save the economy. the capitalist system needed only a narrow technical fix. a decrease in government spending would increase the budget deficit. a decrease in the money supply would cause inflation.

Keynesians argued that monetary policy would NOT be effective if: there was a liquidity trap. the Fed was independent of political pressure. other countries did not follow monetary policy similar to that of the United States. no one bought bonds when the Fed conducted open-market operations.

If the money supply is growing at a constant rate of 2% and the economy undergoes a negative demand shock, the theory of monetarism recommends: coordinating a monetary expansion with a fiscal expansion to increase aggregate demand. raising the growth rate of money supply to 3% to lower the interest rate. lowering the growth rate of money supply to 1% to increase saving. maintaining the growth rate of money supply at 2% and letting the aggregate price level fall.

Monetarists argue that: the impact lag for monetary policy is short and predictable. stabilization policies may actually be destabilizing. the Federal Reserve System should use active monetary policy. active monetary policy should be used to reinforce active fiscal policy.

The political business cycle implies all of the following EXCEPT that: central banks should be independent of politics. discretionary fiscal policy should be avoided. politicians pumping up the economy in an election year make the economy less stable. monetary policy is ineffective if inflation is high.

New classical economics: focuses on short-run economic fluctuations. returns to the view that shifts in aggregate demand affect only the price level. argues that the business cycle is caused by "animal spirits." focuses on the trade-off between unemployment and inflation.

According to the theory of rational expectations, individuals will respond to expansionary monetary policy by predicting: a lower rate of inflation. a higher rate of inflation. no change in the rate of inflation. incorrectly what will happen to the price level and employment.

Real business cycle theory suggests the business cycle is caused by: discretionary monetary policy. fluctuations in the rate of productivity. "animal spirits." protectionism.

According to the Great Moderation consensus: I. fiscal policy should be the main stabilization tool. II. the effectiveness of economic policy is limited by the political business cycle. I only II only I and II neither I nor II

The Great Moderation consensus regarding the use of monetary or fiscal policy to reduce unemployment in the long run is that: unemployment can be constantly decreased as long as expectations of inflation are kept low. the natural rate of unemployment limits what monetary and fiscal policy can accomplish. the concept of the nonaccelerating inflation rate of unemployment, or NAIRU, was a mistake. the only effective policy is to maintain a constant growth rate of the money supply

Which of the following statements is TRUE of the state of modern macroeconomics? There is much more consensus than disagreement among economists. Inflation targeting and asset price management are incompatible duties for a central bank. Congress indirectly controls the Fed and monetary policy through its annual budget allocations. The Great Recession heightened the areas of disagreement among macroeconomists over key policy questions.

One of the impacts of the budget deficits that resulted from the fiscal stimulus of 2009 was that: the public debt decreased. interest rates remained very low. interest rates increased to record high levels. crowding-out occurred.

Nearly all economists agree that decreases in money supply can _____ aggregate _____. increase; supply decrease; supply decrease; demand increase; demand

Nancy believes that the best way to grow the economy is through tax cuts to increase the incentive to work and invest. Though these tax cuts might initially increase the budget deficit, Nancy is convinced that the economic growth that results will actually increase government tax revenue. Nancy is best described as a: monetarist. classical economist. new Keynesian. supply-sider.