Deck 38: Current Issues in Macro Theory and Policy

Question 1

Which of the following is a component of the equation of exchange?

A) Consumption.
B) The interest rate.
C) Investment.
D) The velocity of money.

Answer 1

D

Question 2

In the equation of exchange,V indicates the:

A) value or purchasing power of the dollar.
B) number of times per year the average dollar is spent.
C) quantity of real output.
D) reciprocal of the price level.

Answer 2

B

Question 3

If a certain household earns and spends $24,000 per year and,on the average,holds a money balance of $6,000,then the velocity of money for this household is:

A) 6.
B) 1/6.
C) 4.
D) 1/4.

Answer 3

C

Question 4

The mainstream view is that macro instability is caused by:

A) erratic growth of the nation's money supply.
B) government interference in the economy.
C) significant changes in investment spending.
D) consumption "booms" and "busts."

Question 5

Monetarists believe that:

A) prices and wages are inflexible or sticky.
B) both product and resource markets are monopolistic.
C) velocity is relatively stable.
D) the economy is more stable when active fiscal and monetary policy are used.

Question 6

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

A) 1.33.
B) 3.
C) 5.33.
D) 100.

Question 7

According to mainstream macroeconomists,U.S.macro instability has resulted from:

A) investment "booms" and "busts" and,occasionally,adverse aggregate supply shocks.
B) adherence by the Fed to a monetary rule.
C) government's attempts to balance its budget.
D) wide fluctuations in net exports.

Question 8

At the equilibrium level of GDP:

A) MV = nominal GDP.
B) MV = real GDP.
C) M = nominal GDP.
D) V = 1/MPS.

Question 9

The velocity of money is equal to:

A) 1/MPS.
B) 1/reserve ratio.
C) M/GDP.
D) none of these.

Question 10

The mainstream view of macro instability is that:

A) changes in the money supply directly cause changes in aggregate demand and thus cause changes in real GDP.
B) changes in investment shift the aggregate demand curve and thus cause changes in real GDP.
C) bursts of innovation put the economy on an unsustainable growth path,eventually producing recession.
D) changes in technology and resource availability are the two main sources of fluctuations of real GDP.

Question 11

According to monetarists:

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.

Question 12

The equation of exchange indicates that:

A) MV = PQ.
B) other things equal,an increase in the demand for money will increase P and/or Q.
C) the velocity and the supply of money vary directly with one another.
D) MP = VQ.

Question 13

The velocity of money is the:

A) relationship between the money supply and the price level.
B) number of times per year the average dollar is spent on final goods and services.
C) relationship between asset and transactions demands for money.
D) price level divided by aggregate supply.

Question 14

The basic equation of monetarism is:

A) MV = PQ.
B) S_a + T + M = I_g + G + X_n.
C) V = M/PQ.
D) C_a + I_g + X_n + G = GDP.

Question 15

In the equation of exchange,the level of aggregate expenditures is indicated by:

A) MV.
B) MV/Q.
C) PM.
D) MV/P.

Question 16

The velocity of money measures the:

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.

Question 17

According to the equation of exchange,changes in the money supply can affect:

A) only the velocity of money.
B) both the price level and real output.
C) only real output and employment.
D) only the price level.

Question 18

Economist Milton Friedman is most closely associated with:

A) Keynesian economics.
B) the rational expectations theory.
C) supply-side economics.
D) monetarism.

Question 19

The velocity of money is equal to:

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

Question 20

The equation underlying the mainstream view of macroeconomics is:

A) MV = PQ.
B) C_a + I_g + X_n + G = GDP.
C) S = a - bY.
D) GDP = P × Q.

Question 21

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms. M = $100
V = 2
C_a = $160
X_n = $10
G = $10
Refer to the given information.Nominal GDP is:

A) $100.
B) $200.
C) $180.
D) $50.

Question 22

Assume monetary equilibrium exists-that is,the desired and the actual supply of money are equal-when nominal GDP equals $480 billion and the money supply is $160 billion.According to a strict monetarist view,an increase in the money supply of $10 billion will increase the nominal GDP by:

A) $30 billion.
B) $25 billion.
C) $20 billion.
D) $10 billion.

Question 23

If the money supply is constant when both nominal and real GDP are rising,we can conclude that:

A) tax rates have been increased.
B) the velocity of money must be increasing.
C) interest rates are falling.
D) the unemployment rate is rising.

Question 24

Monetarists say that the relationship between the amount of money that households and businesses want to hold and the level of national output and income:

A) has decreased historically because of increased accessibility to credit.
B) rises during recession and falls during periods of full employment.
C) falls during recession and rises during periods of full employment.
D) is relatively stable.

Question 25

The equation of exchange suggests that,if the supply and velocity of money remain unchanged,an increase in the physical volume of goods and services produced will cause:

A) the unemployment rate to rise.
B) the Federal Reserve Banks to sell securities in the open market.
C) a decline in the price level.
D) an automatic budget deficit.

Question 26

The real-business-cycle theory holds that business fluctuations are caused by:

A) factors affecting aggregate demand.
B) incorrectly anticipated government stabilization policies.
C) significant changes in technology and resource availability.
D) "stop-and-go" monetary policies.

Question 27

According to monetarists,the Great Depression in the United States largely resulted from:

A) contractionary fiscal policy.
B) excessive imports relative to exports.
C) significant changes in technology and resource availability.
D) inappropriate monetary policy.

Question 28

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:

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

Question 29

If the nominal GDP is $477 billion and the velocity of money is 4.5,then the money supply is:

A) $122 billion.
B) $98 billion.
C) $106 billion.
D) $477 billion.

Question 30

Most monetarists would say that:

A) the MV = PQ equation provides a better understanding of the macroeconomy than does the C_a + I_g + X_n + G = GDP equation.
B) most changes in the price level are explainable by changes in the level of real output.
C) the velocity of money is quite unstable.
D) all of these are true.

Question 31

In the equation of exchange,the nominal GDP is designated by:

A) PQ/M.
B) MV/P.
C) PQ.
D) MV.

Question 32

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms. M = $100
V = 2
C_a = $160
X_n = $10
G = $10
Refer to the given information.In equilibrium,I_g is:

A) $20.
B) $10.
C) $5.
D) $50.

Question 33

To determine the velocity of money,you would need to know:

A) nominal GDP and real GDP.
B) the money supply and the price level.
C) nominal GDP and the money supply.
D) nominal GDP and the interest rate.

Question 34

If the amount of money in circulation is $180 billion and the value of the economy's total output is $540 billion,then the:

A) circulation period of money must be one-fourth of a year.
B) velocity of money is 4.
C) average price per final good sold is $3.
D) velocity of money is 3.

Question 35

Monetarists believe the private economy is inherently:

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.

Question 36

As monetarists view the equation of exchange:

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.

Question 37

Monetarists say:

A) that,because P is stable,a change in M will change Q proportionately in the opposite direction.
B) a change in the money supply will change aggregate demand and therefore the nominal GDP.
C) a change in the money supply will change velocity,which in turn will change nominal GDP.
D) a change in the money supply will change the interest rate,which will change investment spending and nominal GDP.

Question 38

In a full-employment economy,a rise in M will cause inflation unless:

A) V rises in proportion to the increase in M.
B) the quantity of goods produced declines proportionately.
C) tax reductions accompany the increase in the money supply.
D) the velocity of money diminishes.

Question 39

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms. M = $100
V = 2
C_a = $160
X_n = $10
G = $10
Refer to the given information.If the price level P is 4,Q is:

A) 50.
B) 100.
C) 200.
D) 500.

Question 40

According to monetarists,a change in the money supply changes:

A) the velocity of money,which in turn changes the nominal GDP.
B) investment spending,which in turn changes the nominal GDP.
C) the interest rate,which in turn changes the nominal GDP.
D) aggregate demand,which in turn changes the nominal GDP.

Question 41

When most consumers and firms reduce spending only because they expect other consumers and firms to reduce spending,and a recession results:

A) a self-correction has occurred.
B) an adverse aggregate supply shock has occurred.
C) a coordination failure has occurred.
D) a real-business downturn has occurred.

Question 42

A coordination failure:

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.

Question 43

The real-business-cycle theory:

A) is a monetarist view of the business cycle.
B) is the mainstream view of the business cycle.
C) assumes that the supply of money is constant.
D) says that macro instability results from shifts in the long-run aggregate supply curve.

Question 44

New classical economists:

A) stress the importance of federal budget deficits in stimulating aggregate demand.
B) hold that,left alone,the economy gravitates to its full-employment level of output.
C) emphasize tax cuts as means of increasing aggregate supply.
D) advocate active use of monetary policy to stabilize the economy.

Question 45

Rational expectations theory assumes that:

A) people behave rationally and that all product and resource prices are flexible both upward and downward.
B) firms pay above-market wages to elicit work effort.
C) markets fail to coordinate the actions of households and businesses.
D) markets are dominated by monopolistic firms.

Question 46

In the real-business-cycle theory:

A) declines in real output cause declines in the money supply and thus aggregate demand.
B) decreases in long-run aggregate supply are fully anticipated and therefore do not reduce real output.
C) technology is constant.
D) economic instability results from inappropriate monetary policy.

Question 47

Which of the following is not an aggregate-demand-side explanation of business cycles?

A) The real-business-cycle theory.
B) The idea of coordination failures.
C) Mainstream macroeconomics.
D) Monetarism.

Question 48

According to new classical economists,the:

A) short-run demand for labor curve is vertical.
B) short-run aggregate demand curve is vertical.
C) long-run aggregate supply curve is horizontal.
D) long-run aggregate supply curve is vertical.

Question 49

New classical economists say that an unanticipated decrease in aggregate demand first:

A) decreases the price level and real output,and then decreases long-run aggregate supply.
B) decreases long-run aggregate supply,and then decreases the price level and real output.
C) reduces short-run aggregate supply,and then reduces long-run aggregate supply.
D) decreases the price level and real output,and then increases short-run aggregate supply such that the economy returns to the full-employment level of output.

Question 50

The idea that an economy can get stuck in either an unemployment equilibrium or an inflation equilibrium is most closely associated with:

A) new classical economics.
B) the real-business-cycle theory.
C) monetarism.
D) the idea of coordination failures.

Question 51

Rational expectations theory implies that the:

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.

Question 52

Suppose that,as expected,aggregate demand in the economy sharply declines.New classical economists say that the price level will _____________ and real output will ____________.

A) fall;remain constant
B) fall;fall
C) remain constant;fall
D) remain constant;rise

Question 53

In new classical economics,"a price-level surprise":

A) has no effect on the economy.
B) causes a temporary change in real output.
C) causes a permanent change in real output.
D) can never occur since people correctly anticipate the future.

Question 54

Rational expectations theory is based on the assumption that:

A) wages and prices are flexible upward but inflexible downward.
B) both product and resource markets are very competitive.
C) product markets are competitive,but resource markets are monopolistic.
D) both product and resource markets are monopolistic.

Question 55

New classical economists say that an unanticipated increase in aggregate demand first:

A) increases the price level and real output,and then reduces short-run aggregate supply such that the economy returns to the full-employment level of output.
B) increases the price level and real output,and then increases long-run aggregate supply.
C) increases long-run aggregate supply,and then increases the price level and real output.
D) reduces short-run aggregate supply,and then reduces long-run aggregate supply.

Question 56

According to real-business-cycle theory:

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.

Question 57

Assume that many households and businesses reduce their spending only because they expect other households and consumers to reduce their spending.Also suppose that all households and consumers would be better off if they did not reduce their spending.This situation best describes the:

A) real-business-cycle theory.
B) rational expectations theory.
C) concept of coordination failures.
D) adaptive expectations theory.

Question 58

In new classical economics,the change in output caused by a "price-level surprise":

A) is shown as a shift of the long-run aggregate supply curve.
B) does not alter the rate of unemployment,even in the short run.
C) is soon reversed through a shift of the short-run aggregate supply curve.
D) permanently changes the rate of unemployment.

Question 59

New classical economists say that a fully anticipated increase in aggregate demand:

A) shifts the long-run aggregate supply curve to the right.
B) shifts the long-run aggregate supply curve to the left.
C) moves the economy up along its vertical long-run aggregate supply curve.
D) eventually results in a self-correcting decrease in aggregate demand.

Question 60

New classical economists say that a fully anticipated decrease in aggregate demand:

A) shifts the long-run aggregate supply curve to the right.
B) shifts the long-run aggregate supply curve to the left.
C) moves the economy down along its vertical long-run aggregate supply curve.
D) eventually results in a self-correcting increase in aggregate demand.

Question 61

If prices and wages are inflexible downward,a decrease in aggregate demand will:

A) reduce the price level but not real output.
B) increase short-run aggregate supply.
C) decrease short-run aggregate supply.
D) reduce real output but not the price level.

Question 62

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 _________.

A) decrease;remain constant
B) increase;remain constant
C) remain constant;decrease
D) remain constant;increase

Question 63

The crowding-out effect refers to the possibility that:

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.

Question 64

A higher wage could result in a lower labor cost per unit of output than a lower wage if the higher wage:

A) is accompanied by an offsetting decline in fringe benefits.
B) increases supervision costs.
C) reduces job turnover.
D) increases worker absenteeism.

Question 65

Adherents of the traditional monetary rule say that the supply of money should be:

A) increased at a constant rate each year.
B) decreased during recession and increased during inflation.
C) held constant over time.
D) increased during recession and decreased during inflation.

Question 66

The traditional monetary rule is the idea that:

A) the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP.
B) the annual rate of increase in the money supply should be equal to the long-term increase in the price level.
C) an expansionary fiscal policy should always be accompanied by an easy monetary policy.
D) monetary policy only affects the economy 6 to 9 months after the money supply is changed.

Question 67

In the insider-outsider theory:

A) insiders are workers who retain employment during recession.
B) insiders are managers who have more information about their firms' performance than outsiders.
C) insiders are "principals" and outsiders are "agents."
D) outsiders are foreigners.

Question 68

A higher wage could result in a lower labor cost per unit of output than a lower wage if the higher wage:

A) brings forth greater work effort.
B) increases supervision costs.
C) increases job turnover.
D) increases worker absenteeism.

Question 69

An efficiency wage is:

A) a wage payment necessary to compensate workers for risk of injury on the job.
B) a "wage" that contains a profit-sharing component as well as traditional hourly pay.
C) an above-market wage that minimizes a firm's labor cost per unit of output.
D) a wage that automatically rises with the national index of labor productivity.

Question 70

Mainstream economists question the new classical assumption that:

A) excessive growth of the money supply is a cause of inflation.
B) the price level is determined by aggregate demand and aggregate supply.
C) demand creates its own supply.
D) wages and prices are equally flexible upward and downward.

Question 71

In the insider-outsider theory:

A) outsiders are workers who retain employment during recession.
B) insiders are managers who have more information about their firms' performance than outsiders.
C) insiders are "principals" and outsiders are "agents."
D) outsiders are laid-off workers and other qualified unemployed workers.

Question 72

According to monetarists,an expansionary fiscal policy:

A) will be ineffective because the interest rate will rise and crowd out private investment spending.
B) should not be permitted so long as a public debt exists.
C) should be used only when unemployment exceeds 6 percent of the labor force.
D) will be effective,provided the money supply is held constant.

Question 73

If firms are paying efficiency wages,they:

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.

Question 74

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:

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

Question 75

According to monetarists,an expansionary fiscal policy is a weak stabilization tool because:

A) the asset demand for money varies inversely with the rate of interest.
B) government borrowing to finance a deficit will raise the interest rate and reduce private investment.
C) government borrowing will reduce the supply of money in circulation and depress the GDP.
D) government borrowing to finance a deficit will lower interest rates,increase money balances,and lower velocity.

Question 76

Adherents of the traditional monetary rule advocate that the:

A) functional finance approach to fiscal policy be adopted.
B) money supply should be increased by a constant rate year after year.
C) money supply should be reduced during inflation and increased during recession.
D) money supply should be increased during inflation and reduced during recession.

Question 77

An efficiency wage is:

A) a below-market wage.
B) an above-market wage.
C) a "wage" that contains a profit-sharing component.
D) a wage that is free to rise or fall from day to day,depending on labor supply and demand.

Question 78

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?

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.

Question 79

Monetarists and rational expectations theorists generally agree that:

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.

Question 80

The insider-outsider theory implies that:

A) wages are flexible both upward and downward.
B) unemployment quickly reduces market wages.
C) agents pursue their own agendas,sometimes at the expense of principals.
D) wages may be inflexible downward.