Question 1

Mainstream macroeconomics would suggest that ﬁscal policy

Accepted Answer

Mainstream macroeconomics suggests that fiscal policy changes aggregate demand and GDP through the multiplier process. This is based on the idea that changes in government spending, taxation, and transfer payments have a direct impact on the level of aggregate demand in the economy, which in turn affects real GDP and prices. This view assumes that changes in fiscal policy can have a significant impact on the economy, particularly in the short run, without necessarily depending on changes in the money supply. However, it should be noted that there may be some limitations to the effectiveness of fiscal policy, such as the possibility of anticipation and offsetting effects by individuals and firms in the economy.

Question 2

Monetarists argue that government policy interference in the economy is the primary cause of
macroeconomic instability.

Accepted Answer

Monetarists believe that government intervention in the economy, particularly in the form of monetary and fiscal policy, causes fluctuations in economic activity such as inflation and unemployment. They hold the view that the money supply and interest rates should be allowed to adjust naturally to market conditions, without government interference.

Question 3

If M is $1,000, P is $8, and Q is 500, then V must be 6.

Accepted Answer

There is not enough information to determine the value of V. The formula for V is not given in the question.

Question 4

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

Accepted Answer

The policy position that the supply of money should be increased at a constant rate each year is a central tenet of monetarism, a school of thought within economics that emphasizes the role of money supply in the economy.

Question 5

The most likely advocates for a monetary rule would be

Accepted Answer

Monetarists are proponents of the use of monetary policy rules, such as controlling the growth rate of the money supply, to stabilize the economy. They argue that discretionary monetary policy can be unpredictable and lead to economic instability. Real-business-cycle theorists focus on the role of real shocks in the economy and may prioritize other policy levers, such as reducing tax rates, over monetary policy rules. Mainstream economists may have varying views on monetary policy rules, but it is likely that monetarists would be the most vocal advocates for such rules. Supply-side economists tend to focus on policies that promote economic growth, such as reducing regulations and taxes, and may not place as much emphasis on monetary policy rules.

Question 6

Mainstream economists identify wage-price rigidities as one cause of economic instability.

Accepted Answer

Wage-price rigidities, or the inability of wages and prices to adjust quickly to changes in the economy, can lead to imbalances and instability in the market. Mainstream economists often suggest policies to reduce these rigidities, such as increasing labor market flexibility or reducing minimum wage laws.

Question 7

The equation of exchange indicates that an increase in money supply will always lead only to
inﬂation.

Accepted Answer

The equation of exchange only suggests that there is a direct relationship between the quantity of money in circulation and the overall price level in an economy. However, other factors such as changes in the velocity of money, changes in real output and changes in the demand for money can also influence the overall price level. Therefore, an increase in money supply does not necessarily always lead to inflation.

Question 8

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

Accepted Answer

According to the rational expectations theory, in the long run, agents in the economy will correctly anticipate any changes in government policy and will adjust their behavior accordingly. However, in the short run, unanticipated aggregate demand and aggregate supply shocks can lead to instability in the private economy, as agents may not have enough time to adjust their behavior. Therefore, the observed instability in the private economy would most likely be due to unanticipated aggregate demand and aggregate supply shocks.

Question 9

(Last Word) In the aftermath of the Great Recession of 2007-2009, a new breed of "market monetarists" suggested that the Fed and other central banks should use which of the following to
Adjust monetary policy?

Accepted Answer

Market monetarists suggest the use of prediction markets, which are markets that allow traders to bet on the future outcomes of political events, economic indicators, and other events. The idea is that these markets can provide valuable information to central banks about market expectations and can be used in the formulation of monetary policy.

Question 10

"Targeting the forecast" is the policy that best describes which of the following views?

Accepted Answer

Market monetarism emphasizes the role of central banks in stabilizing the economy by targeting nominal GDP or the forecast of nominal GDP. This approach suggests that by focusing on the expected path of nominal GDP, central banks can effectively manage inflation and economic stability, distinguishing it from the other theories listed.

Question 11

Mainstream economists believe that economic instability is primarily due to unexpected changes in
consumer spending.

Accepted Answer

Mainstream economists do not attribute economic instability solely to changes in consumer spending, but rather consider a wide range of factors including government policies, global economic trends, and financial market fluctuations.

Question 12

The view that anticipated changes in the money supply will have no effect on the economy's output would most likely be a proposition of

Accepted Answer

Rational expectations theory posits that individuals form expectations about the future based on all available information, including anticipated changes in monetary policy. Therefore, if changes in the money supply are fully anticipated, individuals and businesses will adjust their behavior in ways that negate the intended effects of those changes on real economic output.

Question 13

The rational expectations view that expectations regarding policy and its effects are important to consider

Accepted Answer

The rational expectations view is now accepted by most mainstream economists as an important factor to consider in economic analysis. It suggests that individuals form expectations based on all available information, including their understanding of how policy will affect the economy, and that these expectations can have significant economic effects.

Question 14

In the monetarist view, the economy is inherently stable, but the mismanagement of monetary policy
creates instability.

Accepted Answer

Monetarists believe that the economy is inherently stable, but that instability can arise from mismanagement of monetary policy, such as excessive money supply growth or contraction. Monetarists argue that stable money growth is the key to maintaining low inflation and promoting long-term economic growth.

Question 15

(Last Word) So-called market monetarists suggest that the Fed, based on economic performance data over the past many decades, should aim for which of the following targets?

Accepted Answer

Market monetarists suggest that the Fed should aim for a 5 percent per year growth in nominal GDP. This is because they believe that monetary policy should target nominal GDP rather than inflation or unemployment, as it reflects both the level of economic activity and the prices at which goods and services are being traded in the economy. In addition, they argue that a stable growth rate in nominal GDP would lead to more stable inflation and lower unemployment over the long term.

Question 16

The mainstream view is that macro instability is caused by the volatility of the money supply, which
constantly shifts the aggregate demand curve around.

Accepted Answer

The mainstream view, particularly among Keynesian economists, is that macroeconomic instability can be caused by various factors, not just the volatility of the money supply. These include changes in investment, government policy, external shocks, and consumer confidence, which can all shift the aggregate demand curve.

Question 17

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

Accepted Answer

According to Milton Friedman, macroeconomic instability often occurs as a result of discretionary monetary policy, which can lead to changes in the money supply and interest rates that affect economic growth and stability. Tax changes and spending reductions by the Federal government, as well as the issuance of bonds by the U.S. Treasury, can also have an impact on the economy, but they are not seen as the primary cause of macroeconomic instability.

Question 18

Mainstream economists think that the best way to stabilize the economy is to shift aggregate supply.

Accepted Answer

Mainstream economists believe that a combination of fiscal and monetary policies can be used to stabilize the economy, which involves both shifting aggregate demand and supply. Shifting aggregate supply alone is not considered the best way to stabilize the economy.

Question 19

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

Monetarists believe in the Quantity Theory of Money, which states that changes in the money supply (M) will lead to proportional changes in nominal GDP. They assume that velocity (V) is stable in the short run. Therefore, monetarists argue that a change in M will bring about a direct and proportional change in nominal GDP.

Question 20

Real-business-cycle theory views changes in resource availability and technology as shifting
aggregate demand and thus causing macroeconomic instability.

Accepted Answer

Real-business-cycle theory posits that fluctuations in aggregate output are primarily driven by changes in technology and other supply-side factors, rather than shifts in aggregate demand. It argues that these fluctuations reflect efficient responses to changes in real economic conditions, rather than macroeconomic instability caused by inadequate aggregate demand.

Quiz 19: Current Issues in Macro Theory and Policy

Mainstream macroeconomics would suggest that ﬁscal policy

Monetarists argue that government policy interference in the economy is the primary cause of macroeconomic instability.

If M is $1,000, P is $8, and Q is 500, then V must be 6.

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

The most likely advocates for a monetary rule would be

Mainstream economists identify wage-price rigidities as one cause of economic instability.

The equation of exchange indicates that an increase in money supply will always lead only to inﬂation.

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

(Last Word) In the aftermath of the Great Recession of 2007-2009, a new breed of "market monetarists" suggested that the Fed and other central banks should use which of the following to Adjust monetary policy?

"Targeting the forecast" is the policy that best describes which of the following views?

Mainstream economists believe that economic instability is primarily due to unexpected changes in consumer spending.

The view that anticipated changes in the money supply will have no effect on the economy's output would most likely be a proposition of

The rational expectations view that expectations regarding policy and its effects are important to consider

In the monetarist view, the economy is inherently stable, but the mismanagement of monetary policy creates instability.

(Last Word) So-called market monetarists suggest that the Fed, based on economic performance data over the past many decades, should aim for which of the following targets?

The mainstream view is that macro instability is caused by the volatility of the money supply, which constantly shifts the aggregate demand curve around.

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

Mainstream economists think that the best way to stabilize the economy is to shift aggregate supply.

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.

Real-business-cycle theory views changes in resource availability and technology as shifting aggregate demand and thus causing macroeconomic instability.