Macroeconomics C19
Inappropriate monetary policy
According to monetarists, what is the single most important cause of macroeconomic instability?
Lenders would anticipate that the policy is inflationary and raise their nominal interest rates on loans. Workers would anticipate that the policy is inflationary and press for higher nominal wages. Firms would anticipate that the policy is inflationary and raise the prices of their products.
According to rational expectations economists, as a result of an increase in aggregate demand due to an expansionary monetary policy, real output and employment would not increase because of which of the following reasons?
Increase in money demand and money supply Shifts to the right in the long-run aggregate supply curve
According to the real-business-cycle theory, what are the results of an increase in resource availability?
deflation
An inappropriate decrease in the money supply leads to a falling price level or ______, together with instability of real GDP and employment.
inflation
An inappropriate increase in the money supply leads to a rising price level or ______, together with instability of real output and employment.
An unanticipated increase in business investment spending An unanticipated increase in exports An unexpected increase in the price level
An increase in output from quarter 1 to quarter 2 may have been caused by which of the following?
rational expectations (RET) economists
Business and labor may anticipate price-level effects due to changes in fiscal policy, causing the economy to move along its long-run aggregate supply curve, which is why ______ reject discretionary fiscal policy.
3.35
Calculate the velocity of money when the money supply and nominal GDP for an economy are $115 billion and $385 billion, respectively.
Blank 1: long
Changes in technology and resource availability due to business fluctuations affect productivity and the -run growth trend of aggregate supply.
Blank 1: demand
Monetarists and other new classical economists believe that policy rules would prevent government from trying to manage aggregate .
new classical economics
The _______ holds that when the economy occasionally diverges from its full employment output, internal mechanisms within the economy automatically move it back to that output.
Nominal wages typically do not immediately fall in response to a decrease in the price level.
Which of the following correctly indicates a limitation of the self-correction mechanism assumed by rational expectations theory and new classical economists?
downward-sloping
A decrease in the price level increases the equilibrium real GDP, resulting in a ______ aggregate demand curve for the economy.
a decrease in the price level and subsequent increase in equilibrium real GDP. an increase in the price level and subsequent decrease in equilibrium real GDP.
A downward-sloping aggregate demand curve results from
efficiency
A(n) ______ wage is one that minimizes the firm's labor cost per unit of output.
price-level surprises
According to RET, unanticipated changes in the price level, or ______, cause temporary changes in real output.
Wages should increase immediately.
According to RET, what should happen to wages when the price level increases?
velocity
According to monetarists, ______ does not change in response to changes in the money supply.
Blank 1: monetary
For monetarists, changes in the money supply caused by inappropriate policy are the single most important cause of macroeconomic instability.
-Nominal GDP rises by $30 billion because of the collective spending by households and businesses. -Households and businesses will collectively spend the $10 billion to restore equilibrium between nominal GDP and the money supply.
How will households and businesses react if the Federal Reserve increases the money supply by $10 billion when the velocity of money is 3, nominal GDP is $300 billion, and the amount of money desired by the public to purchase said amount of GDP is $100 billion?
Reduce cash balances and thus increase aggregate demand. Reduce cash balances and thus increase nominal GDP.
If the public anticipates a higher than expected level of the money supply, it will attempt to do what?
Blank 1: short Blank 2: long
In rational expectations theory, unanticipated price-level changes cause changes in real output in the run but not in the run.
Total amount spent by purchasers of output
In the equation of exchange, what does MV represent?
Total amount received by sellers of output
In the equation of exchange, what does PQ represent?
Changes in employment Changes in output
In the short term, stickiness in either input or output prices means that any shock to either aggregate demand or aggregate supply will result in which of the following?
unpredictable
In the view of monetarists, the net effect of a budget deficit on aggregate demand is ______.
Agricultural price supports Pro-union legislation Pro-business monopoly legislation Downward wage inflexibility through minimum-wage laws
Monetarists argue that the causes of macroeconomic instability include which of the following?
Business fluctuations
Inflation targeting would focus the Fed's attention exclusively on controlling inflation and deflation rather than on counteracting which of the following?
Blank 1: price
Mainstream economists argue that the economy can get mired in recession for several months or more because of downward and wage inflexibility.
Blank 1: price
Mainstream economists believe that monetary policy and fiscal policy are important tools for achieving and maintaining full employment, stability, and economic growth.
Blank 1: investment or investing
Mainstream economists say that macroeconomic instability usually stems from swings in spending (a component of GDP) and occasionally from adverse aggregate shocks.
inflexibility
Mainstream economists say that the economy can get mired in recession for several months or more because of downward price and wage .
policymakers should not engage in fiscal or monetary policy. the economy will automatically move back to full employment whenever it diverges.
New classical economics holds that
that the economy "self-corrects" when unforeseen events divert it from its full employment level of real output
New classical economists believe:
rational expectations
New classical economists tend to be either monetarists or adherents of ______ theory.
Blank 1: rule
One way in which economists suggest responding to inappropriate monetary policy is to enact a monetary .
Rational expectation
Studying macroeconomics so that you will know how to best invest your money depending on the current monetary policy is an example of which theory?
The rational expectation theory that people behave rationally.
Suppose that very significant increases in the money supply are anticipated to result in hyperinflation. As a result, people begin to consider the purchase of property and other commodities. What does this behavior exemplify?
Blank 1: expectations or expectation
Taking action to limit the personal effects of changes in policies or circumstances that have effects on the economy is the idea behind rational theory.
Product and resource markets are highly competitive. People behave rationally, intelligently processing information to form expectations about things that are economically important to them. Prices and wages are flexible both upward and downward.
The assumptions that form the basis for the rational expectations theory (RET) include which of the following?
a monetary rule
The idea that the Fed should expand the money supply each year at the same annual rate as the typical growth of the economy's production capacity is the basis of ______.
Blank 1: rational
The implication of expectations theory is not only that the economy is self-correcting but that the self-correction occurs quickly.
Blank 1: rational Blank 2: quickly, rapidly, fast, instantaneously, immediately, or instantly
The implication of the expectations theory is not only that the economy is self-correcting but that the self-correction occurs .
Blank 1: prices or price
The mainstream view of economics states that instability in the economy rises from sticky and unexpected shocks to either aggregate demand or aggregate supply.
Blank 1: competitive
The rational expectations theory is based on the assumptions that people behave rationally to form expectations about economic decisions, that product and resource markets are highly , and that prices and wages are flexible upward and downward.
Blank 1: stability
The rationale for a monetary rule is economic growth along with price .
True
True or false: Capitalist economies experienced considerable instability during the twentieth century.
False
True or false: Monetarists say that velocity is stable, meaning it changes at a constant rate.
downward wage inflexibility.
Wage contracts, minimum wage laws, and potential problems with morale, effort, and efficiency are all sources of
Blank 1: targeting
When the Federal Reserve announces that the price level in the economy should rise between 2% and 3% over the course of 4 years, then applies its available monetary policy tools to achieve that range, it is engaging in inflation .
Wage contracts Legal minimum wage
Which of the following are the sources of wage inflexibility?
Holds that a competitive market system gives the economy a high degree of macroeconomic stability Holds that markets are highly competitive Focuses on the money supply
Which of the following phrases define monetarism, or the monetarist view of macroeconomics?
The Fed should keep the price level within a specific range over a particular period of time.
Which of the following recommendations describes the concept of inflation targeting?
Blank 1: Coordination
failures occur when parties are unable to reach a mutually beneficial equilibrium.
Blank 1: Policy
rules refer to measures taken by government to stabilize a sometimes unstable economy.
Blank 1: Inflation
targeting would focus the Fed's attention exclusively on controlling inflation and deflation, rather than on counteracting business fluctuations.
Blank 1: wages or salaries
According to rational expectations economists, as a result of an increase in aggregate demand due to an expansionary monetary policy, real output and employment would not increase because said policy would be offset by higher prices and .
relative to
According to rational expectations theorists, firms mistakenly believe that their own selling price for a product is increasing ______ the prices of other products.
They confuse the general increase in the price level for a specific increase in the price of their own product.
According to rational expectations theory, why do firms increase their output levels above full employment?
spend excess cash
According to the equation of exchange, the public's reaction when holding more money than it desires is to ______.
Blank 1: cycle
According to the real business theory, business fluctuations result from significant changes in technology and resource availability.
Recession with no change in the price level Shift to the left in the long-run aggregate supply curve Reduction in money demand and money supply
According to the real-business-cycle theory, what are the results of a decrease in resource availability?
Reduction in money demand and money supply Recession with no change in the price level Shift to the left in the long-run aggregate supply curve
According to the real-business-cycle theory, what are the results of a decrease in resource availability?
Blank 1: demand
Any change in one of the spending components in the aggregate expenditures equation shifts the aggregate curve.
rational expectations theory
Businesses, consumers, and workers expect changes in policies or circumstances to have certain effects on the economy, so in pursuing their own self-interest, they take actions to make sure those changes affect them as little as possible. This reasoning is known as
money supply
Mainstream economists view the instability of investment as the main cause of the economy's instability, whereas monetarists view changes in the ______ as the main cause of instability in the economy.
Blank 1: spending, demand, or expenditures
Mainstream macroeconomics focuses on aggregate and its components.
money
Monetarism focuses on the supply and holds that markets are highly competitive.
manage aggregate demand
Monetarists and other new classical economists believe that policy rules would prevent government from trying to ______.
the level of nominal GDP present in the economy
Monetarists believe that velocity does not change in response to changes in the money supply; instead, they believe it depends mainly on ______.
inappropriate monetary policy
Monetarists contend that the single most important cause of macroeconomic instability is ______.
Blank 1: adaptive
Monetarists usually hold expectations that people will form their expectations on the basis of present realities and only gradually change their expectations as their experience unfolds.
Blank 1: inflation
Rational expectations economists conclude that an expansionary or restrictive monetary policy would alter the rate of but not real output.
Blank 1: government or federal government
The monetarists' argument for the causes of macroeconomic instability revolve around interference in the economy.
A shift of the aggregate demand curve at the same rate as the shift in potential GDP Economic growth without inflation or deflation
The rationale for a monetary rule is grounded on which of the following?
real
The real-business-cycle view of macroeconomic instability contends that business cycles are caused by ______ factors that affect aggregate supply rather than by monetary or spending factors that cause fluctuations in aggregate demand.
Blank 1: mainstream
The term " view" is used to characterize the prevailing macroeconomic perspective of the majority of economists.
The factors altering velocity change gradually and predictably and can be anticipated from one year to the next.
What do monetarists means when they say that velocity is stable?
A company's labor cost per unit of output
What does an efficiency wage minimize?
Unexpected increase in the price level
What is one result of an unexpected rise in foreign demand for U.S. goods?
M × V = P × Q
What is the equation of exchange?
A shift in the aggregate demand curve
What is the result of a change in one of the spending components in the aggregate expenditures equation?
Velocity of money
What is the term for the average number of times per year that a dollar is spent on final goods and services?
Coordination failure
What is the term for when people fail to reach a mutually beneficial equilibrium because they lack a way to synchronize their actions?
The economy always returns to producing at potential output.
What occurs when input prices and output prices are fully flexible and have time to adjust to changes in aggregate demand or short-run aggregate supply?
Mainstream
What type of macroeconomics focuses on aggregate spending and its components?
You hear the flu is going around your child's school. You send him to school with hand sanitizer and make sure he washes his hands when he gets home. You are flying to the Caribbean during hurricane season. You purchase the trip insurance when you buy your ticket.
Which of the following are examples of the rational expectations theory?
Inflation The Great Depression Recessions
Which of the following events of the twentieth century fall under the category of macroeconomic instability?
New classical economists
Which of the following groups believe that the economy self-corrects when unanticipated events divert it from its full employment level of real output?
Rational expectations economists
Which of the following groups believes that an expansionary or restrictive monetary policy would alter the rate of inflation but not real output?
Mainstream economists
Which of the following groups say that macroeconomic instability usually stems from swings in investment spending and occasionally from adverse aggregate supply shocks?
Adaptive expectations
Which of the following ideas suggests that the speed of adjustment in the self-correction of the economy is based on present realities and as experience unfolds?
An increase in the money supply under conditions of full employment raises the price level. Higher prices caused by increases in the money supply under full employment cause firms to increase their real output. Once nominal wages rise to reflect higher prices and restore real wages, real output moves back to its full employment level.
Which of the following inappropriate steps in monetary policy lead to inflation and macroeconomic instability?
A decrease in the money supply under conditions of full employment
Which of the following inappropriate steps in monetary policy leads to deflation?
Mainstream view
Which of the following terms is used to characterize the prevailing macroeconomic perspective of the majority of economists?
Mainstream economics
Which of the following theories holds that prices, and particularly wages, are not flexible downward because of several factors, including efficiency wages and labor contracts?
