ECO2013 Ch. 36

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:

$180 billion

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:

A coordination failure

Economist Milton Friedman viewed the economy as needing:

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

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:

A to B to C

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:

ASLR1 to ASLR2

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

Adaptive expectations

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

Aggregate supply

Real-business-cycle theory focuses on factors affecting:

Aggregate supply

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

Be more productive at a higher wage rate

Mainstream macroeconomics would suggest that fiscal policy:

Changes aggregate demand and GDP through the multiplier process

The Taylor rule is a:

Combined passive and activist approach to monetary policy

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:

D

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

Decrease the downward inflexibility of wages

Crowding-out results from:

Deficit financing which increases interest rates and reduces investment

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

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

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

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

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

Deviations of aggregate supply from long-term growth trends

Which idea has been absorbed into mainstream macroeconomics?

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

According to rational expectations theory, instantaneous market adjustments make:

Expansionary economic policy ineffective in increasing output

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):

Expansionary fiscal policy and an easy money policy

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

Falls from 8 to 6

Which idea is associated with mainstream economics?

Fiscal policy is a useful stabilization tool

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

Flexible prices, and government policies and regulation

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

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

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:

Increase prices

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

Inflation targeting

The equation of exchange is:

MV = PQ

A mainstream criticism of rational expectations theory is that:

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

An efficiency wage is one that:

Minimizes the firm's labor cost per unit of output

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:

Monetarism

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:

Monetarism

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:

Monetary rule

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

Money supply is $212 billion

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

No change in output and employment

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

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

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

Nominal GDP

The equation of exchange indicates that:

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

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:

P3 and Q2

In the view of rational expectations theory:

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

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

Raise the real Federal funds rate by 0.5 percent

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

Reaction of the public to the expected effects of policy changes

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

Real GDP

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:

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

Monetarists take the position that monetary policy:

Should be based on rules rather than discretion

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:

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

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

The level of aggregate expenditures

Mainstream economists support:

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

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

Unanticipated aggregate demand and aggregate supply shocks in the short run

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

Velocity is more variable and unpredictable than expected

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

Velocity of money

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

Velocity of money is 5