Deck 25: Epilogue: the Story of Macroeconomics

Question 1

The IS- LM model was developed by:

A) Hicks and Hansen.
B) Modigliani and Friedman.
C) Lucas and Sargent.
D) Friedman and Phelps.
E) Romer and Barro.

Answer 1

Hicks and Hansen.

Question 2

According to Keynes:

A) inflation is always and everywhere a monetary phenomenon.
B) The Phillips curve is stable.
C) balancing the budget in the midst of a depression would be a serious mistake.
D) the multiplier effect mutes the effect of demand shocks to output.
E) the Great Depression was caused by ill- considered expansionary fiscal policy.

Answer 2

balancing the budget in the midst of a depression would be a serious mistake.

Question 3

The staggering of wage and price decisions suggests that:

A) people do possess rational expectations.
B) the Lucas critique is entirely correct.
C) the economy will adjust slowly to shocks even if people possess rational expectations.
D) people do not possess rational expectations.
E) real business cycle theory is correct.

Answer 3

the economy will adjust slowly to shocks even if people possess rational expectations.

Question 4

Which of the following was not part of the neoclassical synthesis?

A) Aggregate demand.
B) The LM curve.
C) The IS curve.
D) Rational expectations.
E) The Phillips curve.

Question 5

Which of the following events led to the crisis in macroeconomics and to the development of rational expectations theory?

A) Stagflation in the 1970s.
B) The stock market crash of 1987.
C) Large budget deficits in the 1980s.
D) The stock market speculative bubble of the late 1990s.
E) The Great Depression.

Question 6

The steeper is the IS curve:

A) The more effective is monetary policy.
B) A given change in the money supply will have a greater effect on output.
C) The effectiveness of monetary policy does not change.
D) The effectiveness of monetary policy depends on fiscal policy.
E) The less effective is monetary policy.

Question 7

The research by Robert Hall on the theory of consumption suggests that the best forecast of consumption for next year would be:

A) this year's consumption.
B) an average of academic forecasts of consumption.
C) random.
D) unpredictable.
E) last year's consumption.

Question 8

Which of the following is an implication of rational expectations theory?

A) Macroeconometric models based on past behaviour will not be very useful in formulating policy.
B) Business cycles almost always result from a shift in aggregate demand.
C) Wages and prices are set almost entirely at random, so it is pointless to try to model their behaviour.
D) Deviations of output from the natural rate are likely to be serious and long- lived.
E) The economy is like a complex machine that needs to be optimally controlled with the proper policy.

Question 9

Which of the following statements about Keynes' contribution to macroeconomics is correct?

A) Keynes argued that animal spirits affect consumption more than investment.
B) Although he published his most important ideas about the economy long before the 1930s, few economists paid attention to Keynes until the Great Depression proved him correct.
C) Keynes argued that depressions and recessions were almost always caused by changes in the money supply.
D) Keynes argued that effective demand determines output.
E) Keynes argued that balancing the budget could be an effective way to cure a recession or depression.

Question 10

The theories of investment were developed by:

A) Friedman and Phelps.
B) Tobin and Jorgenson.
C) Modigliani and Friedman.
D) Hicks and Hansen.
E) Lucas and Sargent.

Question 11

Liquidity preference refers to:

A) the controversy sparked by the Lucas critique.
B) real business cycle theorists' explanations for stagflation.
C) Keynes' name for the demand for money.
D) the "random walk" behaviour of consumption spending.
E) monetarists explanations for stagflation.

Question 12

According to rational expectations theory, monetary policy will affect output only if it is:

A) a policy that has been tried in the past.
B) unanticipated.
C) a very small change.
D) a very large change.
E) anticipated.

Question 13

The neoclassical synthesis had emerged by what decade?

A) 1960s.
B) 1950s.
C) 1940s.
D) 1970s.
E) 1930s.

Question 14

The less staggered are labour contracts:

A) the less inflationary effects of a given change in money growth in the medium run.
B) the more inflationary effects of a given change in money growth in the medium run.
C) the less the inflationary effects of a given change in money growth in the medium run.
D) the less rapidly the economy will adjust to changes in aggregate demand.
E) the more rapidly the economy will adjust to changes in aggregate demand.

Question 15

Stagflation refers to:

A) an increase in inflation and unemployment.
B) an increase in inflation.
C) a simultaneous decrease in inflation and unemployment.
D) a decrease in the price level and the unemployment rate.
E) a liquidity trap.

Question 16

Which of the following schools of thought advised against fine- tuning, due to our limited understanding of the economy?

A) Keynesian.
B) New growth.
C) Neoclassical.
D) Monetarist.
E) New Keynesian.

Question 17

The new classical interpretation of the economy suggests that:

A) expansions will not occur.
B) output is always above the natural level.
C) output is always equal to the natural level.
D) recessions will not occur.
E) output is always below the natural level.

Question 18

In the 1960s, the monetarist school of thought held that:

A) fiscal policy was more powerful in determining output fluctuations.
B) there is a long- run tradeoff between inflation and unemployment.
C) monetary policy was not powerful in determining output fluctuations.
D) efforts to fine- tune the economy are likely to do more harm than good.
E) monetary and fiscal policy could explain most of the output fluctuations in U.S. history.

Question 19

The theories of neoclassical consumption were developed by:

A) Modigliani and Friedman.
B) Hicks and Hansen.
C) Lucas and Sargent.
D) Schwartz and Solow.
E) Friedman and Phelps.

Question 20

During the 1970s and 1980s, macroeconomists were busy integrating the insights of which of the following into their ideas about the economy?

A) Rational expectations.
B) Real business cycle theory.
C) Classical macroeconomics.
D) Keynesian theory.
E) Supply- side economics.

Question 21

Which of the following argued that the Great Depression was caused by monetary factors?

A) Friedman and Schwartz.
B) Tobin and Jorgenson.
C) Lucas and Sargent.
D) Modigliani and Friedman.
E) Hicks and Hansen.

Question 22

Which of the following was a surprising aspect of the crisis to economists?

A) Economists did not think financial crises could happen.
B) Rational expectations are no longer a valid working assumption.
C) The financial markets did not function efficiently and broke down.
D) The amplification effect of a housing market shock to a financial and macroeconomic crisis.
E) Economic agents overestimated housing prices.

Question 23

In most of the macroeconomic models built before the crisis, what role did the financial system and intermediation play?

A) The role of banks and other financial institutions in the economy was largely ignored.
B) Banks and other financial institutions were a regular feature of macroeconomic models but played a minor role.
C) Most of the work on the elements needed to understand the crisis was carried out in the fields of finance or corporate finance so that these elements were not fully incorporated.
D) Both A and B.
E) Both A and C.

Question 24

"Effective demand" represents which of the following?

A) The demand for labour.
B) Money demand.
C) Demand for exports.
D) Domestic demand.
E) Aggregate demand.

Question 25

Most economists would agree that, unless it incorporates rational expectations or something like it, a model cannot account for:

A) the relationship between consumption and income.
B) the different initial impact of a permanent versus a temporary policy change.
C) the stagflation of the 1970s.
D) shifts in aggregate supply.
E) the Great Depression.

Question 26

Which of the following is a source of intellectual failure on the part of macroeconomics in predicting the crisis?

A) Economists did not think financial crises could happen.
B) Some economists sounded the alarm but were ignored.
C) Financial intermediation is important to finance not economics.
D) The financial system is too complex to be included in macroeconomic models.
E) A lack of focus on the role of financial institutions in the economy.

Question 27

Those economists who attempt to explain why wages and prices do not freely adjust would most likely be:

A) New Keynesian economists.
B) New growth theorists.
C) Neoclassical theorists.
D) New classical economists.
E) Real business cycle theorists.

Question 28

If consumers are very foresighted, we would expect actual consumption spending to:

A) increase during recessions.
B) be entirely predictable.
C) increase during episodes of stagflation.
D) resemble a "random walk".
E) have no relation to wealth.

Question 29

Which of the following argued that a long- run trade- off between inflation and unemployment could not exist?

A) Tobin and Jorgenson.
B) Friedman and Phelps.
C) Modigliani and Friedman.
D) Lucas and Sargent.
E) Hicks and Hansen.

Question 30

One problem with real business cycle theory is that:

A) it relies almost entirely on Keynes' original ideas, ignoring much of the progress made since then.
B) it treats government officials as well- meaning public servants, despite much evidence to the contrary.
C) its models downplay the importance of technological progress in the economy.
D) it defines "productivity" in a new and not very intuitive way.
E) it is more successful in explaining expansions than in explaining contractions.

Question 31

Liquidity preference refers to the theory of:

A) expectations.
B) consumption.
C) money demand.
D) money supply.
E) investment.

Question 32

Milton Friedman attributed the Great Depression primarily to:

A) the failure of wages to rise.
B) economists' and policymakers' failure to recognize their limited knowledge.
C) a decrease in the money supply.
D) inaccurate expectations by consumers and firms.
E) the government's failure to respond to an increase in the budget deficit.

Question 33

The existence of menu costs are often used to explain why:

A) the price of services, like those provided by restaurants and barbers, rise at a faster rate than the price of goods, like automobiles and clothing.
B) price and wage adjustments will be relatively rapid.
C) food prices tend to rise disproportionately rapidly in the consumer price index.
D) people prefer to look backward, instead of forward, when anticipating the future.
E) fiscal and monetary policies should be relatively effective.

Question 34

"In the long run, we're all dead" was Keynes' way of saying that:

A) output eventually returns, but too slowly, to its natural level.
B) there is no point in saving for retirement.
C) intellectual pursuits, like understanding the economy, are unimportant in the scheme of things.
D) no one would appreciate his theories during his lifetime.
E) it is very important to save for one's retirement.

Question 35

The intellectual leader of the monetarists was:

A) John Hicks.
B) Robert Lucas.
C) John Maynard Keynes.
D) Milton Friedman.
E) Paul Romer.

Question 36

As the IS curve becomes flatter, we know that:

A) a given change in the money supply will cause a smaller change in unemployment.
B) a given change in the money supply will cause a larger change in unemployment.
C) a given change in the money supply will cause the same change in unemployment.
D) the effectiveness of monetary policy depends on fiscal policy.
E) monetary policy becomes less effective.

Question 37

A core belief of modern macroeconomics is that in the long run:

A) a change in money growth will affect the composition of output, but not its level.
B) a change in money growth will affect the level of output, but not its composition.
C) greater saving will result in greater output.
D) a change in fiscal policy will not affect the composition of output.
E) output can deviate permanently from its natural level.

Question 38

Which of the following led a strong attack against mainstream macroeconomists during the 1970s?

A) Modigliani and Friedman.
B) Friedman and Phelps.
C) Lucas, Barro, and Sargent.
D) Tobin and Jorgenson.
E) Hicks and Hansen.

Question 39

If the IS curve is relatively steep, then:

A) there can be no long- run tradeoff between inflation and unemployment.
B) monetary policy cannot be very effective in changing GDP.
C) budget deficits will not affect future capital accumulation.
D) Ricardian equivalence most likely holds.
E) rational expectations theory is probably correct.

Question 40

According to real business cycle theorists:

A) changes in output primarily represent changes in the natural level of output.
B) fiscal policy explains most changes in wage rigidity.
C) fiscal policy explain most changes in output.
D) price and wage rigidity explains most changes in output.
E) efficiency wage theory explains wage rigidity.

Question 41

First, discuss individually the features of the RBC (or New Classical), New Keynesian, and new growth theory approaches. Second, discuss the synthesis that is emerging between the three approaches.

Question 42

Briefly discuss new growth theory.

Question 43

A core belief of modern macroeconomics is that in the short run:

A) fluctuations in aggregate demand have no impact on the price level.
B) fiscal policy is more effective in changing output than monetary policy.
C) the economy always operates at or near the natural rate of unemployment.
D) monetary policy is more effective in changing output than fiscal policy.
E) fluctuations in aggregate demand affect unemployment.

Question 44

In the 1960s, there was significant debate between Keynesians and monetarists. Explain several aspects of this debate.

Question 45

First, what is the Lucas critique? Second, explain how it might relate to the implementation of monetary policy.

Question 46

Explain what is meant by liquidity preference.

Question 47

Explain what is meant by "New Keynesians" and discuss some of the research conducted in this area.

Question 48

Explain several of the key contributions of Keynes.

Question 49

What are some of the lessons in policymaking and macroeconomic analysis that have emerged after the crisis? Discuss.

Question 50

Discuss the various strands of research on the financial system and intermediation that researchers have sought to integrate into consistent macroeconomic models since the crisis.

Question 51

Discuss what is meant by the neoclassical synthesis and explain how it emerged.

Question 52

The neoclassical synthesis:

A) held that econometric models of the economy could not be used to predict the future.
B) was the dominant school of thought among economists in the 1950s and 1960s.
C) held that economy always operated at or very near the natural rate of unemployment.
D) was a name coined by Keynes himself for his new theories.
E) rejected virtually all of Keynes' insights.

Question 53

Discuss new classical economics and real business cycle theory.

Question 54

Discuss some of the implications of rational expectations.