Question 1

In the early 1990s, although the U.S. economy was in a recession, Congress rejected the idea of using an expansionary fiscal policy to close the recessionary gap. What was the reason?

Accepted Answer

Congress was concerned about increasing the government budget deficit, which is a common concern during recessions as policymakers fear that increased government spending will lead to a larger deficit. This concern may have prevented Congress from using an expansionary fiscal policy to close the recessionary gap.

Question 2

Which of the following is true about new Keynesian economics? 
I. It incorporates monetarist ideas about the importance of monetary policy.
II. It incorporates new classical ideas about the importance of aggregate supply.
III. It includes a greater use of microeconomic analysis in macroeconomic analysis than Keynesian economics.
IV. Unlike Keynesian economics, it is opposed to active stabilization policies.

Accepted Answer

New Keynesian economics incorporates monetarist ideas about monetary policy and new classical ideas about aggregate supply, and it uses more microeconomic analysis than traditional Keynesian economics. However, it does not oppose active stabilization policies.

Question 3

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point c. A classical economist would advocate

Accepted Answer

A classical economist would advocate for allowing the economy's self-correcting mechanism to move the economy to point a. This is because classical economists believe that the economy will naturally adjust and return to its long-run equilibrium without government intervention. In this case, the economy is experiencing a recessionary gap (output below potential output), so allowing wages and prices to adjust downwards would eventually lead to full employment at potential output (point a). Pursuing expansionary fiscal policies (choices B, C and D) would go against the principles of classical economics, which emphasize limited government intervention in the economy.

Question 4

New Keynesian economics is built on 
I. the Keynesian approach
II. the monetarist approach
III. the new classical approach

Accepted Answer

New Keynesian economics incorporates elements from the Keynesian approach, such as the importance of aggregate demand, as well as insights from the monetarist and new classical approaches, including rational expectations and the role of monetary policy.

Question 5

Suppose the economy is initially in long-run equilibrium. Now suppose oil prices rise sharply and at the same time, policymakers pursue expansionary monetary and fiscal policies. Which of the following will occur as a result of these two events, given that supply-side effects dominate demand-side effects?

Accepted Answer

When policymakers pursue expansionary monetary and fiscal policies, it creates an increase in aggregate demand which leads to an increase in both output and the price level. However, when oil prices rise sharply, it causes a decrease in aggregate supply which leads to a decrease in output and an increase in the price level. Since supply-side effects dominate demand-side effects in this scenario, the decrease in output caused by the increase in oil prices will be greater than the increase caused by expansionary policies resulting in a decrease in output and an increase in the price level. Therefore, the correct answer is D, the price level must rise and real GDP must fall.

Question 6

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point a. Assume that (1) the public's expectations are completely rational; (2) markets allocate resources instantaneously; and (3) the economy is at its natural level of employment. The theoretical adjustment path resulting from an increase in aggregate demand according to the rational expectations hypothesis is

Accepted Answer

Under rational expectations, people anticipate the effects of economic policies and adjust their behavior accordingly. Thus, an increase in aggregate demand would lead to an immediate adjustment to the new equilibrium at point d, bypassing intermediate points.

Question 7

During the Johnson administration, the U.S. economy was headed toward an inflationary gap. In 1967 President Johnson proposed a temporary 10% increase in personal income taxes. If the Fed wanted to mitigate the effects of this contractionary policy, what could it do?

Accepted Answer

An open market purchase by the Fed would inject money into the economy, offsetting some of the contractionary effects of the tax increase. Conducting an open market sale, raising the reserve requirement ratio, or raising the discount rate would further decrease the money supply and worsen the contractionary effects of the tax increase.

Question 8

In 2009, the Obama administration advocated and Congress passed a massive spending and tax relief package of about $800 billion to stimulate aggregate demand. This policy would be favored by

Accepted Answer

Keynesian economists believe that fiscal policy can be used to stimulate aggregate demand during times of economic downturns. New Keynesian economists also believe in the effectiveness of fiscal policy, but they incorporate some insights from new classical economists who emphasize the importance of expectations and market efficiency. Therefore, both Keynesian and new Keynesian economists would favor the massive spending and tax relief package advocated by the Obama administration in 2009. Monetarists, on the other hand, generally emphasize the importance of monetary policy rather than fiscal policy in stabilizing the economy, and new classical economists would argue that such a policy would be ineffective as it would only lead to temporary increases in output and inflation.

Question 9

The body of economic thought associated with David Ricardo is called new classical
Jeconomics.

Accepted Answer

The body of economic thought associated with David Ricardo is called Classical economics or the Ricardian system. New classical economics is a modern macroeconomic school of thought that emerged in the 1970s.

Question 10

The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

Accepted Answer

This statement is true. The economic downturn, also known as the Great Depression, lasted from 1929 until the late 1930s and had a significant impact on the entire world, not just the United States.

Question 11

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point c. A Keynesian economist would advocate

Accepted Answer

The answer of Figure 17-3 
-Refer to Figure 17-3. Suppose...

Question 12

Classical economics is based primarily on the works of John Maynard Keynes.

Accepted Answer

Classical economics is actually based on the works of economists such as Adam Smith, David Ricardo, and John Stuart Mill, among others. John Maynard Keynes is associated with Keynesian economics, a school of thought that arose in response to the Great Depression in the 1930s.

Question 13

Suppose the economy is initially in long-run equilibrium. Now suppose oil prices rise sharply and at the same time, policymakers pursue expansionary monetary and fiscal policies. Which of the following will occur as a result of these two events?

Accepted Answer

The sharp rise in oil prices will lead to a decrease in aggregate supply, causing the price level to rise. Expansionary monetary and fiscal policies will increase aggregate demand, causing output to increase, but the effect on the price level is indeterminate as it depends on the relative magnitude of the changes in aggregate demand and supply. However, because the initial assumption was that the economy was in long-run equilibrium, any increase in output due to expansionary policies will eventually be offset by an increase in the price level, resulting in a new long-run equilibrium.

Question 14

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from

Accepted Answer

According to the rational expectations hypothesis, an increase in aggregate demand will lead to an increase in both output and the price level, moving the economy from point a to point d. New Keynesian economics, on the other hand, suggests that an increase in aggregate demand will lead to an increase in output but only a small increase in the price level, moving the economy from point a to point b.

Question 15

Which of the following was not an explanation for the lower volatility of the U.S. economy during the 25-year period that preceded the Great Recession?

Accepted Answer

The answer of Which of the following was not an...

Question 16

In the late 1970s, oil prices rose sharply and at the same time, U.S. policymakers pursued expansionary fiscal and monetary policies. As a result, real GDP stayed at potential output, while the implicit price deflator jumped 8.1%. If the Fed's goal was to reduce inflation, which of the following would also occur?

Accepted Answer

To reduce inflation, the Fed would need to pursue contractionary monetary policy, which includes decreasing the money supply and increasing interest rates. This would lead to a decrease in spending, causing a reduction in both inflation and real GDP. However, it would also lead to an increase in unemployment, as businesses reduce output and lay off workers. Therefore, the correct answer is C, an increase in unemployment and an increase in interest rates.

Question 17

In 1979, the CPI rose 13.5%, the highest inflation rate recorded in the twentieth century in the U.S. Public opinion polls in 1979 consistently showed that most people regarded inflation as the leading problem facing the U.S. How did the Fed respond to this situation?

Accepted Answer

The Fed pursued contractionary policies with the primary goal of lowering inflation. This was done through increased interest rates and decreased money supply. The switch from expansionary policies was aimed at addressing the problem of high inflation, which was viewed as the leading problem facing the country at the time.

Question 18

Which of the following policies would supply-side economists favor?

Accepted Answer

The answer of Which of the following policies would supply-side...

Question 19

New Keynesian economics

Accepted Answer

New Keynesian economics stresses the stickiness of prices and the need for activist stabilization policies through aggregate demand management policies to move the economy towards its potential output. This is in contrast to classical economics that advocates for wage and price flexibility for self-correction of the economy. New Keynesian economics also supports the use of monetary and fiscal policies to shift the short-run aggregate supply curve to keep the economy operating close to its potential output.

Question 20

A 2010 survey of economists suggested that the _______ approach is the preferred approach to macroeconomic analysis.

Accepted Answer

The 2010 survey of economists showed that the new Keynesian approach was the preferred approach to macroeconomic analysis, indicating that this school of thought has gained popularity in recent years.

Quiz 17: A Brief History of Macroeconomic Thought and Policy

In the early 1990s, although the U.S. economy was in a recession, Congress rejected the idea of using an expansionary fiscal policy to close the recessionary gap. What was the reason?

Figure 17-3 -Refer to Figure 17-3. Suppose the economy is at point c. A classical economist would advocate

New Keynesian economics is built on I. the Keynesian approach II. the monetarist approach III. the new classical approach