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 that expansionary policies would increase the government budget deficit, leading to further economic problems in the long run. They believed that the deficit could be reduced through spending cuts and other measures, rather than through increased spending.

Question 2

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 responded to the high inflation rate in 1979 by pursuing contractionary policies with the primary goal of lowering inflation. This included raising interest rates to reduce borrowing and spending, and reducing the money supply to decrease availability of credit. The Fed's focus on combating inflation led to a sharp recession in the early 1980s, but ultimately helped to bring down inflation rates in the long run.

Question 3

Use the following to answer questions 
Exhibit: Economic Adjustments 
-(Exhibit: Economic Adjustments)
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

The rational expectations hypothesis posits that individuals and firms use all available information efficiently to forecast future economic variables, leading to adjustments that often negate the intended effects of policy changes. Thus, an increase in aggregate demand might not lead to a significant long-term increase in output or employment but could lead to higher prices (point d). New Keynesian economics, on the other hand, acknowledges frictions and imperfections in the market, suggesting that an increase in aggregate demand can lead to higher output and employment in the short run without immediately causing inflation, moving the economy to point b.

Question 4

Use the following to answer questions 
Exhibit: Economic Adjustments 
-The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

Accepted Answer

The exhibit titled "Economic Adjustments" likely refers to the Great Depression, which occurred in the 1930s and was the worst economic downturn in US history.

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?

Accepted Answer

The increase in oil prices will cause cost-push inflation, which will lead to a rise in the overall price level. The expansionary monetary and fiscal policies will increase aggregate demand, which may counteract the decrease in output caused by the increase in oil prices. However, the net effect on output is uncertain and will depend on the relative strength of these two forces. Therefore, we can say with certainty that the price level will rise, but the effect on real GDP is indeterminate.

Question 6

Use the following to answer questions 
Exhibit: Economic Adjustments 
-(Exhibit: Economic Adjustments)
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

Given the assumptions of rational expectations, instant market adjustments, and the economy being at its natural level of employment, an increase in aggregate demand would lead directly to an increase in the price level without affecting output in the long run. This is represented by a direct move from point a to point d, as output remains at its natural level and only prices adjust.

Question 7

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 the importance of monetary policy and new classical ideas about the importance of aggregate supply, while also including a greater use of microeconomic analysis in macroeconomic analysis than traditional Keynesian economics. It does not oppose active stabilization policies, which is a key feature of traditional Keynesian economics.

Question 8

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

In order to reduce inflation, the Fed would need to implement contractionary monetary policies, such as increasing interest rates. This would lead to a decrease in aggregate demand, resulting in higher unemployment. Therefore, the correct answer is C, an increase in unemployment and an increase in interest rates.

Question 9

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 and new Keynesian economists favor government intervention, such as fiscal policy, to stimulate aggregate demand during periods of economic downturns. The 2009 spending and tax relief package aligns with Keynesian principles, making choice C the correct answer. Monetarists and new classical economists would be more likely to advocate for monetary policy interventions, such as changes to interest rates, to address economic fluctuations.

Question 10

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

Accepted Answer

The survey suggests that the new Keynesian approach is the preferred approach to macroeconomic analysis. This approach recognizes the importance of both government intervention (in line with Keynesian principles) and the role of monetary policy (in line with monetarist principles) in stabilizing the economy. The new classical approach, on the other hand, emphasizes the importance of market forces and efficient market outcomes, while the Keynesian approach is more focused on government intervention in the economy.

Question 11

Use the following to answer questions 
Exhibit: Economic Adjustments 
-(Exhibit: Economic Adjustments)
Suppose the economy is at point c.A classical economist would advocate

Accepted Answer

A classical economist would advocate allowing the economy's self-correcting mechanism to move the economy to point a, as they believe in laissez-faire and the natural adjustment of markets without government intervention.

Question 12

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

The rise in oil prices is a supply-side shock that will shift the short-run aggregate supply curve to the left, causing both the price level and real GDP to rise. However, expansionary monetary and fiscal policies will increase aggregate demand, which will shift the aggregate demand curve to the right. Since supply-side effects dominate demand-side effects, the resulting equilibrium will occur at a higher price level and a lower level of real GDP than the initial long-run equilibrium. Therefore, the price level must rise and real GDP must fall.

Question 13

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. It also emphasizes the importance of government intervention in stabilizing the macroeconomy, especially during periods of recession or inflation. The focus is on reducing business cycle fluctuations and promoting economic stability through government policies such as monetary and fiscal policies.  Thus, option C is the correct answer.

Question 14

Use the following to answer questions 
Exhibit: Economic Adjustments 
-Classical economics is based primarily on the works of John Maynard Keynes.

Accepted Answer

Classical economics is actually based primarily on the works of Adam Smith and David Ricardo, while John Maynard Keynes is associated with Keynesian economics.

Question 15

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

Accepted Answer

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

Question 16

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

Accepted Answer

New Keynesian economics integrates ideas from the Keynesian approach, the monetarist approach, and the new classical approach, incorporating aspects such as price and wage stickiness (Keynesian), the role of monetary policy (monetarist), and rational expectations (new classical) into its framework.

Question 17

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

Increased government spending is not a commonly cited explanation for the lower volatility of the U.S. economy during the 25-year period that preceded the Great Recession. Improved monetary policy, positive structural change in the economy, and good luck are all commonly cited explanations.

Question 18

Use the following to answer questions 
Exhibit: Economic Adjustments 
-(Exhibit: Economic Adjustments)
Suppose the economy is at point c.A Keynesian economist would advocate

Accepted Answer

The answer of Use the following to answer questions 
Exhibit:...

Question 19

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

To mitigate the effects of a contractionary fiscal policy (like increasing taxes), the Fed could conduct an open market purchase. This action increases the money supply, which can help counteract the decrease in aggregate demand caused by the tax increase, potentially reducing the contractionary policy's impact on the economy.

Question 20

The close relationship between M2 and nominal GDP in the 1960s and 1970s vanished from the 1980s through 2015.Which of the following contributed to this breakdown?
I.deregulation of the banking industry
II.introduction of new financial products (not included in M2)
Which allowed people to transfer funds into their checking accounts as and when needed
III.monetary policy lags

Accepted Answer

I and II contributed to the breakdown. Deregulation of the banking industry allowed for more flexibility and innovation in financial products, leading to the introduction of new financial instruments not captured by M2. These changes made M2 a less reliable indicator of economic activity.

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?

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?

Use the following to answer questions Exhibit: Economic Adjustments -(Exhibit: Economic Adjustments) 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

Use the following to answer questions Exhibit: Economic Adjustments -The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

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?

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

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

Use the following to answer questions Exhibit: Economic Adjustments -(Exhibit: Economic Adjustments) Suppose the economy is at point c.A classical economist would advocate

New Keynesian economics

Use the following to answer questions Exhibit: Economic Adjustments -Classical economics is based primarily on the works of John Maynard Keynes.

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

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

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?

Use the following to answer questions Exhibit: Economic Adjustments -(Exhibit: Economic Adjustments) Suppose the economy is at point c.A Keynesian economist would advocate

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?