Question 1

Monetarists believe that changes in monetary policy would have:
A) only short-term effect on the price level.
B) only short-term effect on real GDP.
C) only long-term effect on real GDP.
D) no effect on price level and real GDP.
E) both short-term and long term effect on real GDP.

Accepted Answer

The answer of Monetarists believe that changes in monetary policy...

Question 2

In case of classical model, increase in aggregate expenditure would:
A) shift the aggregate demand curve upward leading to increase in real GDP and prices.
B) shift the aggregate demand curve downward leading to increase in real GDP and prices.
C) shift the aggregate demand curve upward leading to decrease in real GDP and prices.
D) shift the aggregate demand curve downward leading to decrease in real GDP and prices.
E) shift the aggregate demand curve upward leading to increase in prices and no change in real GDP.

Accepted Answer

The answer of In case of classical model, increase in...

Question 3

According to the monetarists, deliberate government intervention:
A) will stabilize the economy if the money supply is increased during recessions and decreased during expansions.
B) will effectively reduce the unemployment rate below its natural rate.
C) will stabilize the economy if the money supply is reduced during recessions and increased during expansions.
D) will destabilize the economy only if the government uses fiscal policy to change equilibrium income.
E) will destabilize the economy and cause a business cycle of its own, regardless of whether fiscal or monetary policy is used.

Accepted Answer

The answer of According to the monetarists, deliberate government intervention:
A)...

Question 4

Who is the leading proponent of the monetarist theory?
A) John Maynard Keynes
B) Paul Volcker
C) Adam Smith
D) Milton Friedman
E) Alan Greenspan

Accepted Answer

Milton Friedman is considered the leading proponent of the monetarist theory, which focuses on the control of the money supply as the primary driver of economic growth and stability.

Question 5

"The dramatic reduction of the money supply during the 1930s was responsible for the Great Depression. The macroeconomy is intrinsically stable if left alone by the prying hand of government. The Federal Reserve Board, instead of tightening money during booms and loosening money during recessions (policies that are ineffective due to time lags), should simply increase the supply of money at a steady rate of 3 to 5 percent per year." This statement reflects which school of thought?
A) The traditional Keynesians
B) The monetarists
C) The traditional classicals
D) The new Keynesians
E) The new classicals

Accepted Answer

The statement reflects the beliefs of the monetarists, who argue that the government should control the money supply to ensure stable economic growth. They believe that the Federal Reserve should increase the money supply at a steady rate to promote growth and avoid fluctuations in the economy.

Question 6

Monetarists think that the government:
A) should take an active role in the economy.
B) should change the money supply growth rate regularly to achieve low inflation.
C) should actively intervene in the economy, but only by decreasing the fiscal expenditure.
D) should intervene in the economy as little as possible.
E) should consciously set out to achieve full employment.

Accepted Answer

The answer of Monetarists think that the government:
A) should take...

Question 7

Milton Friedman in his book on consumption function, discussed the importance of _____, rather than _____, to understand consumer spending.
A) savings; expenditure
B) permanent income; current income
C) money supply; real output
D) wages; savings
E) real output; prices

Accepted Answer

Milton Friedman emphasized the importance of permanent income, which is an individual's expected long-term average income, rather than current income, in understanding consumer spending. He argued that consumers base their spending decisions not on their current income levels but on their expected income over the long term, which he referred to as their permanent income.

Question 8

Monetarists believe that:
A) the government should follow a fixed rule to change money supply in response to business cycles.
B) the government should not use discretionary monetary policy to achieve its goals of economic growth and low inflation.
C) government intervention should be well thought out and should be used only during recessions.
D) government intervention in the economy makes business cycles disappear.
E) government intervention policies have only long-run effects.

Accepted Answer

Monetarists believe that discretionary monetary policy can lead to unintended consequences and uncertainty in the markets. Instead, they advocate for a fixed rule that guides changes in the money supply.

Question 9

_____ believe that a government that takes an active role in the economy may do more harm than good because economic policy operates with a long and variable lag.
A) Traditional Keynesians
B) Keynesians
C) Monetarists
D) Classical economists
E) New classical economists

Accepted Answer

The answer of _____ believe that a government that takes...

Question 10

Monetarists believe that in the short run:
A) the natural rate of unemployment cannot be changed.
B) expansionary monetary policy is ineffective in raising real GDP.
C) a change in the money supply is fully reflected in a change in the interest level.
D) contractionary monetary policy will decrease unemployment.
E) there is a tradeoff between unemployment and inflation.

Accepted Answer

The answer of Monetarists believe that in the short run:
A)...

Question 11

According to the traditional Keynesian school of thought, expansionary fiscal and monetary policy will:
A) increase interest rates, thereby shifting the investment function to the right.
B) reduce both consumption and investment spending, thereby eliminating all inflationary pressures.
C) reduce investment spending, thereby stabilizing the aggregate supply shocks.
D) stimulate both consumption and investment spending, thereby increasing aggregate demand.
E) shift the aggregate demand curve to the left, thereby reducing the unemployment rate.

Accepted Answer

According to traditional Keynesian theory, expansionary fiscal and monetary policy will stimulate both consumption and investment spending, thereby increasing aggregate demand. This is because increased government spending and lower interest rates result in more money flowing through the economy, making it easier for businesses and consumers to borrow and spend. This increased demand can lead to higher inflation, but the Keynesian approach suggests that the benefits of boosting economic growth and reducing unemployment outweigh the risks of inflation in the short term.

Question 12

_____ have faith in the free market (price) system that leads them to favor minimal government intervention.
A) New Keynesian economists
B) Traditional Keynesian economists
C) Monetarist economists
D) Traditional classical economists
E) New classical economists

Accepted Answer

The answer of _____ have faith in the free market...

Question 13

The time it takes for a particular monetary policy to change income is called the _____.
A) recognition lag
B) data lag
C) reaction lag
D) effect lag
E) action lag

Accepted Answer

The effect lag refers to the time it takes for a particular monetary policy to have an impact on the economy, specifically on income. The recognition lag refers to the time it takes for policymakers to recognize that a problem exists, the data lag refers to the time it takes for data to be collected and analyzed, the reaction lag refers to the time it takes for policymakers to react to a problem, and the action lag refers to the time it takes for policies to be implemented. None of these directly relate to the impact on income.

Question 14

Which of the following events challenged Keynesian views, and led to the popularity of Milton Friedman's ideas?
A) The hippie community started advocating socialist values.
B) Hard-core republicans came into office.
C) The U.S. economy faced high levels of inflation and unemployment simultaneously.
D) The oil crisis exploded.
E) Countries that followed Friedman's ideas performed better.

Accepted Answer

The U.S. economy facing high levels of inflation and unemployment simultaneously challenged Keynesian views, as it was thought that government intervention could reduce both. This led to the popularity of Milton Friedman's ideas, particularly his belief in free market solutions to economic problems. The other options are not relevant to the context.

Question 15

The recognition lag refers to the:
A) time taken for changes in the money supply to be translated into changes in real
GDP)
B) time taken by policymakers to formulate an appropriate policy to solve an
Economic problem.
C) time taken by policies to have an impact on the different macroeconomic variables.
D) time taken by policymakers to recognize that an economic problem exists.
E) natural difference between monetary policy timing and fiscal policy timing.

Accepted Answer

The recognition lag refers to the time taken by policymakers to recognize that an economic problem exists. It is the first stage in the policymaking process and involves identifying and defining the nature and extent of the problem before any policy measures can be taken.

Question 16

According to the new Keynesians:
A) prices adjust to equate demand and supply in every market simultaneously.
B) random variations in the money supply are the original source of economic fluctuations.
C) unemployment is voluntary.
D) aggregate supply shocks can be a prime source of economic instability.
E) government policy cannot stabilize the economy.

Accepted Answer

According to the new Keynesians, aggregate supply shocks can be a prime source of economic instability. This is because they believe that prices and wages are sticky and do not adjust immediately to changes in supply, leading to short-term fluctuations in output and employment. They place more emphasis on the role of supply-side factors in the economy compared to traditional Keynesians.

Question 17

"The market is not a self-regulating mechanism because prices are not flexible and nothing ensures that planned leakages will be offset by planned injections. To bring the economy out of depression and end high unemployment, some way of stimulating aggregate demand is required. This can be best achieved by a combination of government deficit spending and regulation of tax rates." Which school of thought does this statement best represent?
A) Rationalist economics
B) Monetarist economics
C) Classical economics
D) Keynesian economics
E) Marxist economics

Accepted Answer

The statement reflects the Keynesian view that markets are not self-regulating and require government intervention to stimulate demand and reduce unemployment. Keynesian economics emphasizes the importance of government deficit spending and tax regulation to address economic problems such as depression and high unemployment.

Question 18

The school of thought that assumes that real GDP is determined by aggregate supply, whereas the equilibrium price level is determined by aggregate demand is known as _____.
A) neoclassical economics
B) classical economics
C) new Keynesian economics
D) Keynesian economics
E) Marxist economics

Accepted Answer

The school of thought described in the question is classical economics.

Question 19

Which of the following schools of thought emphasize the role of money supply in determining equilibrium real GDP and price level?
A) Traditional Keynesian economics
B) New Keynesian economics
C) New classical economics
D) Classical economics
E) Monetarist economics

Accepted Answer

Monetarist economics emphasizes the role of money supply in determining equilibrium real GDP and price level.

Question 20

What is the main difference between new Keynesian economics and monetarists?
A) Monetarists support a fixed-price model, whereas new Keynesians believe that prices fluctuate.
B) Monetarists reject the idea that government intervention can stabilize the economy, whereas new Keynesians support this notion.
C) Monetarists believe that the aggregate supply curve is always vertical, whereas new Keynesians believe that the aggregate supply curve is always horizontal.
D) Monetarists believe that an increase in the money supply changes real GDP instantaneously, whereas new Keynesians assume that economic policy operates with a long and variable lag.
E) Monetarists believe that deficit spending helps stimulate economic growth, whereas new Keynesians advocate a balanced budget.

Accepted Answer

The main difference between new Keynesian economics and monetarists is their belief in government intervention. Monetarists reject the idea that government intervention can stabilize the economy, while new Keynesians support this notion. New Keynesians focus more on sticky prices and nominal rigidities, while monetarists focus on the quantity of money and its effects on the economy.

Quiz 15: Macroeconomic Viewpoints: New Keynesian, Monetarist, and New Classical

Monetarists believe that changes in monetary policy would have:

In case of classical model, increase in aggregate expenditure would:

According to the monetarists, deliberate government intervention:

Who is the leading proponent of the monetarist theory?

Monetarists think that the government:

Milton Friedman in his book on consumption function, discussed the importance of _, rather than _, to understand consumer spending.

Monetarists believe that:

_____ believe that a government that takes an active role in the economy may do more harm than good because economic policy operates with a long and variable lag.

Monetarists believe that in the short run:

According to the traditional Keynesian school of thought, expansionary fiscal and monetary policy will:

_____ have faith in the free market (price) system that leads them to favor minimal government intervention.

The time it takes for a particular monetary policy to change income is called the _____.

Which of the following events challenged Keynesian views, and led to the popularity of Milton Friedman's ideas?

The recognition lag refers to the:

According to the new Keynesians:

The school of thought that assumes that real GDP is determined by aggregate supply, whereas the equilibrium price level is determined by aggregate demand is known as _____.

Which of the following schools of thought emphasize the role of money supply in determining equilibrium real GDP and price level?

What is the main difference between new Keynesian economics and monetarists?