Question 1

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 Keynesian economics, expansionary fiscal and monetary policies will increase government spending and lower interest rates, which will stimulate both consumption and investment spending, resulting in an increase in aggregate demand. This increase in aggregate demand will lead to an increase in output and economic growth, which will eventually lead to a decrease in unemployment. Therefore, option D is the correct choice. Options A, B, and E are incorrect.

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

In the classical model, the economy is at full employment, so an increase in aggregate expenditure leads to higher prices but no change in real GDP.

Question 3

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 of the policymaking process and involves identifying the problem, gathering data, and analyzing the situation before deciding on a course of action.

Question 4

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

Monetarists believe that changes in monetary policy primarily affect real GDP in the short term, as prices and wages are sticky. In the long term, they argue that monetary policy mainly influences the price level, not real GDP, due to the economy's return to its natural level of output.

Question 5

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 6

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

Classical economics assumes that real GDP is determined by aggregate supply, whereas the equilibrium price level is determined by aggregate demand.

Question 7

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, such as changes in technology or natural disasters, can cause economic instability. They believe that imperfect competition in markets can lead to sticky prices, which take time to adjust to changes in demand and supply. This can lead to output and employment fluctuations in the short run, which can be stabilized through government policy interventions. Therefore, options A, B, and E are incorrect, and C is not a view held by new Keynesians.

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 the government should not use discretionary monetary policy because they believe that the primary cause of inflation and recessions is fluctuations in the money supply, and that the best way to stabilize the economy is to adhere to a rule-based monetary policy that maintains a stable growth rate of the money supply.

Question 9

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

Monetarists believe that the government should intervene in the economy as little as possible, emphasizing the importance of controlling the money supply to manage inflation rather than active intervention.

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

Monetarists believe that in the short run, there is a tradeoff between unemployment and inflation, as described by the Phillips Curve.

Question 11

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 12

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

Monetarists believe that government intervention, particularly through monetary policy, can lead to economic instability and create its own business cycles, rather than stabilizing the economy.

Question 13

"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 best represents Keynesian economics as it emphasizes the need for government intervention in the economy to stimulate aggregate demand and reduce unemployment during a depression. Keynesian economics is characterized by the belief that government intervention is necessary to stabilize an economy during a recession or depression, whereas classical economics emphasizes the belief that markets are self-regulating and should be left alone to correct themselves. Monetarist economics emphasizes the importance of controlling the money supply as the key to stabilizing the economy, while Marxist economics proposes the need for a socialist revolution to overthrow capitalism. Rationalist economics is not a recognized school of economic thought.

Question 14

_____ 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 15

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 on the importance of permanent income, which is the expected average income over a long period, as opposed to current income, in understanding consumer spending. He argued that people base their consumption decisions on their expected future income rather than their current income. This is because people smooth out their consumption over their lifetime and therefore, their spending decisions are impacted by their long-term average income rather than their current income.

Question 16

"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 ideas of monetarists, who believe that changes in the money supply are the primary driver of macroeconomic fluctuations and advocate for a steady increase in the money supply to promote economic stability.

Question 17

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.

Question 18

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 widely considered to be the leading proponent of the monetarist theory, which emphasizes the role of the money supply in shaping economic outcomes.

Question 19

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 is the time it takes for a change in monetary policy to have an impact on the economy, specifically on income or output. The recognition lag refers to the time it takes for policymakers to recognize the need for a change in policy, the data lag refers to the time it takes to gather and analyze relevant data, the reaction lag refers to the time it takes for the policy to have an effect on interest rates, and the action lag refers to the time it takes for policymakers to implement the policy once it has been decided upon.

Question 20

_____ 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

Monetarists believe that government intervention in the economy can be harmful due to the long and variable lags associated with economic policy, which can lead to unintended consequences.

Quiz 25: Macroeconomic Viewpoints: New Keynesian, Monetarist, and New Classical

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

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

The recognition lag refers to the:

Monetarists believe that changes in monetary policy would have:

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

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 _____.

According to the new Keynesians:

Monetarists believe that:

Monetarists think that the government:

Monetarists believe that in the short run:

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

According to the monetarists, deliberate government intervention:

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

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

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

Who is the leading proponent of the monetarist theory?

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

_____ 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.