Question 1

New classical economists advocate less government intervention than the new Keynesian school of thought.

Accepted Answer

New classical economists believe that markets are efficient and self-regulating, while new Keynesian economists support government intervention to stabilize the economy during recessions. Therefore, new classical economists advocate less government intervention than the new Keynesian school of thought.

Question 2

The new classical school of thought is usually associated with the theory of rational expectations.

Accepted Answer

The new classical school of thought emphasizes the importance of rational expectations in shaping economic outcomes.

Question 3

The assumption of wage and price flexibility lead classical economists to conclude that business cycle fluctuations are short-term in nature.

Accepted Answer

Classical economists believe that in the long run, wages and prices will adjust to maintain full employment and stabilize the economy. Therefore, they view business cycle fluctuations as short-term disturbances that will be corrected over time.

Question 4

A by-product of the acceptance of the Keynesian school was the wide approval and practice of activist fiscal policy around the world.

Accepted Answer

The Keynesian school emphasized the use of activist fiscal policy to counter economic fluctuations, and this approach gained widespread acceptance and adoption by governments around the world.

Question 5

New classical economists believe that wages are inflexible.

Accepted Answer

New classical economists believe that wages and prices are flexible and adjust quickly to clear markets, unlike Keynesian economists who argue that wages can be sticky.

Question 6

Monetarists believe that discretionary monetary policy, and not discretionary fiscal policy, should be used to correct disequilibrium.

Accepted Answer

The answer of Monetarists believe that discretionary monetary policy, and...

Question 7

New classical economists contend that both the short-run and long-run aggregate supply curves are vertical.

Accepted Answer

New classical economists believe that the long-run aggregate supply curve is vertical, reflecting full employment, but the short-run aggregate supply curve is upward sloping due to price and wage stickiness.

Question 8

The effect lag occurs because it takes policymakers sometime to recognize that a problem exists in an economy.

Accepted Answer

The effect lag refers to the time it takes for a policy action to have an impact on the economy, not the time it takes to recognize a problem. The latter is known as the recognition lag.

Question 9

Agreeing with Keynesian economists, monetarists believe that the economy is subject to disequilibrium that must be corrected by government action.

Accepted Answer

Monetarists believe that the economy is best regulated through controlling the money supply rather than direct government intervention, unlike Keynesian economists who advocate for active government policies to manage economic fluctuations.

Question 10

Monetarists argue that government actions, particularly monetary policy, worsens the negative aspects of the business cycle.

Accepted Answer

Monetarists believe that government actions, particularly monetary policy, can exacerbate inflation or unemployment and worsen the negative aspects of the business cycle. They argue for minimal government intervention in the economy and instead advocate for a stable and predictable monetary policy.

Question 11

Monetarists and new classical economistsfavor an active role of government in promoting low inflation and economic growth.

Accepted Answer

Monetarists and new classical economists advocate for limited government intervention in the economy, instead relying on market forces to drive economic growth and stabilize inflation. They believe that government intervention can often lead to distortions in the market and inefficiencies in the economy.

Question 12

The Federal Reserve System is an independent body so, it does not require to report to Congress on its goals and money targets.

Accepted Answer

The Federal Reserve System is required to report to Congress twice a year on its goals for monetary policy and its plans to achieve those goals.

Question 13

Both new classical economists and monetarists disagree with Keynesians about the optimal degree of involvement of the government in determining the equilibrium level of real GDP.

Accepted Answer

New classical economists and monetarists believe in the efficacy of the market and argue that the government intervention can have unintended consequences and lead to inefficiencies in the long run, while Keynesians believe that government intervention can stabilize the economy and ensure full employment.

Question 14

New classical economics assumes that government has direct control over the equilibrium level of GDP and indirect control over the money supply.

Accepted Answer

New classical economics emphasizes the importance of free markets and considers government interventions as potentially harmful. Therefore, it assumes that government does not have direct control over the equilibrium level of GDP and only minimal, if any, indirect control over the money supply.

Question 15

Reaction lag is the term used to express the fact that some time passes before changes in the money supply are properly translated into changes in real GDP.

Accepted Answer

The answer of Reaction lag is the term used to...

Question 16

According to the new classical school, if macroeconomic policy is perfectly expected, then the aggregate supply curve and the Phillips curve must be vertical in both the short run and the long run.

Accepted Answer

The new classical school suggests that if macroeconomic policy is perfectly anticipated, the aggregate supply curve is vertical in the long run, but not necessarily in the short run. The Phillips curve is also vertical in the long run, but may not be in the short run due to short-term rigidities and expectations adjustments.

Question 17

In the early 1960s, monetary theory rather than Keynesian theory dominated economics.

Accepted Answer

During the early 1960s, Keynesian economics was the dominant framework in economic policy and theory, with a focus on government intervention to manage economic cycles. Monetarism gained prominence later, particularly in the 1970s.

Question 18

According to the traditional classical school of thought, aggregate supply is vertical both in the short run and in the long run.

Accepted Answer

According to the traditional classical school of thought, in the long run, aggregate supply is determined by factors such as technology, capital, and labor, and is therefore considered to be perfectly elastic or vertical. In the short run, however, aggregate supply may be positively sloped due to factors such as price stickiness or supply shocks.

Question 19

According to new classical economics, fiscal policy can change equilibrium real GDP only if it changes the price level or one of the determinants of aggregate supply, and people expect this change.

Accepted Answer

According to new classical economics, fiscal policy has no effect on equilibrium real GDP, regardless of whether people expect the change or not. The only way to affect equilibrium real GDP is through changes in aggregate supply or changes in the money supply affecting the price level.

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