Question 1

In the U.S., the Great Recession was fought with traditional monetary and fiscal policies,

Accepted Answer

The U.S. government and Federal Reserve used traditional monetary and fiscal policies, such as lowering interest rates and increasing government spending, to combat the effects of the Great Recession.

Question 2

New classical economists believe that the potential output of the economy is stable.

Accepted Answer

The answer of New classical economists believe that the potential...

Question 3

Suppose the economy experiences a recessionary gap. How does the new classical
approach to macroeconomic policy (to eliminate the gap) differ from the new Keynesian
approach? Illustrate your answer with an aggregate demand-aggregate supply graph.

Accepted Answer

The answer of Suppose the economy experiences a recessionary gap....

Question 4

Monetarists contend that a consistent relationship exists between changes in the money
supply and changes in nominal GDP.

Accepted Answer

Monetarists believe in the Quantity Theory of Money, which posits that changes in the money supply have a direct and proportional impact on changes in nominal GDP. This relationship is often expressed as the equation MV = PQ, where M represents the money supply, V represents the velocity of money (how quickly money is exchanged for goods and services), P represents the price level, and Q represents the quantity of goods and services produced. Monetarists argue that if the money supply increases faster than real GDP (i.e. if V and Q remain constant), prices will rise to compensate, leading to inflation. Conversely, if the money supply grows slower than real GDP, prices will fall, leading to deflation.

Question 5

During the 1960s, Keynesian economic policies led to lower unemployment rates and
higher prices.

Accepted Answer

Keynesian economics emphasized the role of government spending to stimulate demand and reduce unemployment, which led to lower unemployment rates in the 1960s. However, this also resulted in higher prices due to increased demand, known as demand-pull inflation.

Question 6

In the 1970s, the U.S. economy saw sharp changes in real GDP and in the price level. This
presented a challenge to policymakers and to economists because these outcomes could not be explained by a Keynesian analysis.

Accepted Answer

The statement is true. The sharp changes in real GDP and price level in the 1970s, including stagflation, could not be fully explained by the traditional Keynesian analysis, which focused primarily on the relationship between aggregate demand and employment/inflation. This led to the development of new economic theories, such as supply-side economics and rational expectations theory.

Question 7

Keynesian economics was mostly concerned with the short run.

Accepted Answer

Keynesian economics focused on short-term economic fluctuations and how to stabilize them through government intervention.

Question 8

During the 1970s when the U.S. experienced rising inflation and unemployment, economists began to reconsider the significance of aggregate supply as well.

Accepted Answer

During the 1970s, economists recognized that both aggregate demand and aggregate supply played a significant role in determining economic outcomes such as inflation and unemployment.

Question 9

According to new classical economics, short-run stabilization policy works only if it
surprises people.

Accepted Answer

According to the new classical economics, short-run stabilization policies such as fiscal or monetary policies may be ineffective unless they are unexpected and surprise people, leading them to change their behavior and spend more. This is known as the "rational expectations revolution".

Question 10

Supply-side economics is the belief that fiscal policy can be used to stimulate long-run
economic growth.

Accepted Answer

Supply-side economics suggests that by stimulating investment, increasing production, and reducing regulation and taxes, an economy will grow in the long run. This approach is often associated with conservative economic policies.

Question 11

The rational expectations hypothesis assumes that individuals form expectations about
the future based on the information available to them and that they act on those
expectations.

Accepted Answer

The statement accurately describes the rational expectations hypothesis.

Question 12

While Keynes argued that the Great Depression was caused by government interference in
the economy, monetarists contended that it was the result of a decline in investment
expenditures.

Accepted Answer

Monetarists believed that the Great Depression was caused by a decline in the money supply, not investment expenditures.

Question 13

The events of the 1980s and early 1990s appear to have been consistent with the
hypotheses of either the monetarist or new classical schools.

Accepted Answer

The answer of The events of the 1980s and early...

Question 14

The experience of the Great Depression led to the widespread acceptance of classical
economics.

Accepted Answer

The Great Depression challenged the assumptions and principles of classical economics, leading to the development of alternative economic theories such as Keynesian economics.

Question 15

One distinguishing feature of new Keynesian economics (from earlier schools of thought)
is the greater use of microeconomic analysis in macroeconomic analysis.

Accepted Answer

New Keynesian economics emphasizes the role of microeconomic factors, such as imperfect competition and sticky prices, in shaping macroeconomic outcomes. This is in contrast to earlier Keynesian economics, which focused more on aggregate demand and government policy interventions.

Question 16

Keynes shifted the emphasis in economics from the concept of aggregate supply to the
concept of aggregate demand.

Accepted Answer

This statement is true. Keynes emphasized the importance of government intervention to stimulate aggregate demand during economic downturns, as opposed to the classical economists who focused on the role of aggregate supply in long-term economic growth.

Question 17

The rational expectations hypothesis suggests that monetary policy, even though it will
affect the aggregate demand curve, might have no effect on real GDP.

Accepted Answer

The rational expectations hypothesis suggests that individuals have rational expectations about future economic events, including the effects of monetary policy. Therefore, if individuals expect that monetary policy will be expansionary, they will anticipate higher inflation and adjust their behavior accordingly, which could offset any potential increase in aggregate demand and leave real GDP unchanged. However, this is just a theoretical possibility, and in practice, monetary policy can have real effects on the economy.

Question 18

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Accepted Answer

Monetarists believe that the money supply directly affects nominal GDP in the short run and that inflation is primarily a result of excessive growth in the money supply.

Question 19

Monetarists argue that impact lags associated with changes in the money supply are long and variable.

Accepted Answer

Monetarists believe that changes in the money supply take a long time to have an effect on the economy and that the impact lags can be variable depending on factors such as the velocity of money and the structure of the economy.

Question 20

Compare and contrast the classical and Keynesian views of aggregate demand and
aggregate supply.

Accepted Answer

The answer of Compare and contrast the classical and Keynesian...

Quiz 32: Macroeconomic Policy Around the World

In the U.S., the Great Recession was fought with traditional monetary and fiscal policies,

New classical economists believe that the potential output of the economy is stable.

Suppose the economy experiences a recessionary gap. How does the new classical approach to macroeconomic policy (to eliminate the gap) differ from the new Keynesian approach? Illustrate your answer with an aggregate demand-aggregate supply graph.

Monetarists contend that a consistent relationship exists between changes in the money supply and changes in nominal GDP.

During the 1960s, Keynesian economic policies led to lower unemployment rates and higher prices.

In the 1970s, the U.S. economy saw sharp changes in real GDP and in the price level. This presented a challenge to policymakers and to economists because these outcomes could not be explained by a Keynesian analysis.

Keynesian economics was mostly concerned with the short run.

During the 1970s when the U.S. experienced rising inflation and unemployment, economists began to reconsider the significance of aggregate supply as well.

According to new classical economics, short-run stabilization policy works only if it surprises people.

Supply-side economics is the belief that fiscal policy can be used to stimulate long-run economic growth.

The rational expectations hypothesis assumes that individuals form expectations about the future based on the information available to them and that they act on those expectations.

While Keynes argued that the Great Depression was caused by government interference in the economy, monetarists contended that it was the result of a decline in investment expenditures.

The events of the 1980s and early 1990s appear to have been consistent with the hypotheses of either the monetarist or new classical schools.

The experience of the Great Depression led to the widespread acceptance of classical economics.

One distinguishing feature of new Keynesian economics (from earlier schools of thought) is the greater use of microeconomic analysis in macroeconomic analysis.

Keynes shifted the emphasis in economics from the concept of aggregate supply to the concept of aggregate demand.

The rational expectations hypothesis suggests that monetary policy, even though it will affect the aggregate demand curve, might have no effect on real GDP.

The monetarist school of economics believes that changes in the money supply are the primary causes of changes in nominal GDP.

Monetarists argue that impact lags associated with changes in the money supply are long and variable.

Compare and contrast the classical and Keynesian views of aggregate demand and aggregate supply.