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 rejected the idea of using an expansionary fiscal policy to close the recessionary gap because they were concerned that such policies would increase the government budget deficit.

Question 2

A survey of economists suggested that the _______ approach has emerged as the preferred approach to macroeconomic analysis.

Accepted Answer

The survey suggests that the new Keynesian approach has emerged as the preferred approach to macroeconomic analysis.

Question 3

Classical economics is based primarily on the works of John Maynard Keynes.

Accepted Answer

Classical economics is actually based on the works of economists such as Adam Smith, David Ricardo, and John Stuart Mill. John Maynard Keynes, on the other hand, is associated with Keynesian economics, which emerged in response to the Great Depression and is characterized by the belief that government intervention in the economy can help to stimulate growth and stabilize the business cycle.

Question 4

Figure 17-3
 
-Refer to Figure 17-3.Suppose the economy is at point c.A Keynesian economist would advocate

Accepted Answer

The answer of Figure 17-3
 
-Refer to Figure 17-3.Suppose the...

Question 5

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

To combat inflation, the Fed would aim to reduce the aggregate demand, which would result in a decrease in output and increase in unemployment. To decrease aggregate demand, the Fed would increase interest rates, making it more expensive for consumers and businesses to borrow and spend. Therefore, an increase in unemployment and an increase in interest rates would occur.

Question 6

Figure 17-3
 
-Refer to Figure 17-3.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, which is the natural equilibrium point. They believe that markets are self-regulating and will naturally adjust themselves to the equilibrium level without any intervention from the government. Hence, pursuing expansionary fiscal policies to move the economy to point b or d would not be their recommendation.

Question 7

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

Accepted Answer

The answer of New Keynesian economics is built on
I.the Keynesian...

Question 8

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

Accepted Answer

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

Question 9

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

When oil prices rise sharply, this shifts the short-run aggregate supply curve (SRAS) to the left, leading to a higher price level and lower output. Expansionary monetary and fiscal policies will increase aggregate demand (AD) and shift the AD curve to the right. However, since supply-side effects dominate demand-side effects, the overall impact will be that the equilibrium output will fall further and the equilibrium price level will rise. Therefore, the best choice is D, where the price level must rise and real GDP must fall.

Question 10

The close relationship between M2 and nominal GDP in the 1960s and 1970s vanished from the 1980s through 2007.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

The breakdown was due to deregulation and new financial products, which altered the relationship between M2 and GDP.

Question 11

New Keynesian economics

Accepted Answer

New Keynesian economics emphasizes the stickiness of prices and the need for stabilization policies through aggregate demand management to move the economy towards potential output. It does not advocate for policies that increase wage and price flexibility (B) or focus on shifting the long-run aggregate supply curve (D). Instead, it supports policies that stabilize the economy in the short run by shifting the short-run aggregate supply curve.

Question 12

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 on grounds that it would increase the budget deficit.This view accords with

Accepted Answer

The classical, monetarist, and new classical views generally oppose expansionary fiscal policy due to concerns about budget deficits and long-term economic stability, unlike the new Keynesian view which may support it during recessions.

Question 13

Figure 17-3
 
-Refer to Figure 17-3.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 ________ whereas new Keynesian economics suggests that it will move from _______.

Accepted Answer

The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from point a to point d, whereas new Keynesian economics suggests that it will move from point a to point b.

Question 14

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

The answer of Which of the following is true about...

Question 15

The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

Accepted Answer

The Great Depression, which lasted from 1929 to the late 1930s, was the worst economic downturn in the United States and one of the most severe worldwide.

Question 16

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 expansionary monetary and fiscal policies will increase aggregate demand, leading to an increase in both output and the price level. However, the increase in oil prices will increase production costs, which will cause a decrease in short-run aggregate supply. The increase in the price level due to the expansionary policies and the decrease in short-run aggregate supply will lead to stagflation, where both the price level and output rise in the short run. However, in the long run, the economy will return to its natural level of output due to the decrease in aggregate supply, and the price level will remain permanently higher. Therefore, the price level will necessarily rise, but the effect on output is indeterminate.

Question 17

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

Conducting an open market purchase would increase the money supply, lower interest rates, and stimulate economic activity, counteracting the contractionary effects of the tax increase.

Question 18

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 economists believe in using government intervention, such as fiscal policy, to stimulate aggregate demand in times of economic downturns. New Keynesian economists also support this idea but incorporate more microeconomic principles into their analysis. Therefore, both groups would support the massive spending and tax relief package advocated by the Obama administration in 2009.

Question 19

Figure 17-3
 
-Refer to Figure 17-3.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

According to the rational expectations hypothesis, markets will instantly allocate resources to meet the increase in aggregate demand, and the economy will move directly to the new equilibrium point at d without passing through b or c. Therefore, the theoretical adjustment path will be a to d.

Question 20

In 1979, the CPI rose 13.5%, the highest inflation rate recorded in the twentieth century.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 by pursuing contractionary policies to bring inflation under control. This was done through a combination of increasing interest rates and reducing the growth of the money supply. The primary goal at this time was to lower inflation, even at the cost of short-term economic growth.

Quiz 32: Macro 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?

A survey of economists suggested that the _______ approach has emerged as the preferred approach to macroeconomic analysis.

Classical economics is based primarily on the works of John Maynard Keynes.

Figure 17-3 -Refer to Figure 17-3.Suppose the economy is at point c.A Keynesian economist would advocate

Figure 17-3 -Refer to Figure 17-3.Suppose the economy is at point c.A classical economist would advocate

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

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

New Keynesian economics

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 on grounds that it would increase the budget deficit.This view accords with

Figure 17-3 -Refer to Figure 17-3.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 __ whereas new Keynesian economics suggests that it will move from _.

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?

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?

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

In 1979, the CPI rose 13.5%, the highest inflation rate recorded in the twentieth century.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?

Quiz 32: Macro 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?

A survey of economists suggested that the _______ approach has emerged as the preferred approach to macroeconomic analysis.

Classical economics is based primarily on the works of John Maynard Keynes.

Figure 17-3 -Refer to Figure 17-3.Suppose the economy is at point c.A Keynesian economist would advocate

Figure 17-3 -Refer to Figure 17-3.Suppose the economy is at point c.A classical economist would advocate

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

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

New Keynesian economics

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 on grounds that it would increase the budget deficit.This view accords with

Figure 17-3 -Refer to Figure 17-3.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 ________ whereas new Keynesian economics suggests that it will move from _______.

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?

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?

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

In 1979, the CPI rose 13.5%, the highest inflation rate recorded in the twentieth century.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?

Figure 17-3 -Refer to Figure 17-3.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 __ whereas new Keynesian economics suggests that it will move from _.