Question 1

A supply-side economist would recommend a cut in marginal tax rates on capital gains and on investment expenditures

Accepted Answer

Supply-side economists argue for lower marginal tax rates on capital gains and investments to stimulate economic growth by encouraging more investment, regardless of the economy's current state or other fiscal policies.

Question 2

Statement I: The key difference between supply-siders and other economists is in their judgment about how much output would be changed by a change in the tax rates or regulations facing taxpayers.
Statement II: A supply-side economist would argue that a big tax cut would cause an output increase,but not inflation,when the economy is already near full employment.

Accepted Answer

Statement I is true as the key difference between supply-siders and other economists lies in their views about how taxes and regulations affect output.

Statement II is also true as supply-side economists believe that tax cuts can help stimulate output without causing inflation, especially if the economy is already near full employment.

Question 3

Which school is the most opposed to government countercyclical intervention?

Accepted Answer

The new classical economists are the most opposed to government countercyclical intervention, as they believe that market forces will naturally correct any economic fluctuations in the long run and that government intervention may actually prolong the adjustments needed.

Question 4

Milton Friedman's macroeconomic theory and political philosophy have the relationship one would expect.He is a

Accepted Answer

Milton Friedman was a leading monetarist economist who believed in the importance of controlling the money supply to regulate the economy. He was also a political conservative who advocated for limited government intervention in the economy and greater individual freedom. This is reflected in his support for free market policies and opposition to government welfare programs.

Question 5

When the money supply is increased,what do monetarists expect to happen to the nominal or market rate of interest?

Accepted Answer

Monetarists believe that increasing the money supply will initially lower interest rates due to the greater availability of money. However, in the long run, the increased money supply can lead to inflation, which in turn can cause interest rates to rise as lenders demand higher rates to compensate for the decreased purchasing power of money.

Question 6

An economist is most likely to favor discretionary aggregate demand policies,rather than a policy rule,if he or she is in which economic tradition?

Accepted Answer

Keynesian economists tend to believe in the efficacy of discretionary, government-led efforts to manage aggregate demand in order to stabilize the macroeconomy. This is in contrast to classical and monetarist economists who tend to favor more rule-based, market-oriented approaches. Supply-side and libertarian economists generally prioritize policies that focus on growth, rather than stabilization.

Question 7

The monetarists' prescription for monetary policy is called the "monetary rule." The monetary rule means that

Accepted Answer

The monetary rule according to the monetarists is that the rate of increase in the money supply should be slow and steady, and for price stability, it should equal the potential annual growth rate of real GDP. This is to ensure that inflation is kept under control and the economy can grow steadily without any disruptions caused by sudden changes in money supply.

Question 8

While most economists believe that Keynes was correct when he placed primary focus on aggregate demand manipulation to solve the recessionary gap of the Great Depression,supply-siders are critical of this focus,claiming that

Accepted Answer

Supply-siders argue that Keynesian economics focused too much on demand-side policies and neglected important factors such as work effort, labor productivity, and incentives to save and invest. They believe that policies such as tax cuts and deregulation can boost the supply side of the economy and lead to long-term economic growth.

Question 9

John Maynard Keynes did NOT accept the classical assumption that

Accepted Answer

John Maynard Keynes challenged several classical economic assumptions, including those listed in options A, B, C, and D. He believed that the velocity of money was not constant, full employment was not the natural state of the economy, money balances were held for speculative purposes in addition to transactions, and that interest rates do affect the quantity of money demanded.

Question 10

Keynesians

Accepted Answer

Keynesians argue for government intervention in the economy to promote economic stability and growth. They believe that the economy can experience periods of instability and even depression, and that government policies such as fiscal and monetary policy can help to stabilize the economy and promote full employment.

Question 11

-Which tax rate will provide the government with the maximum revenue?

Accepted Answer

The answer of 
-Which tax rate will provide the government...

Question 12

If V in the equation of exchange is constant,an increase in M will necessarily increase

Accepted Answer

The answer of If V in the equation of exchange...

Question 13

New classical economists believe that

Accepted Answer

New classical economists believe in the efficiency of the free market and argue that government intervention can lead to inefficiencies and distortions in the economy. They view the government's role as limited to providing a stable macroeconomic environment through the control of inflation and promoting free market competition. Therefore, they do not believe in wage and price controls, and other forms of government intervention as effective tools in controlling inflation.

Question 14

-Which tax revenue given here will be generated by two different tax rates?

Accepted Answer

The answer of 
-Which tax revenue given here will be...

Question 15

In periods of relatively high levels of unemployment,a classical economist would advocate which of the following governmental policies to move the economy toward full employment?

Accepted Answer

Classical economists believe in the self-correcting nature of markets with minimal government intervention. They argue that if left alone, the economy will naturally adjust back to a state of full employment through the flexibility of prices and wages.

Question 16

-Which tax rates result in zero tax revenue?

Accepted Answer

Tax rates of 0% and 100% result in zero tax revenue. At 0%, there is no tax collected on any income. At 100%, there is no incentive for individuals to earn income, leading to no taxable income and thus no tax revenue.

Question 17

According to the monetarists

Accepted Answer

According to the monetarists, changes in the money supply are the primary cause of changes in the price level. This is because they believe that changes in the money supply affect aggregate demand, which in turn affects prices.

Question 18

Monetarists

Accepted Answer

Monetarists believe that government policies, particularly in regards to monetary policy, have actually reduced the stability of the economy. They argue for a more rules-based approach to monetary policy, rather than discretionary actions by the government.

Question 19

Monetarists advocate that the

Accepted Answer

Monetarists, like Milton Friedman, advocate for a constant growth rate of the money supply, believing that this helps to stabilize the economy and control inflation over time.

Question 20

The theory of rational expectations concludes that

Accepted Answer

The theory of rational expectations suggests that individuals will adjust their behavior based on their expectations of how government policies will affect the economy. This means that if individuals expect a particular policy to result in inflation or recession, for example, they will take steps to protect themselves from these outcomes, which can potentially offset the intended effects of the policy. Therefore, rational expectations theory suggests that policy interventions are unlikely to have a significant impact on the economy unless they manage to alter individuals' expectations in a significant way.

Quiz 15: A Century of Economic Theory