Chapter 17

1.	Classical economists suggest that full employment is A. best achieved through government interventions B. not possible in an unstable market economy C. inversely related to the price level D. the norm in a market economy

2.	The aggregate supply curve of classical economists A. is vertical B. is horizontal C. slopes upward D. slopes downward

3.

Classical theory concludes that the production behavior of firms will not change when the price level decreases because input costs would A. rise along with product prices to leave real profits and output unchanged B. fall along with product prices to leave real profits and output unchanged C. fall, but product prices would rise, offsetting any change in real profits or output D. rise, but product prices would rise, offsetting any change in real profits or output

4.

In classical economics, a decrease in aggregate demand results in A. a decrease in both the price level and domestic output B. a decrease in the price level and no change in domestic output C. no change in the price level and a decrease in domestic output D. no change in either the price level or domestic output

5.	The aggregate supply curve in the Keynesian model is A. vertical at the full-employment output level B. horizontal to the full-employment output level C. positively sloped to the full-employment output level D. negatively sloped to the full-employment output level

6.

In the Keynesian model, a decrease in aggregate demand results in A. a decrease in both the price level and domestic output B. a decrease in the price level and no change in domestic output C. no change in the price level and a decrease in domestic output D. no change in either the price level or domestic output

7.

The mainstream view of the economy holds that A. government intervention in the economy is not desirable B. product and labor markets are highly competitive and flexible C. changes in investment spending lead to changes in aggregate demand D. economic growth is best achieved through implementation of a monetary rule

8.

In the monetarist perspective A. discretionary monetary policy is the most effective way to moderate swings in the business cycle B. government policies have reduced macroeconomic stability C. macroeconomic stability results from adverse aggregate supply shocks D. markets in a capitalistic economy are largely noncompetitive

9.	Which is the equation of exchange? A. PQ/M + V = GDP B. V = M + PQ C. MV = PQ D. V + Ig + M = GDP

10.	In the equation of exchange, if V is stable, an increase in M will necessarily increase A. the demand for money B. government spending C. nominal GDP D. velocity

11.	When nominal gross domestic product (GDP) is divided by the money supply (M), then you will obtain the A. velocity of money B. monetary multiplier C. equation of exchange D. monetary rule

12.	Monetarists argue that the amount of money the public will want to hold depends primarily on the level of A. nominal GDP B. investment C. consumption D. prices

13.

Real-business-cycle theory suggests that A. velocity changes gradually and predictably; thus it is able to accommodate the long-run changes in nominal GDP B. the volatility of investment is the main cause of the economy's instability C. inappropriate monetary policy is the single most important cause of macroeconomic instability D. changes in technology and resources affect productivity, and thus the long-run growth of aggregate supply

14.

In real-business-cycle theory, if the long-run aggregate supply increased, then aggregate demand would increase by A. an equal amount, so real output and the price level would increase B. less than an equal amount, so real output would increase and the price level would decrease C. greater than an equal amount, so real output and the price level would increase D. an equal amount, so real output would increase and the price level would be unchanged

15.	If aggregate demand declined and the economy experienced a recession due to a self-fulfilling prophecy, this would be an example of A. real-business-cycle theory B. insider-outsider theory C. a coordination failure D. a change in velocity

16.

In the new classical view, when the economy diverges from its full-employment output, A. internal mechanisms within the economy would automatically return it to its full-employment output B. discretionary monetary policy is needed to return it to its full-employment output C. discretionary fiscal policy is needed to return it to its full-employment output D. the adoption of an efficiency wage in the economy would return it to its full-employment output

17.

The views about the speed of adjustment for self-correction in the economy suggest that A. monetarists think it would be gradual and rational expectations economists think it would be quick B. monetarists think it would be quick and rational expectations economists think it would be gradual C. monetarists and mainstream economists think it would be quick D. real-business-cycle theorists and rational expectations economists think it would be gradual

18.

Proponents of rational expectations theory argue that people A. are not as rational as monetarists assume them to be B. make forecasts that are based on poor information, causing economic policy to be driven by a self-fulfilling prophecy C. form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur D. do not respond quickly to changes in wages and prices, causing a misallocation of economic resources in the economy

19.	In the rational expectations theory, a temporary change in real output would occur from a A. fully anticipated price-level change B. downward wage inflexibility C. coordination failure D. price-level surprise

20.

The conclusion mainstream economists draw about the downward price and wage inflexibility is that A. the effects can be reversed relatively quickly B. efficiency wages do not contribute to the problem C. the economy can be mired in recession for long periods D. wage and price controls are needed to counteract the situation

21.	According to mainstream economists, which contributes to the downward inflexibility of wages? A. price-level surprises B. insider-outsider relationships C. adverse aggregate supply shocks D. inadequate investment spending

22.	The rule suggested by the monetarists is that the money supply should be increased at the same rate as the A. price level B. interest rate C. velocity of money D. potential growth in real GDP

23.

To stabilize the economy, monetarist and rational expectations economists advocate A. the use of price-level surprises and adoption of an efficiency wage B. a monetary rule and a balanced-budget requirement C. the use of discretionary fiscal policy instead of discretionary monetary policy D. the use of discretionary monetary policy instead of discretionary fiscal policy

24.	Mainstream economists support A. increasing the money supply at a constant rate B. eliminating insider-outsider relationships in business C. the use of discretionary monetary and fiscal policy D. a balanced-budget requirement and a monetary rule

25.

Which would be an idea from monetarism which has been absorbed into mainstream macroeconomics? A. how changes in investment spending change aggregate demand B. the importance of money and the money supply in the economy C. using discretion rather than rules for guiding economic policy D. building the macro foundations for microeconomics

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