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In the strict monetarist view, a large increase in the money supplywill have

a large impact on the velocity of money and a large impact on nominaloutput.

a large impact onthe velocity of money and a small impact on nominal output.

C. no effect on the velocityof money and a large impact on nominaloutput.

D. no effect on the velocityof money and a small impact on the nominal output.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-01Describe alternative perspectives on the causes of macroeconomic instability, including the views of mainstream economists, monetarists, real-business-cycle advocates, and proponents of coordination failures.

Test Bank: II Topic: What Causes Macro Instability?

Monetarists argue that the relationship between

A. the quantityof money the public wants to hold and the level of GDP is not stable.

B. the quantityof money the public wants to hold and the level of GDP is stable.

the quantity of money the public wants to hold and the level of savingis stable.

velocity and the interest rate varies directly.

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Test Bank: II Topic: What Causes Macro Instability?

If the velocity of money remains unchanged and the economy is at full employment, then the equation of exchange predictsthat a rise in the money supplywill

A. increaseprices.

increase interest rates.

increase real output.

decrease nominal GDP.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-01 Describe alternative perspectives on the causes of macroeconomic instability, including the views of mainstream economists, monetarists, real-business-cycle advocates, and proponents of coordination failures.

Test Bank: II Topic: What Causes Macro Instability?

Mainstream economics views monetarypolicy as a

source of instability, similar to the view of monetarism.

stabilizing factor, similar to the view of monetarism.

source of instability, while monetarismviews it as a stabilizing factor.

D. stabilizing factor, while monetarism views it as a source of instability.

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Test Bank: II Topic: What Causes Macro Instability?

If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy,then the

A. velocity of money is 5.

money supply is $40 billion.

level of the price index is 320.

equilibrium level of GDP is $320 billion.

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Blooms: UnderstandDifficulty: 02 Medium

Test Bank: II Topic: What Causes Macro Instability?

Assume monetary equilibrium exists; thatis,the desired and actual supplyof money are equal. Also assume that nominal GDP equals $960 billion and the money supply is $160 billion.From a strict monetaristview, an increasein the money supply by $12 billion will increase nominal GDP by

$13 billion.

$24 billion.

C. $72 billion.

D. $80 billion.

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Test Bank: II Topic: What Causes Macro Instability?

If nominal GDP is $848 billion and the velocity of money is 4, then the

A. money supply is $170 billion.

B. money supply is $212 billion.

consumer price index is 340.

average level of pricesis $170 billion.

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Test Bank: II Topic: What Causes Macro Instability?

If M is $800, P is $2, and Q is 1,200, then

aggregate expenditures will be $1,600.

aggregate expenditures will be $960,000.

C. V must be 3.

D. V must be 1.5.

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Test Bank: II Topic: What Causes Macro Instability?

If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchangedat $4,800 billion,then the income velocity ofmoney

rises by 33 percent.

falls by 33 percent.

rises from 6 to 8.

D. falls from 8 to 6.

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Learning Objective: 19-01 Describe alternative perspectives on the causes of macroeconomic instability, including the views of mainstream economists, monetarists, real-business-cycle advocates, and proponents of coordination failures.

Test Bank: II Topic: What Causes Macro Instability?

If money supply is $800 billionand nominal GDP is $2 trillion,then the averagenumber of times that money is spent and changes hands is

A. 2.5 times per year.

2 times per year.

1.6 times per year.

16 times per year.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-01 Describe alternative perspectives on the causes of macroeconomic instability, including the views of mainstream economists, monetarists, real-business-cycle advocates, and proponents of coordination failures.

Test Bank: II Topic: What Causes Macro Instability?

Assume that M is $200 billion and V is 6. If V increasesby 15 percent, then, according to the monetaristequation, nominal GDP will have increased by

A. $140 billion.

B. $180 billion.

$220 billion.

$260 billion.

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Test Bank: II Topic: What Causes Macro Instability?

In the mainstream view, the severe recession of 2007–2009 was caused by

A. an aggregate-supply shock,which caused the AS curve to shift left.

B. a financial crisis thatcaused a shrinkagein investment and consumption spending, thereby reducing aggregate demand.

monetary factors,specifically the excessiveexpansion of money supply brought about by the FederalReserve, starting in the recessionof 2001.

a huge and sudden drop in the velocity of money, causing a significant reduction in both nominaland real GDP.

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Test Bank: II Topic: What Causes Macro Instability?

Monetarists would argue that the severe recession of 2007–2009 was primarily caused by

adverse aggregate-supply shocks causing tremendous unemployment.

wide swings in investment expenditures driving erraticfluctuations in aggregate demand.

C. excessivemoney supply creating a bubble in some sectors of the economy.

D. too much deregulation of the financialsector in previous years.

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Learning Objective: 19-01 Describe alternative perspectives on the causes of macroeconomic instability, including the views of mainstream economists, monetarists, real-business-cycle advocates, and proponents of coordination failures.

Test Bank: II Topic: What Causes Macro Instability?

Real-business-cycle theoryfocuses on factors affecting

A. aggregatedemand.

B. aggregatesupply.

the velocity of money.

consumer spending.

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Blooms: UnderstandDifficulty: 02 Medium

Test Bank: II Topic: What Causes Macro Instability?

Real-business-cycle theory suggests that changes in

monetary policy are the single most important cause of macroeconomic instability.

investment spending will have a direct and significant effect on aggregatedemand.

C. technology and resourcesaffect productivity, and thus the long-run growth of aggregatesupply.

D. the velocity of money is gradual and predictable, and thus is able to accommodate the long-run changes in nominalGDP.

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Test Bank: II Topic: What Causes Macro Instability?

According to real-business-cycle theory, recessions are caused by

A. deviations of aggregate supplyfromlong-term growthtrends.

monetary factors affecting aggregate demand.

people choosingleisure rather than work.

a declinein the supplyof money.

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Test Bank: II Topic: What Causes Macro Instability?

The idea that business fluctuations are primarily caused by factorsaffecting aggregate supply rather than aggregate demand is a central tenet of

A. efficiencywage theory.

B. real-business-cycle theory.

mainstream economics.

monetarism.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-01 Describe alternative perspectives on the causes of macroeconomic instability, including the views of mainstream economists, monetarists, real-business-cycle advocates, and proponents of coordination failures.

Test Bank: II Topic: What Causes Macro Instability?

In the view of real-business-cycle theory, an increase in the long-run aggregate supply would lead to a(n)

A. increasein aggregate demand by an equal amount, so real output would increaseand the price level would be unchanged.

increase in aggregate demand by an equal amount, so real outputandthe price level would increase.

decrease in aggregatedemand, so real output would increase and the price level would decrease.

decrease in aggregate demand, so real output and the price level would increase.

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Test Bank: II Topic: What Causes Macro Instability?

In real-business-cycle theory, changes in the

A. demand for money respond to changes in the supply of money.

B. supply of money respondto changes in the demand for money.

demand for moneyrespond to changes in efficiency wages.

supply of money respond to changes in coordination failures.

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Test Bank: II Topic: What Causes Macro Instability?

173.

Refer to the graph. It is given that the economy is at an initial equilibrium at point A. In the mainstreameconomic view, the effect of a significantincrease in productivity on the economy can best be represented by a shift from

ASLR2 to ASLR1.

AD1 to AD2.

C. ASLR1 to ASLR2.

D. AD2 to AD1.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-01 Describe alternative perspectives on the causes of macroeconomic instability, including the views of mainstream economists, monetarists, real-business-cycle advocates, and proponents of coordination failures.

Test Bank: II Topic: What Causes Macro Instability?

Type: Graph

174.

Refer to the graph. Assume that the economy is in initial equilibrium where AD1 intersects ASLR1. If the economy experiences a change in technology that increasesproductivity and resources, then real-business-cycle theory would suggest that this macroeconomic instability would eventually produce a new equilibrium at point

A. B.

B. C.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 19-01 Describe alternative perspectives on the causes of macroeconomic instability, including the views of mainstream economists, monetarists, real-business-cycle advocates, and proponents of coordination failures.

Test Bank: II Topic: What Causes Macro Instability?

Type: Graph

175.

Refer to the graph. Assume that the economy was initiallyin equilibrium at point A. Ifthere is a significant technological innovation in the economy, then according to real-business-cycle theory, aggregate

demand will shift, which constitutes the full extent of the volatility.

demand will shift, which causes a corresponding shift in aggregate supply.

C. supply will shift, which causes a corresponding shift in aggregatedemand.

D. supply will shift, but such shifts are very rare in the real economy.

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Blooms: UnderstandDifficulty: 02 Medium

Test Bank: II Topic: What Causes Macro Instability?

Type: Graph

Coordination failures occur when peoplelack some way to jointly coordinate their actions to reach a(n)

unanticipated price level change.

fully anticipated price level change.

C. mutuallybeneficial equilibrium.

D. insider-outsider relationship.

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Test Bank: II Topic: What Causes Macro Instability?

If households and firms cutback on spending because they expectother households and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of

insider-outsider relationships.

efficiency wage theory.

C. a coordination failure.

D. a price-level surprise.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-01 Describe alternative perspectives on the causes of macroeconomic instability, including the views of mainstream economists, monetarists, real-business-cycle advocates, and proponents of coordination failures.

Test Bank: II Topic: What Causes Macro Instability?

If the economy diverges from its full-employment output, new classicaleconomics would suggest that

a change in the velocityof money would be all that is needed to return it to its full-employment output.

an improvement in insider-outsider relationships is all that is needed to return it to its full-employmentoutput.

an efficiencywage in the economy would return itto its full-employment output.

D. internal mechanisms within the economy would automatically return it to its full-employmentoutput.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classicaleconomists believe the economy will " self-correct" from aggregate demand and aggregatesupply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

New classicaleconomics suggests thatinthe long-run, changes in aggregate demand will cause

only short-run changes in output and employment.

long-run changesin output and employment.

only short-run changes in the price level.

D. no change in output and employment.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

If there is an unanticipated increase in aggregate demand, then accordingto new classicaleconomics, the economy will self-correct with a(n)

A. decrease in short-run aggregate supply, so output returnsto its initial level but the price level rises.

decrease in short-run aggregate supply, so output increasesand the price level rises.

decrease in short-run aggregate supply,so output returns to its initial level and the price level falls.

increase in short-runaggregate supply, so output increasesand the price level rises.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Within the aggregatedemand-aggregate supply framework, monetarists argue that a change in aggregate

A. demand will have a large effecton the price level but a temporary effect on output.

demand will have a small effect on the price level but a permanent effect on output.

demand will have a large effect on the price level and a large effect on output.

supply will have a large effect on the price level but a temporaryeffect on output.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classicaleconomists believe the economy will " self-correct" from aggregate demand and aggregatesupply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

182.

Refer to the graph. Assume thattheeconomy is in initial equilibrium where AD1 intersects AS1. If there is an unanticipated increase in aggregate demand, then accordingto new classicaleconomics, the economy will self-correct with a

movement from point B to pointA.

movement from point A to point B.

C. shift from AS1 to AS2.

D. shift from AD2 to AD1.

AACSB: Knowledge Application

Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classicaleconomists believe the economy will " self-correct" from aggregate demand and aggregatesupply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Type: Graph

183.

Refer to the graph. Assume thattheeconomy is in initialequilibrium where AD1 intersects AS1. If there is an unanticipated increase in aggregate demand and the economy self-corrects, then the adaptive-expectations adjustment path would go from point

A. A directly to B.

B. A to B to C.

B to A to D.

A to B to C to D.

AACSB: Knowledge Application

Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Type: Graph

184.

Refer to the graph. Assume thattheeconomy is in initialequilibrium where AD1 intersects AS1. If there is an anticipated increase in aggregate demand to AD2, then, according to the rational expectations economists, the path foradjustment runs from point

A to B to C.

A to D to C.

C. A directlyto C.

D. A directlyto B.

AACSB: Knowledge Application

Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Type: Graph

185.

Refer to the graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is an unanticipated decrease in aggregatedemand to AD2, then, in the view of new classicaleconomics, the economy will

A. self-correct through a shift in AS, which brings output back to Q1.

self-correct through a shift in AD, which brings output back to Q1.

need the government to implement expansionary policy in order to bring output back to Q1.

need the government to implement contractionary policyin order to bring output back to Q1.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Type: Graph

186.

Refer to the graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. Ifthere is an anticipated decrease in aggregatedemand to AD2, then, according to rationalexpectations theory, the path for adjustment runs from point

A to B to C.

A to D to C.

C. A directlyto C.

D. A directlyto D.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Type: Graph

187.

Refer to the graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is a decrease in aggregate demand to AD2, then, according to mainstream economists, if prices are flexible and wages are not, this will result in an equilibrium at point

C. D.

D. E.

AACSB: Knowledge Application

Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classicaleconomists believe the economy will " self-correct" from aggregate demand and aggregatesupply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Type: Graph

188.

Refer to the graph. Assume thattheeconomy is in initial equilibrium where AD1 intersects AS1. Ifthere is a decrease in aggregate demand to AD2, then, according to mainstream economists, if prices and wages are not flexible,this will resultinan equilibrium at point

A. E.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Type: Graph

Monetarists base their assessmentof the speed of adjustment for self-correction in the economy on

A. adaptiveexpectations.

rational expectations.

coordination failures.

efficiency wages.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classicaleconomists believe the economy will " self-correct" from aggregate demand and aggregatesupply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Which view of the macroeconomy suggests that the speed of adjustmentforself-correction would be very quick?

monetarism

mainstream economics

supply-side economics

D. rationalexpectations theory

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Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

In the view of rational expectations theory,

A. people make economic forecasts that are based on insider-outsider relationships and self-fulfilling prophecies.

B. people form beliefs aboutfuture economic outcomes that accurately reflect the likelihood that those outcomeswill occur.

people form their expectations on present realities and only gradually change their expectations as experience unfolds.

the economy does not respond quickly to changes in prices,which causes a misallocation of economic resources.

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Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

In the rationalexpectations theory, a temporary change in real output could result from

A. anticipated price-level changes.

B. a price-level surprise.

a coordination failure.

insider-outsider relationships.

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Learning Objective: 19-02 Discuss why new classicaleconomists believe the economy will " self-correct" from aggregate demand and aggregatesupply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

One of the basic assumptions of rationalexpectations theory is that

A. people can anticipatethe future effects of policy changesand the actions they take may offset the effects of economic policy.

people are not able to assess the future effectsof policy changes, so government can use economic policy effectively.

markets are not very competitive and fail to adjust quickly to changes in demand and supply.

people expect government to solve the major unemployment and inflation problems facing the nation and behave accordingly.

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Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

From a rational expectations perspective, an easy money policy is likelyto be completely

A. ineffective unless the increase in the money supply is unanticipated.

effective unless the increase in the money supply is unanticipated.

ineffective unless the increase in the money supply is anticipated.

effective unless the increase in the money supply is anticipated.

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Blooms: UnderstandDifficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Within the aggregate demand-aggregate supply framework, a strict interpretation of rational expectations theory suggests that a change in aggregate

demand will have a large effect on the price level but a small effect on output.

demand will have a small effect on the price level but a large effect on output.

C. demand will have a large effecton the price level but no effect on output.

D. supply will have a large effect on the price level but no effect on output.

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Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Rational expectations theory considersthe aggregate

A. demand curve to be vertical.

B. supplycurve to be vertical.

supply curve to be horizontal.

demand curve to be horizontal.

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Learning Objective: 19-02 Discuss why new classicaleconomists believe the economy will " self-correct" from aggregate demand and aggregatesupply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Mainstream economists think that

market participants change their actions in response to anticipated price-level changes such that no change in real output occurs.

the economy self-corrects when unanticipated events divert itfrom its full-employment level of real output.

C. the downwardinflexibility of wages and prices may leave the economy stuck in a costlyrecession for long periods.

D. significant changes in technology and resourceavailability cause macroeconomic instability.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

Which economic perspective typically views the market system as less than fully competitive, and thereforesubject to macroeconomic instability?

A. monetarism

B. mainstreameconomics

real-business-cycle theory

rational expectations theory

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Learning Objective: 19-02 Discuss why new classical economists believe the economy will "self-correct"from aggregate demand and aggregate supply shocks.

Test Bank: II Topic: Does the Economy Self-Correct?

A mainstreamcriticism of rational expectations theory is that

the theorists confuse correlation with causation in interpreting the empiricalevidence.

people do not make consistent forecasting errors that can be exploitedby policymakers.

C. many markets are not purelycompetitive and do not adjust rapidly to changing market conditions.

D. the data indicatethat economic policydoes not affect real GDP and employment.