Question 1

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

Accepted Answer

A)  rises by 33 percent.
B)  falls by 33 percent.
C)  rises from 6 to 8.
D)  falls from 8 to 6.E) B) and C)
F) C) and D)

Question 2

One reason the lowest wage rate is not necessarily the same as the efficiency wage is that workers might

Accepted Answer

A)  be more productive at a higher wage rate.
B)  have more incentive to shirk at higher wage rates.
C)  be tempted to switch jobs more frequently at higher wage rates.
D)  be less inclined to work well at a higher wage rate.E) All of the above
F) A) and C)

Question 3

Efficiency wage theory says that an above-market wage can reduce labor costs per unit of output by eliciting greater work effort, lowering supervision costs, and reducing job turnover.

Accepted Answer

A) True 
 B)False

Question 4

Which monetarist idea has been absorbed into mainstream macroeconomics?

Accepted Answer

A)  The net export effect has a stronger effect on fiscal policy than monetary policy.
B)  Cuts in tax rates significantly increase the productive capacity of the economy over the historical averages.
C)  Excessive growth in the money supply over long periods leads to inflation.
D)  The federal funds rate is a more important monetary target than the money supply.E) A) and C)
F) A) and B)

Question 5

An efficiency wage is

Accepted Answer

A)  a wage payment necessary to compensate workers for risk of injury on the job.
B)  a "wage" that contains a profit-sharing component as well as traditional hourly pay.
C)  an above-market wage that minimizes a firm's labor cost per unit of output.
D)  a wage that automatically rises with the national index of labor productivity.E) A) and B)
F) B) and C)

Question 6

In 2012, the Fed

Accepted Answer

A)  adopted a strict monetary rule of 2 percent per year.
B)  adopted inflation targeting, setting a target rate of 2 percent per year.
C)  relaxed all monetary rules and targets in favor of a fully flexible monetary policy.
D)  adopted a nominal GDP growth rate target of 6 percent per year.E) B) and D)
F) C) and D)

Question 7

Monetarists believe that a monetary policy rule will tend to lead to inflation.

Accepted Answer

A) True 
 B)False

Question 8

Nearly all modern economists support the idea of a monetary rule.

Accepted Answer

A) True 
 B)False

Question 9

The equation of exchange is

Accepted Answer

A)  AS = AD.
B)  Saving = Income - Spending.
C)  MV = PQ.
D)  AD = C + Ig + G + Xn.E) B) and C)
F) C) and D)

Question 10

Modern mainstream macroeconomists agree with the monetarists that

Accepted Answer

A)  the Fed should increase the money supply at a fixed annual rate.
B)  velocity is highly stable.
C)  fiscal policy is largely ineffective.
D)  "money matters" in the macroeconomy.E) All of the above
F) A) and D)

Question 11

Economist Abba Lerner compared the economy to a car needing

Accepted Answer

A)  an efficiency wage to make the labor markets work like an efficient engine.
B)  regular price-level surprises, like oil changes, to make it run smoothly.
C)  a "steering wheel" that the government can use to guide it forward.
D)  a monetary rule to prevent a "backseat driver" from making it go off course.E) B) and D)
F) B) and C)

Question 12

According to real-business-cycle theory,

Accepted Answer

A)  monetary factors affecting aggregate demand cause macroeconomic instability.
B)  recessions result from declines in long-run aggregate supply, rather than decreases in aggregate demand.
C)  when real wages fall during recessions, "real" unemployment rates rise.
D)  the net long-run costs of business fluctuations are severe.E) C) and D)
F) A) and D)

Question 13

Mainstream economists contend that, as stabilization tools,

Accepted Answer

A)  discretionary fiscal policy is effective, but discretionary monetary policy is not.
B)  discretionary monetary policy is effective, but discretionary fiscal policy is not.
C)  both discretionary fiscal policy and discretionary monetary policy can be effective if appropriately used.
D)  discretionary fiscal policy and discretionary monetary policy cause more instability than they cure.E) A) and D)
F) None of the above

Question 14

According to mainstream economic analysis, a balanced-budget rule for fiscal policy would be

Accepted Answer

A)  countercyclical.
B)  ineffective.
C)  destabilizing.
D)  pro-growth.E) C) and D)
F) A) and B)

Question 15

In the aftermath of the Great Recession of 2007-2009, a new breed of "market monetarists" suggested that the Fed and other central banks should use which of the following to adjust monetary policy?

Accepted Answer

A)  stock markets
B)  domestic and export markets
C)  predictions markets
D)  labor marketsE) A) and D)
F) B) and C)

Question 16

(Last Word)  Market monetarists advocate that the Fed "target the forecast" (of the predicted nominal GDP growth rate) , claiming primarily that it will

Accepted Answer

A)  promote economic stability by ensuring that total spending will grow at a predictable rate each year.
B)  prevent high rates of inflation.
C)  keep the economy at its natural rate of unemployment.
D)  prevent real GDP from growing too much.E) B) and C)
F) A) and D)

Question 17

Mainstream economists contend that a policy rule based on the equation of exchange breaks down because

Accepted Answer

A)  there is a tight relationship between the money supply and nominal GDP.
B)  velocity is more variable and unpredictable than expected.
C)  the money supply increases at a constant, not a variable, rate.
D)  nominal GDP is directly related to changes in the price level.E) C) and D)
F) A) and B)

Question 18

If a certain household earns and spends $24,000 per year and, on the average, holds a money balance of $6,000, then the velocity of money for this household is

Accepted Answer

A)  6.
B)  1/6.
C)  4.
D)  1/4.E) A) and C)
F) None of the above

Question 19

In recent years, economists holding monetarist views have replaced their call for a monetary rule with a call for

Accepted Answer

A)  artful Fed management of interest rates.
B)  inflation targeting.
C)  nominal GDP targeting.
D)  inflationary and recessionary gap analysis.E) C) and D)
F) A) and B)

Question 20

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

Accepted Answer

A)  adaptive expectations.
B)  rational expectations.
C)  coordination failures.
D)  efficiency wages.E) None of the above
F) All of the above

Exam 39: Current Issues in Macro Theory and Policy

If a certain household earns and spends $24,000 per year and, on the average, holds a money balance of $6,000, then the velocity of money for this household is

Correct AnswerverifiedShow Answer

According to mainstream economic analysis, a balanced-budget rule for fiscal policy would be

Correct AnswerverifiedShow Answer

Which monetarist idea has been absorbed into mainstream macroeconomics?

Correct AnswerverifiedShow Answer

An efficiency wage is

Correct AnswerverifiedShow Answer

(Last Word) Market monetarists advocate that the Fed "target the forecast" (of the predicted nominal GDP growth rate) , claiming primarily that it will

Correct AnswerverifiedShow Answer

According to real-business-cycle theory,

Correct AnswerverifiedShow Answer

Modern mainstream macroeconomists agree with the monetarists that

Correct AnswerverifiedShow Answer

In the aftermath of the Great Recession of 2007-2009, a new breed of "market monetarists" suggested that the Fed and other central banks should use which of the following to adjust monetary policy?

Correct AnswerverifiedShow Answer

Mainstream economists contend that, as stabilization tools,

Correct AnswerverifiedShow Answer

Nearly all modern economists support the idea of a monetary rule.

Correct AnswerverifiedShow Answer

Monetarists believe that a monetary policy rule will tend to lead to inflation.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

One reason the lowest wage rate is not necessarily the same as the efficiency wage is that workers might

Correct AnswerverifiedShow Answer

In 2012, the Fed

Correct AnswerverifiedShow Answer

Economist Abba Lerner compared the economy to a car needing

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In recent years, economists holding monetarist views have replaced their call for a monetary rule with a call for

Correct AnswerverifiedShow Answer

Mainstream economists contend that a policy rule based on the equation of exchange breaks down because

Correct AnswerverifiedShow Answer

The equation of exchange is

Correct AnswerverifiedShow Answer

Efficiency wage theory says that an above-market wage can reduce labor costs per unit of output by eliciting greater work effort, lowering supervision costs, and reducing job turnover.

Correct AnswerverifiedShow Answer

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