Roots of Modern Macroeconomics

Show Answers

Correct options are highlighted when revealed.

1.What is the key assumption in new classical macroeconomics that is often questioned for its realism?

That monetary policy has a direct impact on aggregate demandThat markets adjust slowly and do not clear immediatelyThat fiscal policy influences overall demand in the economyThat economic agents form expectations rationallyThat prices are completely rigid in the short run

2.Why is it challenging to assess if the velocity of money remains steady over time?

Because tracking nominal GDP values consistently over time is complicated.Since the money supply has shown minimal variation throughout the years.Due to difficulties in accurately gauging the demand for money over different periods.Because the constancy of velocity can vary depending on the method used to measure the money supply.

3.According to the quantity theory of money, what effect does a specific percentage change in the money supply have?

An identical percentage change in nominal GDP.An identical percentage change in real GDP.A greater percentage change in nominal GDP.A lesser percentage change in nominal GDP.No change in nominal GDP.

4.What does it mean when individuals are described as having rational expectations?

They predict this year’s inflation will match last year’s rate.They make random guesses about the inflation rate.They expect this year’s inflation to be the average of the past decade.They incorporate all relevant information when forecasting inflation.

5.What is the theory called that assumes individuals have full knowledge of the actual economic model and utilize it to predict future outcomes?

Rational-expectations hypothesisPassive-expectations hypothesisAdaptive expectations hypothesisLagged-expectations hypothesis

6.What term describes the government's ability to influence the overall economy through policy adjustments?

fine tuningmonetarismmicroeconomic basis of macroeconomicsclassical economic model

7.According to Keynesian theory, what primarily determines the level of employment in an economy?

The influence of labor unions.The amount of money circulating in the economy.The prevailing prices and wage rates.The total demand for goods and services across the economy.

8.In traditional economic theories, what is the main factor that determines the level of employment?

The overall demand for products and servicesThe prevailing prices and wage ratesThe current interest rate levelsThe total money supplyGovernment fiscal policies

9.Which group of economists highlighted wage flexibility as a key approach to addressing unemployment?

10.Which group of contemporary economists argues that institutional elements and confidence significantly affect business actions, and that boosting demand typically raises output instead of prices?

Monetarist economistsKeynesian economistsPost-Keynesian economistsNew classical economists

11.Which group of contemporary economists argues that markets adjust almost instantly and that increasing the money supply only leads to higher prices without boosting employment?

12.What economic phenomenon did the new classical theories aim to clarify?

The prolonged unemployment experienced during the Great DepressionThe acceleration in real output growth witnessed in the 1950sThe occurrence of stagflation during the 1970sWhy permanent policy adjustments influence individual behavior more than temporary ones

13.When money demand varies with the interest rate, how does this affect the velocity of money circulation?

It remains stable, and the quantity theory of money is valid.It stays fixed, supporting the quantity theory of money.It fluctuates, causing the quantity theory of money to be invalid.It remains stable, but the quantity theory of money fails.

14.What term describes the continued existence of an issue like unemployment despite the elimination of its original causes?

the composition fallacyreverse entropyhysteresisall other things being equal

15.According to the rational expectations theory, how do people's predictions about future inflation typically perform?

They tend to systematically predict inflation rates higher than what actually occurs.They are perfectly accurate without any mistakes.They generally forecast inflation rates lower than the actual figures.On average, their predictions are accurate but include errors that are randomly spread.They are completely unreliable and bear no relation to actual inflation.

16.What term describes a rapid rise in prices occurring alongside high unemployment during an economic downturn?

economic slumpprice inflationstagflationeconomic stagnation

17.When the government raises its expenditure to lower unemployment, this action is known as what?

Hands-off economic approachAdjustments in money supplyFine tuningBuilt-in economic stabilizers

18.Why did Keynesian economics gain widespread acceptance?

It accounted for stagflation experienced in the late 1970sIt explained demand-driven inflation during the 1960sIt clarified the reasons behind slow economic growth in the 1950sIt provided an explanation for the long-lasting high unemployment during the Great Depression

19.What did classical economists believe about the functioning of the economy?

Needs constant intervention to achieve full employmentIs always operating at full employment without exceptionIs incapable of reaching full employmentNaturally adjusts itself to restore full employmentIs permanently unstable and unpredictable

20.What term describes prices that do not quickly change to balance supply and demand?

market ratessticky pricesset pricescontrolled prices