19 - Chapter 37 Current Issues in Macro Theory and Policy Multiple-Choice Questions 1 The economic theory that holds that the economy is generally

19 - Chapter 37 Current Issues in Macro Theory and Policy...

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Chapter 37: Current Issues in Macro Theory and PolicyMultiple-Choice Questions1. The economic theory that holds that the economy is generally unstable is known as(A) Classical theory(B) Keynesian theory(C) Monetarist theory(D) Rational Expectations theory(E) Neoclassical theory(B) The other theories hold that the economy is stable at full-employment output. According to those theories, if any event destabilizes the economy, the economy will self-adjust.Difficulty: EasyStyle: FactualAP Economics Curricular Requirement Macroeconomics: Stabilization PoliciesBook Section: Mainstream View 2. Keynesians argue that the economy does not self-adjust to demand shocks because(C) Prices and wages tend to be downwardly inflexible (sticky) due to long-term contracts. When demanddecreases, costs of production tend not to decrease or adjust quickly. As a result, the economy will be producing at less than full-employment output for a protracted period of time.Difficulty: MediumStyle: ConceptualAP Economics Curricular Requirement Macroeconomics: Sticky versus Flexible Wages and PricesBook Section: Mainstream View of Self-Correction3. The Monetarist equation of exchange states that the money supply times the velocity equals(A) the inflation rate(B) the unemployment rate(C) the federal budget(D) real GDP(E) nominal GDP(E) The Quantity Theory of Money is MV=PQ, where M is the money supply, V is the velocity of money,P is the price level, and Q is real output. Nominal GDP is the P x Q on the right side of the equation, representing the price level and the quantity of output produced.Difficulty: MediumStyle: Conceptual
AP Economics Curricular Requirement Macroeconomics: Quantity Theory of MoneyBook Section: Monetarist View4. According to Monetarists, the quantity theory of money holds that if the central bank increases the money supply in response to a recession, the policy will result inI. a reduction in unemploymentII. a possible increase in real outputIII. an increase in interest ratesIV. an increase in the price level(A) I only(B) II only(C) III only(D) IV only(E) II and IV only(E) Monetarists hold that velocity is stable (or even constant). An increase in money supply will then increase either the price level or real output or both (nominal GDP).Difficulty: MediumStyle: ConceptualAP Economics Curricular Requirement Macroeconomics: Quantity Theory of MoneyBook Section: Monetarist View5. Classical economists argue that when the economy experiences supply or demand shocks, it self-corrects through the mechanism of flexible

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