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Chapter 28
Money, Banking, and the Business Cycle
after World War II
GENERAL QUESTIONS
1. Stagflation is defined as
a. the simultaneous occurrence of high inflation and high unemployment.
b. high inflation accompanied by falling interest rates.
c. declining GDP accompanied by a stable price level.
d. a persistent decline in the price level that is unresponsive to monetary and
fiscal policies.
2. Fiscal policy aims to influence the overall health of the economy through
changes in
a. the money supply.
b. government spending and tax rates.
c. interest rates.
d. international exchange rates.
e. all of the above.
3. Monetary policy is primarily exercised by
a. Congress.
b. the president.
c. the Federal Reserve.
d. the Treasury Department.
4. Which of the following economists is often credited with establishing the
monetarist school of thought?
a. John Maynard Keynes
b. Arthur Laffer
c. A. W. Phillips
d. Milton Friedman
5. The belief that government spending is necessary to offset sluggish private
investment demand is associated with
a. monetarism.
b. supply-side economics.
c. Keynesianism.
d. rational expectations theory.
6. Policies adopted by the Truman administration effectively avoided inflation
during the Korean War. These policies included
a. increased personal and corporate tax rates.
b. price and wage controls.
c. reduced purchases of government debt by the Federal Reserve.
d. discontinuance of the practice of “pegging” interest rates.
e. all of the above.
7. Which of the following historical events is often cited as an example of the
successful implementation of Keynesian theory?
a. the Kennedy-Johnson tax cut of 1964
b. the price controls of the Nixon administration
c. the anti-inflation policies of the Carter administration
d. the series of tax cuts implemented by the Reagan administration during
the 1980s
8. Following World War II, the United States and most developed countries
adopted a system of fixed exchange rates known as
a. the Heller plan.
b. the new gold standard.
c. the Bretton Woods system.
d. the Geneva accord.
9. The Bretton Woods system
a. allowed for market-determined exchange rates.
b. ended the use of the gold standard in all participating countries.
c. led to a dramatic increase in the U.S. balance of payments deficit.
d. resulted in the rapid increase of the U.S. gold supply in the 1960s.
e. all of the above
10. The U.S. economy of the 1960s
a. was continuously plagued by low output and high unemployment.
b. is notable because the inflation rate reached double-digit levels.
c. presents a rare example of deflation in a developed economy.
d. enjoyed the longest expansion that the country had experienced since
before WWII.
11. Beginning in 1971, the Nixon administration enacted a series of price controls
in hopes of reducing inflation. The first, known as Phase I,
a. consisted of a complete price freeze.
b. imposed a ceiling price on meat, but left other prices unregulated.
c. froze wages, but left other prices unregulated.
d. applied only to oil prices.
12. Following the lifting of price controls that had been implemented in the early
1970s, inflation skyrocketed. Economists’ explanations for this acceleration in
the price level include
a. the increase in the money supply that also occurred during the early
1970s.
b. increases in the federal government deficit, especially in 1971 and 1972.
c. supply-side shocks in oil and food.
d. the release of inflationary pressures that built up during the period of
price controls.
e. all of the above.
13. Fiscal and monetary policies adopted by the Carter administration in the first
half of his term resulted in
a. stable prices and low unemployment.
b. deflation.
c. a rapid rise in the inflation rate.
d. a balanced federal budget.
14. In the early 1980s, many people found themselves unable to purchase new
homes because of
a. rising prices and interest rates.
b. rising prices and falling interest rates.
c. new government restrictions on mortgages for first-time buyers.
d. increases in income tax rates.
15. In his book, The Economic Consequences of Peace, John Maynard Keynes writes,
“There is no subtler, no surer means of overturning the existing basis of
society than to debauch the currency.” Keynes credits ___________ as having
originally expressed this belief.
a. Irving Fisher
b. Alfred Marshall
c. Vladimir Lenin
d. Adolf Hitler
16. In his 1967 address to the American Economic Association, Milton Friedman
explained that increases in the money supply will temporarily reduce
unemployment because
a. wages do not respond to monetary policy.
b. unions support policies that increase inflation.
c. inflation benefits lenders.
d. prices rise faster than wages.
17. Under the leadership of Federal Reserve Chairman _______________, the
double-digit inflation of the 1970s and early 1980s was finally reduced using
policies advocated by monetarists.
a. Milton Friedman
b. Alan Greenspan
c. Paul Volcker
d. Alfred Kahn
18. The Laffer curve expresses a relationship between
a. tax rates and tax revenues.
b. inflation and unemployment.
c. interest rates and saving.
d. money supply and the price level.
19. The Reagan administration’s experiment with supply-side economics
produced a historic period of economic expansion that was accompanied by
a. falling real interest rates.
b. high unemployment rates.
c. a dramatic increase in the federal government’s budget deficit.
d. a reduction in the U.S. trade deficit.
e. all of the above.
20. The Federal Reserve chair with the longest tenure is
a. Alan Greenspan.
b. Paul Volcker.
c. Milton Friedman.
d. Arthur Laffer.
21. During his tenure as chair, Alan Greenspan has firmly adhered to
a. a policy of steady growth in the money supply at precisely the same rate
over time.
b. policies designed to promote price stability.
c. policies that encouraged large and rapid increases in stock prices.
d. a policy of fixed interest rates.
22. Following WWII, savings and loan associations (S&Ls) emerged as serious
competitors of commercial banks, especially in the market for
a. loans to new businesses.
b. home mortgages.
c. trust funds.
d. government bond sales.
23. Factors that led to the S&L crisis of the 1980s include
a. over-investment by S&Ls in high-risk real estate ventures.
b.
c.
d.
e.
S&L investments in junk bonds.
fraud within the S&L industry.
perverse incentives created by government insurance on S&L deposits.
all of the above.
24. Banking crises of the 1980s include all of the following except
a. a wave of bankruptcies in the S&L industry.
b. Mexico’s announcement that it was unable to repay its debt obligations.
c. a bank run on Continental Illinois Bank.
d. Chase Manhattan Bank’s declaration of bankruptcy.
ECONOMIC INSIGHTS
1. When it was introduced in 1958, the Phillips curve presented policy makers
with a “menu” from which they could choose the appropriate
a. combination of monetary and fiscal policy.
b. combination of inflation and unemployment.
c. level of aggregate money supply.
d. income tax rate.
2. Over time, the Phillips curve has
a. remained stable.
b. shifted downward.
c. shifted upward.
d. has become positively sloped.
3. Robert Lucas and his followers have argued that the Philips curve appears to
be a
a. vertical line.
b. horizontal line.
c. negatively sloped curve.
d. positively sloped curve.
ECONOMIC ANALYSIS
1. According to the Fisher effect, if a lender and a borrower would agree on an
interest rate of 8 percent when no inflation is expected, they should set a rate
of _______ when an inflation rate of 3 percent is expected.
a. 2 percent
b. 5 percent
c. 8 percent
d. 11 percent
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