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Chapter 18 Conclusion: Where We Stand
1) The evolution of macroeconomic theory
A) usually precedes and causes major macroeconomic events.
B) usually is in reaction to major macroeconomic events.
C) is evenly divided between causing and reacting to major macroeconomic events.
D) proceeds rather independently of major macroeconomic events.
2) Before the Great Depression, macroeconomic theory was dominated by the __________
approach that presumed the essential ________ of the private economy.
A) Keynesian, stability
B) Keynesian, instability
C) old classical, stability
D) old classical, instability
3) The old classical macroeconomic was based on an assumption of price and wage
___________, and thus an economy that ______________.
A) flexibility, promptly self-corrected
B) flexibility, failed to self-correct promptly
C) stickiness, promptly self-corrected
D) stickiness, failed to self-correct promptly
4) The Great Depression of the 1930s opened the door to the _________ revolution in
macroeconomic theory.
A) Keynesian
B) old classical
C) New Keynesian
D) New classical
5) The Keynesian revolution was based on the assumption of price and wage _________ and
thus the need for an activist ________ policy.
A) flexibility, monetary
B) flexibility, fiscal
C) stickiness, monetary
D) stickiness, fiscal
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6) The quantity theory of money idea that velocity is _________ link between money growth
and nominal GDP growth was _________ in the 1930s.
A) a stable, confirmed
B) a stable, disproved
C) an unstable, confirmed
D) an unstable, disproved
7) The _______________ of the U.S. economy during World War II, with its vast defense
spending, ______________ of Keynesian macroeconomics.
A) continued stagnation, established the supremacy
B) continued stagnation, was the demise
C) rapid recovery, established the supremacy
D) rapid recovery, was the demise
8) In the late 1950s and early 1960s, postwar U.S. economic performance led to the
formulation of and belief in a
A) vertical Phillips curve in the short and long runs.
B) vertical Phillips curve in the long run.
C) horizontal Phillips curve in the short and long runs.
D) downward-sloping Phillips curve in the short and long runs.
9) The U.S. economy in the 1960s was dominated by a massively expansionary _______
policy that ended up ___________________.
A) monetary, overstimulating the economy
B) monetary, being impotent in ending the long stagnation of that decade
C) fiscal, overstimulating the economy
D) fiscal, being impotent in ending the long stagnation of that decade
10) The great failure of activist fiscal policy in the 1960s was its
A) timidity in the face of persistent stagnation.
B) over-reliance on tax cuts to the exclusion of government spending programs.
C) delay in reversing course as the economy became overstimulated.
D) limited role as an accommodator of an activist monetary policy.
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11) By the end of the 1960s, fiscal activism was falling out of favor due to its long __________
lag and, as predicted by the permanent-income hypothesis, the ______________ of the
1968 tax surcharge.
A) legislative, ineffectiveness
B) legislative, overstimulation
C) effectiveness, ineffectiveness
D) effectiveness, overstimulation
12) An important failure of the "new economics" of the 1960s was its ____________ monetary
policy and its ability if made ________ to offset a tighter fiscal policy.
A) denigration of, tighter
B) denigration of, easier
C) overemphasis on, tighter
D) overemphasis on, easier
13) The ________ of the 1968 tax surcharge led to the prominence of the developer of the
permanent-income hypothesis that predicted it, ______________.
A) success, Walter Heller
B) success, Milton Friedman
C) failure, Walter Heller
D) failure, Milton Friedman
14) In the late 1960s, the Friedman-Phelps "natural rate hypothesis" predicted from the
microeconomic structure of the labor market that the long-run Phillips curve is
__________, while macroeconomic events caused a very ________ acceptance of this
change in aggregate supply theory.
A) horizontal, rapid
B) horizontal, gradual
C) vertical, rapid
D) vertical, gradual
15) The "new classical" economics took advantage of the disarray and partial eclipse of
Keynesian economics to reestablish macro model-building based on the assumption of price
_________ and market ____________.
A) flexibility, clearing
B) flexibility, non-clearing
C) stickiness, clearing
D) stickiness, non-clearing
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16) The work of Robert Lucas and Thomas Sargent ___________ the existence of a downwardsloping Phillips curve in the ____________.
A) first proposed, short run
B) first proposed, short and long runs
C) cast further doubt on, long but not short run
D) cast further doubt on, short and long runs
17) Most Keynesian macroeconomists today _______ the natural rate hypothesis, which has
helped lead to the _____________ of Keynesian macroeconomics in the 1990s.
A) reject, near-total extinction
B) reject, revival
C) accept, near-total extinction
D) accept, revival
18) The "stagflation" of the 1970s _____________ Keynesian macroeconomics until the
Keynesians started to build the consequences of changing inflationary expectations and
________ shocks into their models.
A) reinforced the dominance, supply
B) reinforced the dominance, demand
C) deepened the eclipse, supply
D) deepened the eclipse, demand
19) The tax cuts and entitlement program expansions of the 1980s led to such ______ federal
deficits in the 1990s that fiscal policy _______________ for smoothing-out business cycle
fluctuations.
A) small, again became the preferred tool
B) small, was all but abandoned
C) large, again became the preferred tool
D) large, was all but abandoned
20) The depth of the 1981-1982 recession caused the Fed to abandon its experiment in targeting
______________ and move to what now appears to be _________ growth rule.
A) money growth, an interest rate
B) money growth, a real GDP growth
C) money growth, an unemployment rate
D) interest rates, a high-powered money growth
E) interest rates, a nominal GDP growth
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21) Memory of the supply shocks of the 1970s _________ the growth of real-business-cycle
theory, while it was being ________ by new classical work on model-building methods.
A) assisted, assisted as well
B) assisted, hindered
C) hindered, assisted
D) hindered, hindered as well
22) Two emerging trends in 1990s macroeconomic thinking are that fiscal policy should be
designed according to its ______________ consequences and that monetary aggregates
________ useful in the conduct of monetary policy.
A) short-run stabilization, are no longer
B) short-run stabilization, continue to be
C) long-run growth, are no longer
D) long-run growth, continue to be
23) There is currently a resurgence in Keynesian macroeconomics, based on the assumptions of
market _________ and ____________ expectations.
A) non-clearing, adaptive
B) non-clearing, rational
C) clearing, adaptive
D) clearing, rational
24) The U.S. inflation of the 1960s was spread overseas via the _______ exchange rates of the
time and led to the __________ of the Bretton Woods system.
A) fixed, collapse
B) fixed, establishment
C) flexible, collapse
D) flexible, establishment
25) Flexible exchange rates, proving to be much ______ volatile than economists predicted,
have led to ______ calls for a return to fixed exchange rates.
A) less, few
B) less, many
C) more, few
D) more, many
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26) When did the Fed fail to engage in a pre-emptive strike to keep the economy at or near the
natural rate of unemployment?
A) 1994
B) 1998
C) 2001
D) None of the above. The Fed acted in each of these years.
27) The economic expansion which began in March 1991 was unusual in that
A) the first year and a half of the expansion was very weak and unemployment did not
peak until 16 months after the trough.
B) the inflation rate decelerated from 1993 to 1997 rather than accelerating.
C) monetary policy was tightened substantially in 1994 even though there was no
evidence of accelerating inflation.
D) all of the above.
28) In the 1990s
A) growth of M1 was more stable than growth of nominal GDP, and velocity soared
through most of the period.
B) growth of nominal GDP was more stable than growth of M1, and velocity soared
through most of the period.
C) growth of M1 was more stable than growth of nominal GDP, and velocity plummeted
through most of the period.
D) growth of nominal GDP was more stable than growth of M1, and velocity plummeted
through most of the period.
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