neoclassical

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Macroeconomics,7e(Blanchard)

Chapter24:Epilogue:TheStoryofMacroeconomics

24.1KeynesandtheGreatDepression

1)WhichofthefollowingstatementsaboutKeynes'contributiontomacroeconomicsiscorrect?

A)Althoughhepublishedhismostimportantideasabouttheeconomylongbeforethe1930s,

feweconomistspaidattentiontoKeynesuntiltheGreatDepressionprovedhimcorrect.

B)Keynesarguedthatdepressionsandrecessionswerealmostalwayscaudbychangesinthe

moneysupply.

C)Keynesarguedthatbalancingthebudgetcouldbeaneffectivewaytocurearecessionor

depression.

D)alloftheabove

E)noneoftheabove

Answer:E

Diff:1

2)AccordingtoKeynes,

A)theGreatDepressionwascaudbyill-consideredexpansionaryfiscalpolicy.

B)balancingthebudgetinthemidstofadepressionwouldbeariousmistake.

C)inflationisalwaysandeverywhereamonetaryphenomenon.

D)thePhillipscurveisstable.

E)noneoftheabove

Answer:B

Diff:1

3)Liquiditypreferencerefersto

A)Keynes'nameforthedemandformoney.

B)the"randomwalk"behaviorofconsumptionspending.

C)monetaristxplanationsforstagflation.

D)realbusinesscycletheorists'explanationsforstagflation.

E)thecontroversysparkedbytheLucascritique.

Answer:A

Diff:1

4)"Inthelongrun,we'realldead"wasKeynes'wayofsayingthat

A)intellectualpursuits,likeunderstandingtheeconomy,areunimportantintheschemeof

things.

B)noonewouldappreciatehistheoriesduringhislifetime.

C)thereisnopointinsavingforretirement.

D)itisveryimportanttosaveforone'sretirement.

E)noneoftheabove

Answer:E

Diff:1

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5)"Effectivedemand"reprentswhichofthefollowing?

A)moneydemand

B)demandforexports

C)domesticdemand

D)thedemandforlabor

E)aggregatedemand

Answer:E

Diff:1

6)Liquiditypreferencereferstothetheoryof

A)moneydemand.

B)consumption.

C)investment.

D)expectations.

Answer:A

Diff:1

24.2TheNeoclassicalSynthesis

1)Theneoclassicalsynthesis

A)wasanamecoinedbyKeyneshimlfforhisnewtheories.

B)rejectedvirtuallyallofKeynes'insights.

C)heldthateconometricmodelsoftheeconomycouldnotbeudtopredictthefuture.

D)heldthateconomyalwaysoperatedatorverynearthenaturalrateofunemployment.

E)wasthedominantschoolofthoughtamongeconomistsinthe1950sand1960s.

Answer:E

Diff:1

2)Whichofthefollowingwasnotpartoftheneoclassicalsynthesis?

A)theIScurve

B)theLMcurve

C)thePhillipscurve

D)aggregatedemand

E)rationalexpectations

Answer:E

Diff:1

3)Whichofthefollowingschoolsofthoughtadvidagainstfine-tuning,duetoourlimited

understandingoftheeconomy?

A)Monetarist

B)Keynesian

C)NewKeynesianism

D)Newgrowth

E)Neoclassical

Answer:E

Diff:1

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4)Theintellectualleaderofthemonetaristswas

A)RobertLucas.

B)MiltonFriedman.

C)JohnMaynardKeynes.

D)PaulRomer.

E)JohnTaylor.

Answer:B

Diff:1

5)Inthe1960s,themonetaristschoolofthoughtheldthat

A)moy.

B)thereisalong-runtradeoffbetweeninflationandunemployment.

C)effortstofine-tunetheeconomyarelikelytodomoreharmthangood.

D)alloftheabove

E)noneoftheabove

Answer:C

Diff:1

6)IftheIScurveisrelativelysteep,then

A)therecanbenolong-runtradeoffbetweeninflationandunemployment.

B)monetarypolicycannotbeveryeffectiveinchangingGDP.

C)rationalexpectationstheoryisprobablycorrect.

D)Ricardianequivalencemostlikelyholds.

E)budgetdeficitswillnotaffectfuturecapitalaccumulation.

Answer:B

Diff:1

7)Duringthe1970sand1980s,macroeconomistswerebusyintegratingtheinsightsofwhichof

thefollowingintotheirideasabouttheeconomy?

A)realbusinesscycletheory

B)Keynesiantheory

C)supplysideeconomics

D)classicalmacroeconomics

E)noneoftheabove

Answer:E

Diff:1

8)Theneoclassicalsynthesishademergedbywhatdecade?

A)1930s

B)1940s

C)1950s

D)1960s

E)1990s

Answer:C

Diff:1

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9)TheIS-LMmodelwasdevelopedby

A)FriedmanandPhelps.

B)HicksandHann.

C)ModiglianiandFriedman.

D)LucasandSargent.

E)noneoftheabove

Answer:E

Diff:1

10)Thetheoriesofconsumptionweredevelopedby

A)FriedmanandPhelps.

B)HicksandHann.

C)ModiglianiandFriedman.

D)LucasandSargent.

Answer:C

Diff:1

11)Thetheoriesofinvestmentweredevelopedby

A)FriedmanandPhelps.

B)HicksandHann.

C)ModiglianiandFriedman.

D)LucasandSargent.

E)TobinandJorgenson.

Answer:E

Diff:1

12)WhichofthefollowingarguedthattheGreatDepressionwascaudbymonetaryfactors?

A)FriedmanandSchwartz

B)HicksandHann

C)ModiglianiandFriedman

D)LucasandSargent

E)TobinandJorgenson

Answer:A

Diff:1

13)ExplainveralofthekeycontributionsofKeynes.

Answer:Obviously,sshouldinclude

topicslike:theimportanceofexpectations,businesscycletheory,theimportanceofaggregate

demandincausingfluctuations,liquiditypreference,andtheconceptofthemultiplier.

Diff:1

14)Explainwhatismeantbyliquiditypreference.

Answer:LiquiditypreferenceisthephraKeynesgavetomoneydemand.

Diff:1

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15)Discusswhatismeantbytheneoclassicalsynthesisandexplainhowitemerged.

Answer:Thisisthetitlegiventowhatwasbelievedtobetheemergingconnsusin

economics.

Diff:1

16)Inthe1960s,n

veralaspectsofthisdebate.

Answer:Therewerethreekeyareasofthisdebate:(1)therelativeimportanceofmonetaryand

fiscalpolicy;(2)theperceivedstabilityofthePhillipscurve;and(3)theroleofpolicyto

stabilizetheeconomy.

Diff:1

24.3TheRationalExpectationsCritique

1)Whichofthefollowingeventsledtothecrisisinmacroeconomicsandtothedevelopmentof

rationalexpectationstheory?

A)theGreatDepression

B)thestockmarketcrashof1987

C)thestockmarketspeculativebubbleofthelate1990s

D)stagflationinthe1970s

E)largebudgetdeficitsinthe1980s

Answer:D

Diff:1

2)MiltonFriedmanattributedtheGreatDepressionprimarilyto

A)thegovernment'sfailuretorespondtoanincreainthebudgetdeficit.

B)areductioninthemoneysupply.

C)economists'andpolicy-makers'failuretoacknowledgetheirlimitedknowledge.

D)thefailureofwagestori.

E)inaccurateexpectationsbyconsumersandfirms.

Answer:B

Diff:1

3)Whichofthefollowingisanimplicationofrationalexpectationstheory?

A)Deviationsofoutputfromthenaturalratearelikelytoberiousandlong-lived.

B)Theeconomyislikeacomplexmachine,thatneedstobeoptimallycontrolledwiththeproper

policy.

C)Macroeconometricmodelsbadonpastbehaviorwillnotbeveryufulinformulating

policy.

D)Wagesandpricesaretalmostentirelyatrandom,soitispointlesstotrytomodeltheir

behavior.

E)Businesscyclesalmostalwaysresultfromashiftinaggregatedemand.

Answer:C

Diff:1

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4)Mosteconomistswouldagreethat,unlessitincorporatesrationalexpectationsorsomething

likeit,amodelcannotaccountfor

A)theGreatDepression.

B)shiftsinaggregatesupply.

C)therelationshipbetweenconsumptionandincome.

D)thestagflationofthe1970s.

E)thedifferentinitialimpactofapermanentversusatemporarypolicychange.

Answer:E

Diff:1

5)Accordingtorationalexpectationstheory,monetarypolicywillaffectoutputonlyifitis

A)anticipated.

B)unanticipated.

C)averylargechange.

D)averysmallchange.

E)apolicythathasbeentriedinthepast.

Answer:A

Diff:1

6)Thestaggeringofwageandpricedecisionssuggeststhat

A)peopledonotposssrationalexpectations.

B)peopledoposssrationalexpectations.

C)theeconomywilladjustslowlytoshockvenifpeopleposssrationalexpectations.

D)theLucascritiqueintirelycorrect.

E)realbusinesscycletheoryiscorrect.

Answer:C

Diff:1

7)Whichofthefollowingarguedthatalong-runtrade-offbetweeninflationandunemployment

couldnotexist?

A)FriedmanandPhelps

B)HicksandHann

C)ModiglianiandFriedman

D)LucasandSargent

E)TobinandJorgenson

Answer:A

Diff:1

8)ThesteeperistheIScurve,

A)themoreeffectiveismonetarypolicy.

B)thelesffectiveismonetarypolicy.

C)theeffectivenessofmonetarypolicydoesnotchange.

D)agivenchangeinthemoneysupplywillhaveagreatereffectonoutput.

Answer:A

Diff:1

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9)AstheIScurvebecomesflatter,weknowthat

A)agivenchangeinthemoneysupplywillcaualargerchangeinoutput.

B)agivenchangeinthemoneysupplywillcauasmallerchangeinoutput.

C)agivenchangeinthemoneysupplywillcauthesamechangeinoutput.

D)monetarypolicybecomeslesffective.

Answer:B

Diff:1

10)Stagflationrefersto

A)areductionininflation.

B)asimultaneousreductionininflationandreductioninunemployment.

C)aliquiditytrap.

D)reductioninthepricelevelandareductionintheunemploymentrate.

E)noneoftheabove

Answer:E

Diff:1

11)Whichofthefollowingledastrongattackagainstmainstreammacroeconomistsduringthe

1970s?

A)FriedmanandPhelps

B)HicksandHann

C)ModiglianiandFriedman

D)Lucas,Barro,andSargent

Answer:D

Diff:1

12)TherearchbyRobertHallonthetheoryofconsumptionsuggeststhatthebestforecastof

consumptionfornextyearwouldbe

A)unpredictable.

B)random.

C)thisyear'sconsumption.

D)lastyear'sconsumption.

Answer:C

Diff:1

13)Themorestaggeredarelaborcontracts,

A)themorerapidlytheeconomywilladjusttochangesinaggregatedemand.

B)thelessrapidlytheeconomywilladjusttochangesinaggregatedemand.

C)thegreatertheinflationaryeffectsofagivenchangeinmoneygrowthinthemediumrun.

D)thelessinflationaryeffectsofagivenchangeinmoneygrowthinthemediumrun.

Answer:A

Diff:1

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14)Thenewclassicalinterpretationoftheeconomysuggeststhat

A)outputisalwaysabovethenaturallevel.

B)outputisalwaysbelowthenaturallevel.

C)outputisalwayqualtothenaturallevel.

D)recessionswillnotoccur.

Answer:C

Diff:1

15)TheflatteristheIScurve,

A)themoreeffectiveismonetarypolicy.

B)thelesffectiveismonetarypolicy.

C)theeffectivenessofmonetarypolicydoesnotchange.

D)agivenchangeinthemoneysupplywillhaveasmallereffectonoutput.

Answer:B

Diff:1

16)AstheIScurvebecomessteeper,weknowthat

A)agivenchangeinthemoneysupplywillcaualargerchangeinoutput.

B)agivenchangeinthemoneysupplywillcauasmallerchangeinoutput.

C)agivenchangeinthemoneysupplywillcauthesamechangeinoutput.

D)monetarypolicybecomesmoreeffective.

Answer:A

Diff:1

17)Thelessstaggeredarelaborcontracts,

A)themorerapidlytheeconomywilladjusttochangesinaggregatedemand.

B)thelessrapidlytheeconomywilladjusttochangesinaggregatedemand.

C)thegreatertheinflationaryeffectsofagivenchangeinmoneygrowthinthemediumrun.

D)thelessinflationaryeffectsofagivenchangeinmoneygrowthinthemediumrun.

Answer:B

Diff:1

18)Discusssomeoftheimplicationsofrationalexpectations.

Answer:Answersshouldincludeadiscussionoftheimplicationsofrationalexpectationson:

(1)ourunderstandingofthebehaviorofconsumptionandfinancialmarketvariables;(2)the

determinantsofwageandpricettingbehavior;and(3)thetheory,implementation,and

effectivenessofpolicy.

Diff:1

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19)First,whatistheLucascritique?Second,explainhowitmightrelatetotheimplementation

ofmonetarypolicy.

Answer:TheLucascritiquereferstotheargumentmadebyRobertLucasthatusingexisting

macromodelstomakepredictionsabouttheeffectsofpropodpolicywouldnotbesuccessful.

Themodels'predictionswerebadonpreviousrelationshipsthat,asLucasnoted,wouldno

netarypolicyisimplemented,themodels

mightpredict,forexample,r,aswenowknow,expectationsofthe

effectsofthepolicieswouldchange.

Diff:1

24.4DevelopmentsinMacroeconomicsupto2009Crisis

1)Accordingtorealbusinesscycletheorists,

A)fiscalpolicyexplainsmostchangesinoutput.

B)priceandwagerigidityexplainmostchangesinoutput.

C)efficiencywagetheoryexplainswagerigidity.

D)changesinoutputprimarilyreprentchangesinthenaturallevelofoutput.

E)fiscalpolicyexplainsmostchangesinefficiencywagetheory.

Answer:D

Diff:1

2)Oneproblemwithrealbusinesscycletheoryisthat

A)itismoresuccessfulinexplainingexpansionsthaninexplainingcontractions.

B)itreliesalmostentirelyonKeynes'originalideas,ignoringmuchoftheprogressmadesince

then.

C)ittreatsgovernmentofficialsaswell-meaningpublicrvants,despitemuchevidencetothe

contrary.

D)itdefines"productivity"inanewandnotveryintuitiveway.

E)itsmodelsdownplaytheimportanceoftechnologicalprogressintheeconomy.

Answer:A

Diff:1

3)Thoeconomistswhoattempttoexplainwhywagesandpricesdonotfreelyadjustwould

mostlikelybe

A)realbusinesscycletheorists.

B)newclassicaleconomists.

C)newKeynesianeconomists.

D)newgrowththeorists.

E)noneoftheabove

Answer:C

Diff:1

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4)Theexistenceofmenucostsareoftenudtoexplainwhy

A)fiscalandmonetarypoliciesshouldberelativelyeffective.

B)thepriceofrvices,likethoprovidedbyrestaurantsandbarbers,riatafasterratethan

thepriceofgoods,likeautomobilesandclothing.

C)foodpricestendtoridisproportionatelyrapidlyintheconsumerpriceindex.

D)priceandwageadjustmentswillberelativelyrapid.

E)peopleprefertolookbackward,insteadofforward,whenanticipatingthefuture.

Answer:A

Diff:1

5)Ifconsumersareveryforesighted,wewouldexpectactualconsumptionspendingto

A)increaduringrecessions.

B)increaduringepisodesofstagflation.

C)havenorelationtowealth.

D)remblea"randomwalk."

E)beentirelypredictable.

Answer:D

Diff:2

6)Acorebeliefofmodernmacroeconomicsisthatintheshortrun,

A)fiscalpolicyismoreeffectiveinchangingoutputthanmonetarypolicy.

B)monetarypolicyismoreeffectiveinchangingoutputthanfiscalpolicy.

C)fluctuationsinaggregatedemandaffectunemployment.

D)fluctuationsinaggregatedemandhavenoimpactonthepricelevel.

E)theeconomyalwaysoperatesatornearthenaturalrateofunemployment.

Answer:C

Diff:1

7)Acorebeliefofmodernmacroeconomicsisthatinthelongrun,

A)achangeinmoneygrowthwillaffectthelevelofoutput,butnotitscomposition.

B)achangeinmoneygrowthwillaffectthecompositionofoutput,butnotitslevel.

C)outputcandeviatepermanentlyfromitsnaturallevel.

D)achangeinfiscalpolicywillnotaffectthecompositionofoutput.

E)greatersavingwillresultingreateroutput.

Answer:E

Diff:1

8)Oneofthemostimportantareasofdisagreementamongmacroeconomiststodayisover

A)theslopeoftheIScurve.

B)theslopeoftheLMcurve.

C)thedefinitionofconsumptionspending.

D)thedefinitionofgovernmentspending.

E)noneoftheabove

Answer:E

Diff:1

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9)BoththenewclassicalandnewKeynesianmodelshadincommonthebeliefthat

A)inthemediumrun,outputreturnstoitsnaturallevel.

B)outputisalwaysatitsnaturallevel.

C)intheshortrun,outputwouldlikelydeviatefromitsnaturallevel.

D)noneoftheabove

Answer:A

Diff:1

10)Themaindebateduringthe1960swas

A)betweenKeynesiansandclassicals.

B)betweennewKeynesiansandnewclassicals.

C)betweenKeynesiansandmonetarists.

D)betweennewKeynesiansandmonetarists.

Answer:C

Diff:1

11)Theintellectualleaderofnewclassicalsis

A)EdwardPrescott.

B)JohnTaylor.

C)StanleyFischer.

D)BenBernanke.

Answer:A

Diff:1

12)Discussnewclassicaleconomicsandrealbusinesscycletheory.

Answer:Newclassicaleconomicsreferstothatareaofrearchwhereitisassumedthatthere

fairlylogicalextensionofLucas'workon

sinesscycletheoryattemptstoexplainfluctuationsinoutputas

changesinthenaturallevelofoutput.

Diff:1

13)Explainwhatismeantby"newKeynesians"anddiscusssomeoftherearchconductedin

thisarea.

Answer:NewKeynesiansfocusontheimplicationsofmarketimperfectionssuchasnominal

archhasalsofocudonthedeterminationofwages(encywage

theory).Othershavefocudon"menucosts"toexplainwhypricesmightnotadjustasrapidly

toclearproductmarkets.

Diff:1

14)Brieflydiscussnewgrowththeory.

Answer:Newgrowththeoryfocusonthedeterminantsoftechnologicalprogressandonthe

extenttowhichincreasingreturnstoscalemightexist.

Diff:1

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15)Explainthemenucostexplanationofoutputfluctuations.

Answer:Eachwagetterorpricetterislargelyindifferentastowhenandhowoftenhe

ore,evensmallcostsofchangingpricescanleadto

aggeringleadstoslowadjustmentoftheprice

levelandtolargeaggregateoutputfluctuationsinrespontomovementsinaggregatedemand.

Inshort,decisionsthatdonotmattermuchattheindividuallevel(howoftentochangepricesor

wages)leadtolargeaggregateeffects(slowadjustmentofthepricelevel,andshiftsinaggregate

demandthathavealargeeffectonoutput).

Diff:1

24.5FirstLessonsforMacroeconomicsaftertheCrisis

1)Thecrisisreflectsamajorintellectualfailureofmacroeconomicstounderstandthe

macroeconomicimportanceof

A)financialsystem.

B)growth.

C)unemployment.

D)inflation.

Answer:A

Diff:1

2)WorkbyDougDiamondandPhilipDybviginthe1980shadclarifiedthenatureof

A)unemployment.

B)bankruns.

C)inflation.

D)growth.

Answer:B

Diff:1

3)Economist________showsthe"limitsofarbitrage."

A)DougDiamond

B)AndreiShleifer

C)PhilipDybvig

D)RichardThaler

Answer:B

Diff:1

4)TheGreatDepressionhadledeconomiststosuggestalargerrolefor

A)marketmechanism.

B)governmentintervention.

C)pricemechanism.

D)internationaltrade.

Answer:B

Diff:1

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5)achofthem.

Answer:Newclassical:theextenttowhichfluctuationsinoutputareexplainedbymovements

nesian:exploringthenatureofmarketimperfectionsand

nominalwth

theory:examinesthedeterminantsoftechnologicalprogressandtheimplicationsofincreasing

returnstoscaleforeconomicgrowth.

Diff:1

6)Discussthemajorintellectualfailureonmacroeconomicsfromthecrisis.

Answer:Thefailurewasinnotrealizingthatsuchalargecrisiscouldhappen,thatthe

characteristicsoftheeconomyweresuchthatarelativelysmallshock,inthiscathedecrea

gprices,

sourceofthefailure,inturn,wasalackoffocusontheroleofthefinancialinstitutionsinthe

economy.

Diff:1

7)Discussrearchontheroleofbanksandotherfinancialinstitutionsintheintermediationof

fundsbetweenlendersandborrowers.

Answer:WorkbyDougDiamondandPhilipDybviginthe1980shadclarifiedthenatureof

bankruns:liquid

problemcouldonlybeavoidedbytheprovisionofliquiditybythecentralbankifandwhen

BengtHolmströmandJeanTirolehadshownthatliquidityissueswere

oral

economistshadpointedtothewayinwhichindividualsdifferfromtherationalindividualmodel

typicallyudineconomics,andhaddrawnimplicationsforfinancialmarkets.

Diff:1

8)Discusstheconnsusontheadjustmentprocessafterthecrisis.

Answer:Thecrisishasraidalargerissue,abouttheadjustmentprocessthroughwhichoutput

eisaconnsus,itmightbethatwithrespecttosmallshocks

andnormalfluctuations,theadjustmentprocessworks,andpolicycanacceleratethisreturn;but

that,inrespontolarge,exceptionalshocks,thenormaladjustmentprocessmayfail,theroom

forpolicymaybelimited,anditmaytakealongtimefortheeconomytorepairitlf.

Diff:1