1. The discipline of macroeconomics developed during the:

a. early phase of the Industrial Revolution.

b. American Revolution.

c. Civil War.

d. Great Depression.

2. Keynesian economics focuses on situations in which:

a. the short-run aggregate supply curve is upward sloping.

b. the short-run aggregate supply curve is downward sloping.

c. the short-run aggregate supply curve is vertical.

d. changes in aggregate demand affect only the price level, and leave output unchanged.

3. Economists using a Keynesian model will suggest that:

a. supply shocks do not affect real output.

b. demand shocks do not affect real output.

c. shifts in the aggregate demand curve will affect output and employment as well as aggregate prices.

d. shifts in the aggregate demand curve will affect aggregate prices but will leave output and employment unchanged.

4. In Keynesian economics:

a. there is no business cycle.

b. changes in aggregate demand do not affect real output.

c. the level of business confidence is not a factor in determining real output.

d. the upward slope of the short-run aggregate supply curve allows expansionary fiscal policy to be effective during periods of recession.

5. Macroeconomic policies are designed to address:

a. the transition from an agricultural economy to an industrial economy.

b. the transition from an industrial economy to a service economy.

c. fluctuations in the level of real output.

d. the problems that arise from international trade.

6. The Great Depression was characterized by:

a. falling prices and rising real output.

b. falling prices and falling real output.

c. rising prices and falling real output.

d. rising prices and rising real output.

7. Keynesian economics is characterized by a(n):

a. emphasis on the short run rather than the long run.

b. emphasis on the long run rather than the short run.

c. model in which the short-run aggregate supply curve is vertical.

d. commitment to a monetary policy rule.

8. Keynesian economics:

a. asserts that the business cycle arises from supply shocks, not demand shocks.

b. provides a rationale for macroeconomic policy activism.

c. arose as a response to rational expectations theory.

d. arose as a response to monetarism.

9. Keynes asserted that the Great Depression could be ended by:

a. raising interest rates.

b. restricting imports.

c. increasing the money supply.

d. using federal deficit spending to boost aggregate demand.

10. A shift from relying on fiscal policy to relying on monetary policy:

a. makes the short-run aggregate supply curve steeper.

b. lessens the importance of the Federal Reserve in the economy.

c. makes macroeconomic policy less of a political issue.

d. increases the importance of Congress in economic policy issues.

11. Milton Friedman argued that:

a. a discretionary monetary policy should be used to offset the fluctuations of the business cycle.

b. the effectiveness of expansionary fiscal policy is often limited by the effects of crowding out.

c. a central bank following a monetary policy rule would destabilize the economy.

d. the velocity of money is unstable.

12. To the extent that there is volatility in the velocity of money:

a. Congress will have to execute monetary policy, rather than the Federal Reserve.

b. a monetary policy rule will not be an effective tool of stabilization.

c. people will not be able to plan the timing of their consumption expenditures.

d. the natural rate of unemployment will be lowered.

13. The Friedman-Phelps (natural rate) hypothesis predicted that:

a. the apparent trade off between inflation and unemployment would not survive once expectations of high inflation were built into public perceptions.

b. effective policy action by the Federal Reserve could keep unemployment below its natural rate.

c. effective policy action by Congress could keep unemployment below its natural rate.

d. the velocity of money would become volatile when the economy reached a situation of full employment.

14. If fiscal policy is used to stimulate the economy at a key time prior to an election:

a. the result will be a political business cycle.

b. it will not create any inflationary pressure.

c. there will be no short-term effect on unemployment.

d. it will cause a supply shock rather than a demand shock.

15. The Federal Reserve adopted a monetarist approach when it:

a. ceased engaging in open-market operations.

b. tried to push the rate of unemployment below the natural rate.

c. announced target ranges for the money supply and dropped interest rate targets.

d. announced target ranges for interest rates and dropped money supply targets.

16. A liquidity trap arises when:

a. the actual unemployment rate is less than the natural rate.

b. consumers do not have cash to spend.

c. monetary policy is ineffective because the interest rate is down against the zero bound.

d. asset prices peak, just prior to a plunge.

17. New classical macroeconomics is built on the two concepts of:

a. an upward-sloping aggregate supply curve and a vertical aggregate demand curve.

b. the liquidity trap and the political business cycle.

c. discretionary monetary policy and an emphasis on the short run.

d. rational expectations and real business cycle theory.

18. In the Keynesian framework of macroeconomic policy:

a. all expectations are rational.

b. a recessionary gap can be corrected by an increase in government expenditures.

c. an expansionary fiscal policy will permanently change inflationary expectations.

d. business cycles are caused by supply shocks.

19. To the extent that people have rational expectations:

a. stabilization policies will be effective only when they are unanticipated.

b. total factor productivity will remain constant.

c. workers will be slow to respond to changes in inflation.

d. workers, investors, and consumers will use only information about past economic conditions, and ignore information about current conditions, when making decisions.

20. Which of the following statements is LEAST likely to be supported by all macroeconomists?

a. Changes in the money supply will affect both the overall level of prices and the level of real GDP.

b. Tax cuts do not increase aggregate demand.

c. Monetary policy, rather than fiscal policy, should play a lead role in stabilization.

d. The central bank should be independent of political pressure.