Transcript Economics for Today 2nd edition Irvin B. Tucker

Chapter 20A
Practice Quiz
Tutorial
Policy Disputes Using the SelfCorrecting Aggregate Demand
and Supply Model
©2000 South-Western College Publishing
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1. Assume the economy is experiencing a
recessionary gap. Classic economists would
support which of the following policies:
a.
b.
c.
d.
Contractionary
Expansionary
Nonintervention
Fixed wage
c. Under nonintervention policy, the classical
assumption is that nominal wages are flexible
and unemployed workers compete for jobs. As
the wage rate falls, the short-run aggregate
supply curve increases and restores full
employment real GDP.
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2. Assume the economy is in short-run equilibrium at a
real GDP below its potential real GDP. According to
classical self-correction theory, which of the
following policies should be followed?
a. The Federal Reserve should increase the
money supply.
b. The federal government should increase
spending.
c. The federal government should cut taxes.
d. None of the above
d. Answers a.,b., and c., are examples of
interventionist monetary and fiscal
policies.
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3. Assuming the economy is in a recession, classical
economists predict that:
a. wages will remain fixed.
b. monetary policy will sell government
securities.
c. higher wages will shift the short-run aggregate
supply curve leftward.
d. lower wages will shift the short-run aggregate
supply curve rightward.
d. According to classical economists, competition
among employed workers during a recession
causes a reduction in the cost of labor. As a
result, firms can supply more real GDP
at each possible price level, which
is represented by an increase in the
short-run aggregate supply curve.
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4. Assume the economy is operating at a real GDP
below full-employment real GDP. Keynesian
economists would prescribe which of the following
policies:
a. Nonintervention
b. Fixed rule
c. Contractionary
d. Expansionary
d. Keynesians advocate discretionary fiscal
policy and discretionary monetary policy.
Under this expansionary policy, government
increases spending or decrease taxes while the
Fed increases the money supply.
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5. Assume the economy is in short-run equilibrium at a
real GDP above its potential real GDP. According to
Keynesian theory, which of the following policies
should be followed?
a. The Federal Reserve should use open market
operations and buy U.S. government securities.
b. The Federal Reserve should follow a fixed rule.
c. The federal government should cut taxes.
d. Fiscal policy and monetary policy should be
contractionary.
d. Keynesians advocate discretionary fiscal policy
and discretionary monetary policy. Under
contractionary policy, government decreases
spending or increases taxes while the Fed
decreases the money supply.
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6. Assume the economy is experiencing an
inflationary gap. Keynesian economists would
believe that:
a. wages will remain inflexible.
b. the federal government should decrease
spending.
c. the Federal Reserve should lower the
interest rate.
d. The federal government should increase
spending to shift the aggregate demand
curve rightward.
b. Decreasing government spending shifts the
aggregate demand curve leftward until fullemployment real GDP is restored.
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END
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