11) During the 1970s and 1980s, macroeconomists were busy integrating the insights of which of the following into their ideas about the economy?
A) real business cycle theory
B) Keynesian theory
C) supply side economics
D) classical
E) none of the above
12) Which of the following events led to the crisis in macroeconomics and to the development of rational expectations theory?
A) the Great Depression
B) the stock market crash of 1987
C) the stock market speculative bubble of the late 1990s
D) stagflation in the 1970s
E) large budget deficits in the 1980s
13) Milton Friedman attributed the Great Depression primarily to
A) the government's failure to respond to an increase in the budget deficit.
B) a reduction in the money supply.
C) economists' and policy-makers' failure to acknowledge their limited knowledge.
D) the failure of wages to rise.
E) inaccurate expectations by consumers and firms.
14) Which of the following is an implication of rational expectations theory?
A) deviations of output from the natural rate are likely to be serious and long-lived.
B) the economy is like a complex machine, that needs to be optimally controlled with the proper policy.
C) macroeconometric models based on past behavior will not be very useful in formulating policy.
D) wages and prices are set almost entirely at random, so it is pointless to try to model their behavior.
E) business cycles almost always result from a shift in aggregate demand.
15) Most economists would agree that, unless it incorporates rational expectations or something like it, a model cannot account for
A) the Great Depression.
B) shifts in
C) the relationship between consumption and income.
D) the stagflation of the 1970s.
E) the different initial impact of a permanent versus a temporary policy change.
16) According to rational expectations theory,
A) anticipated.
B) unanticipated.
C) a very large change.
D) a very small change.
E) a policy that has been tried in the past.
17) If consumers are very foresighted, we would expect actual consumption spending to
A) increase during recessions.
B) increase during episodes of stagflation.
C) have no relation to wealth.
D) resemble a "random walk."
E) be entirely predictable.
18) The staggering of wage and price decisions suggests that
A) people do not possess rational expectations.
B) people do possess rational expectations.
C) the economy will adjust slowly to shocks even if people possess rational expectations.
D) the Lucas critique is entirely correct.
E) real business cycle theory is correct.
19) According to real business cycle theorists,
A) fiscal policy explains most changes in output.
B) price and wage rigidity explain most changes in output.
C) efficiency wage theory explains wage rigidity.
D) changes in output primarily represent changes in the natural level of output.
E) fiscal policy explains most changes in efficiency wage theory.
20) One problem with real business cycle theory is that
A) it is more successful in explaining expansions than in explaining contractions.
B) it relies almost entirely on Keynes' original ideas, ignoring much of the progress made since then.
C) it treats government officials as well-meaning public servants, despite much evidence to the contrary.
D) it defines "productivity" in a new and not very intuitive way.
E) its models downplay the importance of technological progress in the economy.
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