Exam 2

Question 1

When an economy falls into a recession or depression Keynes argued that government should:

Answer 1

Increase spending to solve the problem.

Question 2

If the US economy fell into a severe recession, a Keynesian economistwould likely advise the president to engage in:

Answer 2

An expansionary fiscal policy and if necessary run budget deficits.

Question 3

When economists study the business cycle, they use:

Answer 3

The short-run framework for analysis.

Question 4

Keynes was a clasically traned economist who through his research came to believe that the classical argument that any government attempts to increase aggregate demand (AD) would lead to an increase in inflation without any increase in real GDP was incorrect because:

Answer 4

In a depression or servere recession the long-run aggregate supply curve was likely to be horizontal.

Question 5

Which of the following statements is accurate?

Answer 5

Neo-classical economists will usually advise against running budget deficits during economic contractions.

Question 6

Keynes argued that governments could:

Answer 6

Counter the busines cycle through impacting aggregate demand.

Question 7

If the US economy was experiencing a recession a Keynesian economist would likely advise which of the following policy prescriptions?

Answer 7

The government should reduce income taxes on houselands earning less than $200,000 per year.

Question 8

Which of the following would not directly affect the US GDP?

Answer 8

The federal government increases veteran benefits by 22%.

Question 9

When the US economy fell into recession in 2008 Obama turned to his Council of Economic Advisors for policy advice. If his economic advisors are Keynesians their advice might include which of the following?

Answer 9

Cut payroll and income taxes and increase government spending, therby running a budget deficit.

Question 10

When the Great Depression began in 1929 the economic advice President Hoover received came from neo-classical economists. That advice included which of the following?

Answer 10

Cut government spending in order to balance the budget.

Question 11

When the US economy fell into a recession Obama turned to his Council of Economic Advisors for policy advice. If his economic advisors are laissez-faire economists their advice might include which of the following?

Answer 11

Balance the budget and reduce regulations on business.

Question 12

According to Keynesian economists which of the following would likely increase aggregate demand in the US economy:

Answer 12

The US wins the 2018 World cup in Russia (beating Argentina 4-3 in the final) causing Americans to become increasingly optimistic about the economic future of the United States.

Question 13

Keynes used the phrase “animal spirits” to explain:

Answer 13

Why market economies sometimes swung from extreme optimism to extreme pessimism.

Question 14

When the rate of capacity utilization is relatively low and the unemployment rate is relatively high:

Answer 14

The economy is below potential output.

Question 15

If output moves below potential output, it is most likely that:

Answer 15

Unemployment will increase and inflation will decrease.

Question 16

If the US economy is experiencing a period of economic growth with an accompanying increase in tax revenue for the government, Keynesian economists would likely advise the government to:

Answer 16

Run a budget surplus in order to be better prepared for the next economic downturn.

Question 17

What would be the most likely effect on long-run economic growth if government reduced spending on public schools?

Answer 17

We would see a decrease in long-run economic growth because of the negative effects on human capital.

Question 18

Some economists have concluded that the US economy is experiencing a period of structural stagnation. Their analysis is partly based on data demonstrating:

Answer 18

Many of the workers laid off during recessins are failing to find jobs when the recessions end.

Question 19

According to Keynesian economists a significant decrease in aggregate demand can cause:

Answer 19

A recessionary gap in real GDP leading to high unemployment and a decrease in the price level.

Question 20

Which of the following would most likely lead to increased long-run economic growth:

Answer 20

Programs in high schools that focus on training students to be adaptable and flexible creative thinkers.

Question 21

After watching the Chinese economist Yasheng Huang’s Ted Talk “Does Democracy Stifle Economic Growth?” in which of the following schools of economic thought would you place him?

Answer 21

Institutionalist.

Question 22

If the US economy was experiencing an unsustainable economic expansion (causing an increase in price level and a decrease in the unemployment rate below the target rate) Keynesian economists would likely advise the government to:

Answer 22

Increase income taxes and reduce spending.

Question 23

The US economy enters into a recession. Which of the following is the Federal Reserve likely to undertake:

Answer 23

An expansionary monetary policy - lowering interest rates.

Question 24

Why might a redistribution of income from high-income households to low-income households increase aggregate demand?

Answer 24

Low-income households are more likely to spend their additional income.

Question 25

Peter Clarike in the introduction to his biography on Keynes, states that Keynes argued that “laissez-faire had done its work and now meant superstitous faith in the market”. Keynes was suggesting that the laissez-faire economists were market fundamentalists. What is meant by the term “market fundamentatlist”?

Answer 25

A belief that markets are an end rather than a means to economic growth.

Question 26

Which of the following metrics would be most useful in determining how much money will remain in Ireland to be spent in Ireland’s economy:

Answer 26

GNP.

Question 27

While Keynes agreed with the neoclassical position thaat the self-adjusting mechanism of the market would return an economy to equilibrium in the long-run, he believed:

Answer 27

That an economy could get stuck below potential GDP and remain there for an extended period.

Question 28

The consensus amongst economists is that GDP is a useful metric for calculating the dollar value of goods and services produced by an economy. The consensus is not as strong when the question becomes what metric should guide macroeconomic policy. Which of the following best explains why a growing number of economists argue that a metric other than GDP should guide government macroeconomic policy:

Answer 28

All of the above (The negative extremeties of economic production will often increase GDP, increasing work hours and decreasing leisure hours will increase GDP, and depleting finite resources increases GDP).

Question 29

Which of the following does Yasheng Huang emphasize to explain the faster rate of economic growth of China relative to India?

Answer 29

Human capital.

Question 30

Which of the following would likely have the strongest positive effect on long-run economic growth in the US?

Answer 30

Congress increaes funding for public universities.

Question 31

Simon Kuznets (the chief architect of GDP) likely recommended that GDP should not be used as a metric for living standards because:

Answer 31

Increases in aggregate production do not necessarily increase living standards.

Question 32

Which of the following would a Keynesian economist likely advise if the US economy was contracting?

Answer 32

Increase spending on youth vocational training and lower taxes on small businesses.

Question 33

Yasheng Huang finishes his Ted Talk by asking whether the Dragon ot the Elephant is better positioned for future economic growth? Which of the following most accurately reflects his position regarding this question?

Answer 33

India, because of its political institutions.

Question 34

Which of the following would most likely increase US GDP?

Answer 34

The CIA spends $1,000,000 on landscaping.

Question 35

According to Yasheng Huang, many economists are infatuated with authoritarian governments. Huang uses the “Asian Tigers” as an example of this infatuation. Huang believes the infatuation is the result of which of the following?

Answer 35

Their research methodology is flawed in that they are selecting on the dependent variable.

Question 36

According to the introduction to Peter Clarke’s biography of Keynes, Keynes:

Answer 36

Was capable of changing his thinking when presented with new data.

Question 37

Which of the following would most likely increase aggregate demand?

Answer 37

Redistribute income from high-income household to lower-income households.

Question 38

An immigration bill that gave undocumented workers in the US legal status and made it easier for Nigerians to emigrate to the US would likely:

Answer 38

Increase the long-run aggregate supply curve in the US, shifting it to the right in the AS/AD model.

Question 39

What is meant by the “self-adjusting mechanism of the market”?

Answer 39

Prices will adjust to bring the economy to equilibrium.

Question 40

Which of the following would new growth theorists most likely agree with?

Answer 40

Growth will be achieved through policies that increase aggregate supply.

Question 41

The US Supreme Court recently ruled that the Environemental Protection Agency (EPA) has the legal power to regulate carbon emission from US production facilities. Which of the following best explains why the EPA would act to regulate carbon emissions from power plants and factories?

Answer 41

Regulation will decrease the negative externalities of industrial activity.

Question 42

There is a growing consensus amongst economists that a policy goal other than real GDP should guide government policy in wealthy countries. Why?

Answer 42

The data suggests very little correlation between growth in real GDP and the happiness of a country’s residents.

Question 43

Which of the following would Keynesian economists argue would have the optimal short-run and long-run effects on the macroeconomy?

Answer 43

An increase in SNAP (food stamps) benefits for low income Americans and an increase in government spending on high-speed fiber optic internet connectivity in rural areas.

Question 44

President Obama responded to the “great recession” of 2008 by:

Answer 44

Extending unemployment benefits and cutting payroll taxes.

Question 45

Imagine a world where laissez-faire and Keynesian economists agree that government should engage in expansionary fiscal and monetary policies during severe recession. Which of the following might still prevent the policies from moving the economy back to potential GDP?

Answer 45

All of the above (The political implementation of the policies is delayed by partisan bickering between Democrats and Republicans, the federal government implements the policies in a timely manner but local and state governments reduce their spending at the same time federal spending increases, and the government budget is in deficit and the government has great difficulty borrowing in the market).

Question 46

When the Great Depression began in 1929, President Hoover’s economic advisors urged the president to:

Answer 46

Balance the federal budget and allow the market to create a new generation of innovative entrepreneurs.

Question 47

Keynesian and Classical economists agree that business cycles exist in free market economies but they differ with regard to business cycles in that:

Answer 47

Keynesian economists believe that economic policies can counter the business cycle, while Classical economists do not.

Question 48

Which of the following would most likely increase the labor force participation of women?

Answer 48

None of the above (Allowing businesses to discontinue offering their employees contraception in their employer healthcare benefits because of religious beliefs, The Supreme Court overturning the decision in Roe V. Wade that legalized abortion, and laws that make it more difficult to prove sexual harassment in the workplace).

Question 49

Over much of the last 35 years US governments have ignored the advice of Keynesian economists and frequently enageged in pro-cyclical fiscal policy - decreasing taxes and/or increasing spending during economic expansions. Which of the following would best explain this behavior?

Answer 49

Both B & C (There is tremendous political pressure to give Americans back their money when economic times are good & Politicians care about their legacy and want to be seen as the leaders who cut taxes and/or engaged in prestigious infrastructure/spending projects).

Question 50

Austerity policies during recessions are typically favored by:

Answer 50

Neo-classical economists.

Question 51

Which of the following would economists that support new growth theory most likely recomment to government in order to grow the US economy in the long-run?

Answer 51

Government should increase funding for primary education.

Question 52

The Classical growth model predicted that countries that continued to ass additional capital would eventually experience diminishing returns from the capital. The new growth theory suggests that countries might experience increasing returns if they follow the new growth model, why?

Answer 52

Ideas are on-rivalrous and can have positive externalities.

Question 53

Which of the following is most likely to be an effective policy prescription to reduce structural unemployment?

Answer 53

Increased government spending on educational programs designed to equip unemployed workers with the knowledge and skills required in growth areas of the economy.

Question 54

The unemployment rate released by the Labor Department on the first Friday of every month is sometimes criticized as underestimating real unemployment in the economy. The critics argue that the unemployment rate fails to capture hidden unemployment. Which of the following is best described as hidden unemployment?

Answer 54

A female worker who successfully completed a 2 year course in jet engine machines finds employment as a home health aide.

Question 55

Which of the following federal agenciesis responsible for calculating the labor force metrics?

Answer 55

The BLS.

Question 56

Loretta J Mester, President of the Cleaveland federal reserve suggests in her piece “Long-Run Economic Growth” that the wages of less educated workers:

Answer 56

Increase in geographic areas with a high percentage of more educated workers.

Question 57

The piece “Patience: The Big Virtue” from the Economist magazine includes the quote: “…and sociological transformation was at least as important as technological transformation in catalysting the lift off of growth…” “Sociological transformation” in this context means:

Answer 57

Increase in social capital.