1. A liquidity trap arises when:
- consumers do not have cash to spend.
- the actual unemployment rate is less than the natural rate.
- monetary policy is ineffective because the interest rate is down against the zero bound.
- asset prices peak, just prior to a plunge.
2. New classical macroeconomics is built on the two concepts of:
- discretionary monetary policy and an emphasis on the short run.
- rational expectations and real business cycle theory.
- an upward-sloping aggregate supply curve and a vertical aggregate demand curve.
- the liquidity trap and the political business cycle.
3. In the Keynesian framework of macroeconomic policy:
- all expectations are rational.
- an expansionary fiscal policy will permanently change inflationary expectations.
- business cycles are caused by supply shocks.
- a recessionary gap can be corrected by an increase in government expenditures.
4. To the extent that people have rational expectations:
- stabilization policies will be effective only when they are unanticipated.
- workers will be slow to respond to changes in inflation.
- total factor productivity will remain constant.
- workers, investors, and consumers will use only information about past economic conditions, and ignore information about current conditions, when making decisions.
5. Which of the following statements is LEAST likely to be supported by all macroeconomists?
- Tax cuts do not increase aggregate demand.
- Monetary policy, rather than fiscal policy, should play a lead role in stabilization.
- Changes in the money supply will affect both the overall level of prices and the level of real GDP.
- The central bank should be independent of political pressure.