Question

1. In the monetarist view

a. changes in investment spending are a major source of macroeconomic instability.

b. inappropriate monetary policy is a major source of macroeconomic instability.

c. adverse aggregate supply shocks are a major source of macroeconomic instability.

d. the fact that prices and wages are flexible is a major source of macroeconomic instability.

2. Monetarists argue that changes in the money supply

a. lead to direct changes in spending.

b. work indirectly via increased investment.

c. lead directly to recessions and expansions.

d. do not affect GDP.

3. According to real business cycle theory,

a. monetary factors affecting aggregate demand cause macroeconomic instability.

b. when real wages fall during recessions, "real" unemployment rates rise.

c. the net long-run costs of business fluctuations are severe.

d. recessions result from declines in long-run aggregate supply, rather than decreases in aggregate demand.

Answer 1

1. The monetarist theory is an economic concept which contends that changes in the money supply are the most significant determinants of the rate of economic growth and the behaviour of the business cycle.

Hence, b. inappropriate monetary policy is a major source of macroeconomic instability.

2.  The monetarist theory is an economic concept which contends that changes in the money supply are the most significant determinants of the rate of economic growth and the behaviour of the business cycle.

Hence, c. lead directly to recessions and expansions.

3. In Real business-cycle theory, business-cycle fluctuations to a large extent can be accounted for by real in contrast to nominal shocks.

Hence, d. recessions result from declines in long-run aggregate supply, rather than decreases in aggregate demand.