Page 396 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Multiple-Choice Questions
1. Which of the following was an important point emphasized in b. high enough that the actual rate of inflation equals the
Keynes’s influential work? expected rate.
I. In the short run, shifts in aggregate demand affect c. as close to zero as possible.
aggregate output. d. 5%.
II. Animal spirits are an important determinant of business e. left wherever the economy sets it.
cycles.
4. The main difference between the classical model of the price
III. In the long run we’re all dead.
level and Keynesian economics is that
a. I only
a. the classical model assumes a vertical short-run aggregate
b. II only
supply curve.
c. III only
b. Keynesian economics assumes a vertical short-run aggregate
d. I and II only
supply curve.
e. I, II, and III
c. the classical model assumes an upward sloping long-run
2. Which of the following is a central point of monetarism? aggregate supply curve.
a. Business cycles are associated with fluctuations in money d. Keynesian economics assumes a vertical long-run aggregate
demand. supply curve.
b. Activist monetary policy is the best way to address business e. the classical model assumes aggregate demand can not
cycles. change in the long run.
c. Discretionary monetary policy is effective while
5. That fluctuations in total factor productivity growth cause the
discretionary fiscal policy is not.
business cycle is the main tenet of which theory?
d. The Fed should follow a monetary policy rule.
a. Keynesian
e. All of the above.
b. classical
3. The natural rate hypothesis says that the unemployment rate c. rational expectations
should be d. real business cycle
a. below the NAIRU. e. natural rate

Tackle the Test: Free-Response Questions
1. a. According to monetarism, business cycles are associated 2. For each of the following economic theories, identify its
with fluctuations in what? fundamental conclusion.
b. Does monetarism advocate discretionary fiscal policy? a. the classical model of the price level
Discretionary monetary policy? b. Keynesian economics
c. What monetary policy does monetarism suggest? c. monetarism
d. What is the velocity equation? Define each of the terms in d. the natural rate hypothesis
the velocity equation. e. rational expectations
e. Use the velocity equation to explain the major conclusion of f. real business cycle theory
monetarism.

Answer (10 points)
1 point: The money supply
1 point: No

1 point: No
1 point: A monetary policy rule
1 point: M × V = P × Y
1 point: M is the money supply.
1 point: V is the velocity of money.
1 point: P is the aggregate price level.
1 point: Y is real GDP.
1 point: Since V is stable, a steady growth of M will lead to a steady growth in GDP.

354 section 6 Inflation, Unemployment, and Stabilization Policies