1. A liquidity trap arises when:
- the actual unemployment rate is less than the natural rate.
- asset prices peak, just prior to a plunge.
- consumers do not have cash to spend.
- monetary policy is ineffective because the interest rate is down against the zero bound.
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:
- an expansionary fiscal policy will permanently change inflationary expectations.
- business cycles are caused by supply shocks.
- all expectations are rational.
- 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, investors, and consumers will use only information about past economic conditions, and ignore information about current conditions, when making decisions.
- total factor productivity will remain constant.
- workers will be slow to respond to changes in inflation.
5. Which of the following statements is LEAST likely to be supported by all macroeconomists?
- Tax cuts do not increase aggregate demand.
- Changes in the money supply will affect both the overall level of prices and the level of real GDP.
- Monetary policy, rather than fiscal policy, should play a lead role in stabilization.
- The central bank should be independent of political pressure.