Economics (McConnell), 18th Edition

Chapter 36: Current Issues in Macro Theory and Policy

Key Questions

1. Suppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and $336 billion, respectively. What is the velocity of money? How will households and businesses react if the central bank reduces the money supply by $20 billion? By how much will nominal GDP have to fall to restore equilibrium, according to the monetarist perspective?

2. Use an AD-AS graph to demonstrate and explain the price-level and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is operating at its full-employment level of output.) Then demonstrate and explain on the same graph the outcome as viewed by mainstream economists.

3. Place "MON," "RET," or "MAIN" beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively:

1. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.
2. Downward wage inflexibility means that declines in aggregate demand can cause long-lasting recession.
3. Changes in the money supply M increase PQ; at first only Q rises because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.
4. Fiscal and monetary policies smooth out the business cycle.
5. The Fed should increase the money supply at a fixed annual rate.

Chapter 36 Key Question Solutions (113.0K)