Austrian Business Cycle Theory Sample Questions

1) Under the Austrian business cycle theory, downturns (recessions) are caused by:

A) prior excessive money creation
B) unpredictable private investment spending
C) bad government fiscal policy
D) peaks in the Sun's sunspot cycles
E) we don't know -- they just happen

2) The key feature which distinguishes the Austrian business cycle theory from other cycle theories is:
A) a focus on a country's capital stock and its composition
B) a focus on the unpredictability of private investment spending
C) a belief that zero price inflation is desirable
D) a focus on static expectations

3) The key policy prescription we get from the Austrian business cycle theory is:
A) leave the money supply alone (constant M)
B) try to keep prices from changing (constant P)
C) try to keep interest rates low
D) vary target interest rates so as to achieve a low but steady price inflation
E) we should import capital only from Austria
Answer: A

4) New Classical theorists advocate which monetary policy:

A) Keeping a constant money supply, causing prices to fall when we have real GDP growth
B) Using monetary policy tools to keep interest rates low, since low interest rates are good for the economy
C) Increasing the money supply at a rate that matches real growth, in order to achieve a stable price level
D) Shrinking the money supply from time to time in order to wring out of the economy any malinvestment
caused by prior inflation
E) Increasing the money supply at a rate that exceeds real growth, because the resulting price inflation is
beneficial.

5) Monetarist theorists advocate which monetary policy:

A) Keeping a constant money supply, causing prices to fall when we have real GDP growth
B) Using monetary policy tools to keep interest rates low, since low interest rates are good for the economy
C) Increasing the money supply at a rate that matches real growth, in order to achieve a stable price level
D) Shrinking the money supply from time to time in order to wring out of the economy any malinvestment
caused by prior inflation
E) Increasing the money supply at a rate that exceeds real growth, because the resulting price inflation is
beneficial.

6) Keynesian theorists advocate which monetary policy:

A) Keeping a constant money supply, causing prices to fall when we have real GDP growth
B) Using monetary policy tools to keep interest rates low, since low interest rates are good for the economy
C) Increasing the money supply at a rate that matches real growth, in order to achieve a stable price level
D) Shrinking the money supply from time to time in order to wring out of the economy any malinvestment
caused by prior inflation
E) Increasing the money supply at a rate that exceeds real growth, because the resulting price inflation is
beneficial.

7) Austrian school economists advocate which monetary policy:

A) Keeping a constant money supply, causing prices to fall when we have real GDP growth
B) Using monetary policy tools to keep interest rates low, since low interest rates are good for the economy
C) Increasing the money supply at a rate that matches real growth, in order to achieve a stable price level
D) Shrinking the money supply from time to time in order to wring out of the economy any malinvestment
caused by prior inflation
E) Increasing the money supply at a rate that exceeds real growth, because the resulting price inflation is
beneficial.

8) Which school of economic thought has advocated the following monetary policy: shrink the money supply every now and then in order to "wring out" of the economy the mal-investments caused by prior inflation.
A) Austrians
B) Monetarists
C) New Classicals
D) Keynesians
E) None of the above

9) Currently [2007] accepted monetary policy recommends increasing the money supply at a rate slightly exceeding real growth, in order to achieve a low but stable rate of inflation. Austrian theorists disagree, saying that such a policy will cause business cycles because it distorts:

A) the spiritual harmony of the Emperor
B) bank reserves
C) the composition of the economy's capital stock
D) consumer preferences
E) energy prices

10) Current [2007] fashion at the Fed implements which monetary policy:

A) Keeping a constant money supply, causing prices to fall when we have GDP growth
B) Increasing the money supply at a rate that matches real growth, in order to achieve a stable price level
C) Using monetary policy tools to keep interest rates low, since low interest rates are good for the economy
D) Shrinking the money supply from time to time in order to wring out of the economy any malinvestment
caused by prior inflation
E) Increasing the money supply at a rate that exceeds real growth, in order to prevent falling prices

11) Recent monetary policy recommended increasing the money supply at a rate matching real growth, in order to achieve a stable price level. Austrian theorists disagreed, saying that such a policy would still cause business cycles because it distorts:
A) interest rates
B) consumer preferences C) bank reserves
D) college grades
E) unemployment levels