Introduction to Economic Reasoning, 8e (Rohlf)
Chapter 14: The Activist-Nonactivist Debate
1) All of the following schools of economists would be described as nonactivists EXCEPT
A) monetarist economists.
B) classical economists.
C) rational expectations theorists.
D) Keynesian economists.
E) new classical economists.
2) Keynesian economists
A) advocate a government policy of laissez-faire.
B) believe in the “policy ineffectiveness theorem.”
C) believe that government should attempt to “manage” aggregate demand.
D) emphasize supply-side remedies for unemployment and inflation.
E) believe that fiscal policy is ineffective because of crowding out.
3) According to Keynesians, the appropriate fiscal policy for a period of unemployment would
involve
A) expanding the money supply.
B) balancing the federal budget.
C) raising taxes.
D) no discretionary action by the government.
E) increasing government spending.
4) During a period of inflation, Keynesian economists would probably advocate
A) that government avoid interfering in the economy.
B) a reduction in income taxes.
C) a restrictive monetary policy to drive up interest rates.
D) an increase in the budget deficit.
E) an expansionary monetary policy to reduce interest rates.
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5) Which of the following statements about the activist-nonactivist debate is accurate?
A) Monetarists advocate the use of discretionary fiscal policy to ensure full employment.
B) New classical economists support the use of discretionary fiscal policy but believe that
discretionary monetary policy is ineffective.
C) Keynesians advocate the use of discretionary fiscal policy but not discretionary monetary
policy.
D) Keynesians believe that the economy’s self-correcting mechanism works too slowly to be
relied upon.
E) Monetarists believe that the economy’s self-correcting mechanism works too slowly to be
relied upon.
6) Discretionary monetary policy is subject to two types of lags; they are the
A) recognition lag and the spending lag.
B) spending lag and the policy lag.
C) impact lag and the recognition lag.
D) spending lag and the impact lag.
E) recognition lag and the policy lag.
7) Monetarists believe that discretionary monetary policy is
A) ineffective and counterproductive because the public acts on rational expectations.
B) highly effective because it is much more powerful than fiscal policy.
C) ineffective because of crowding out.
D) highly effective because it is much faster than fiscal policy.
E) ineffective and counterproductive because it is subject to significant lags.
8) Monetarists tend to support
A) increasing or decreasing the money supply to try to avoid unemployment or inflation.
B) a broad role for government in stabilizing the economy.
C) a fixed rate of growth of the money supply.
D) a more powerful Federal Reserve.
E) direct government controls on wages and prices.
9) Monetarists support a “monetary rule.” This means they would like to see
A) the Fed more actively involved in manipulating the money supply to stabilize the economy.
B) the money supply increased at a constant annual rate.
C) the power of the Fed increased so that it could be more effective in stabilizing the economy.
D) larger increases in the money supply during periods of unemployment.
E) the federal government required to balance its budget annually.
10) According to the monetarist view, Keynesian monetary policy which attempts to stabilize the
economy
A) has proven to be highly successful.
B) has tended to make the performance of the economy worse than it would otherwise have
been.
C) has helped to stabilize interest rates.
D) could be made more effective by more frequent changes in the growth rate of the money
supply.
E) could be made more effective if it was combined with discretionary fiscal policy.
11) Monetarists believe that discretionary fiscal policy
A) is more powerful than monetary policy.
B) should be relied on to stabilize the economy.
C) can help to prevent or reduce unemployment and inflation.
D) is generally ineffective.
E) often helps to encourage investment spending.
12) According to monetarists, increases in government spending
A) are the most effective way to combat unemployment.
B) tend to stimulate private spending by businesses.
C) tend to crowd out investment spending.
D) have a larger multiplier effect than changes in consumption spending by households.
E) have a depressing effect on interest rates.
13) The theory of rational expectations suggests that
A) the public is always optimistic and anticipates the best.
B) the existence of a rational public allows discretionary policies to work as the Keynesian
model predicts.
C) the public cannot accurately predict the actions of policymakers.
D) individuals consider all available information when they formulate their expectations about
the future.
E) the public expects policymakers to be rational, which causes it to forecast future policies
incorrectly.
14) Supporters to the theory of rational expectations believe that Keynesian monetary and fiscal
policies for combating unemployment
A) can be made to work more rapidly if the expectations of households and businesses are
considered.
B) tend to be ineffective and counterproductive.
C) tend to have a larger multiplier effect than was generally believed.
D) can be more effective if the expectations of policymakers are considered.
E) cannot be correctly anticipated by a rational public.
15) Monetarists and new classical economists both support
A) a much larger role for government in the economy.
B) the use of discretionary fiscal policy to stabilize the economy.
C) a “monetary rule.”
D) a more active role for Fed policymakers in manipulating the money supply.
E) a higher salary for the chairperson of the Fed’s board of governors.
16) Monetarists and new classical economists believe that if policymakers did not intervene in
the economy
A) the rates of unemployment and inflation experienced by the economy would tend to become
higher.
B) unemployment and inflation would disappear.
C) unemployment and inflation would be minimized.
D) poverty would be eliminated.
E) its performance would be more volatile, with more pronounced ups and downs in the level of
unemployment.
17) Which of the following policies would not be supported by a supply-side economist?
A) an increase in investment tax credits to stimulate investment spending
B) an increase in marginal tax rates to help pay off the public debt
C) the elimination of government regulations that drive up the cost of doing business
D) the reduction of tariff barriers to stimulate competition and lower prices
E) a lower tax rate on interest earned on savings accounts
18) Supply-side economists support investment tax credits as a way to
A) stimulate investment spending and shift the aggregate demand curve upward.
B) increase the economy’s productive capacity.
C) stimulate aggregate demand.
D) shift the aggregate demand curve to the left.
E) increase interest rates.
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19) During a period of inflation
A) Keynesian economists would support a tax reduction.
B) monetarist economists would call for a policy of slowing the growth of the money supply.
C) supply-side economists would call for a tax increase.
D) new classical economists would call for steady growth of the money supply.
E) the original classical economists would call for controls on wages and prices.
20) Supply-side economists believe that a reduction in marginal tax rates will
A) encourage people to work harder and longer.
B) shift the aggregate supply curve to the left.
C) lead to a reduction in both the price level and the level of real GDP.
D) reduce the number of hours that people work, since they can now earn the same income in
fewer hours.
E) have no impact on the behavior of households, since they form their expectations rationally.
21) One advantage of stimulating aggregate supply rather than aggregate demand is that
increases in aggregate supply
A) tend to take effect more quickly than increases in aggregate demand.
B) automatically cause increases in the money supply.
C) can reduce both the price level and real GDP at the same time.
D) always increase the price level.
E) can reduce unemployment and inflation at the same time.
1) Which of the following schools of economists would be described as activists?
A) Classical economists
B) Keynesian economists
C) Monetarist economists
D) New classical economists
2) Which of the following statements about the activist-nonactivist debate is true?
A) Monetarists advocate the use of discretionary monetary policy to manage aggregate demand
and to ensure full employment.
B) New classical economists support the use of fiscal policy to guide the economy but believe
that monetary policy is ineffective
C) Keynesians advocate government intervention because they believe that the self-correcting
mechanism works too slowly.
D) All of the above.
3) According to the monetarists,
A) fiscal policy is ineffective because of crowding out.
B) fiscal policy is more effective than monetary policy.
C) increases in government spending tend to lower interest rates, thus stimulating investment
spending.
D) increases in government spending tend to stimulate investment spending by making business
leaders more optimistic.
4) Which of the following is a true statement about the monetarists?
A) They favor the use of discretionary monetary policy to guide the economy’s performance.
B) They believe that the money supply should be increased at a constant rate.
C) They favor legislation to provide Fed policymakers with more power to guide the economy’s
performance.
D) Both A and C are correct.
5) The “monetary rule” is advocated by
A) Keynesians and calls for greater reliance on monetary policy and less reliance on
discretionary fiscal policy.
B) monetarists and calls for exclusive reliance on discretionary monetary policy in guiding the
economy’s performance.
C) Keynesian economists and calls for the Fed to regularly pursue lower interest rates to
stimulate investment spending.
D) monetarists and calls for the Fed to increase the money supply at a constant annual rate.
6) Both the monetarists and the new classical economists
A) advocate the use of policy “rules” rather than discretion in guiding the economy.
B) oppose the use of discretionary fiscal policy but support the use of discretionary monetary
policy.
C) oppose the use of discretionary monetary policy but support the use of discretionary fiscal
policy.
D) believe the economy is inherently unstable and requires periodic intervention to maintain
acceptable performance.
7) The major reason monetarists oppose the use of discretionary monetary policy to guide the
economy’s performance is that they
A) do not believe that changes in the money supply have any impact on output or employment.
B) believe that lags cause monetary policy to have a destabilizing effect on the economy.
C) believe that monetary policy is not as effective as fiscal policy.
D) believe that rational expectations make monetary policy changes ineffective.
8) Keynesians believe that the economy is inherently unstable because of
A) the instability created by government fiscal policy.
B) fluctuations in the level of government spending.
C) the volatility of investment spending.
D) Federal Reserve monetary policies.
9) Which of the following is not a belief of the new classical economists?
A) Wages and prices are highly flexible.
B) Expectations are formed rationally.
C) Unemployment is voluntary.
D) Labor markets adjust very slowly to changes in demand.
10) According to the theory of rational expectations,
A) households and businesses base their expectations only on past experiences.
B) people use all available information in developing their expectations about the future.
C) it is reasonable for households and businesses to ignore the actions of policymakers.
D) only policymakers have sufficient knowledge to develop accurate estimates of future price
levels.
11) According to the policy ineffectiveness theorem,
A) anticipated changes in monetary or fiscal policy will alter only the price level.
B) fiscal policy is ineffective unless it is accompanied by monetary policy.
C) monetary policy is ineffective unless it is accompanied by fiscal policy.
D) unanticipated changes in monetary or fiscal policy will alter only the price level.
12) The new classical economists believe that any increase in the money supply that is
anticipated by the public will
A) drive down interest rates and expand output and employment.
B) increase investment spending and potential GDP.
C) result in a higher price level with no change in output or employment.
D) immediately result in an increase in aggregate supply.
13) According to Keynesians, which of the following is true?
A) When unemployment is caused by inadequate aggregate demand, expanding the money
supply will reduce unemployment but intensify inflation.
B) When inflation is caused by a supply shock, reducing the money supply will lower the rate of
inflation but aggravate unemployment.
C) When unemployment is caused by a reduction in aggregate supply, increasing the money
supply will reduce unemployment but aggravate inflation.
D) All of the above.
E) None of the above.
14) Which of the following is not a supply-side remedy?
A) use tax credits to encourage investment
B) reduce marginal tax rates to encourage people to work longer and harder
C) increase tax rates on interest income in order to discourage saving and stimulate consumption
spending
D) eliminate government regulations that do not serve a valid purpose
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15) In the short run, reductions in marginal tax rates probably increase
A) only aggregate demand.
B) only aggregate supply.
C) both aggregate demand and aggregate supply but have a greater impact on demand.
D) both aggregate demand and aggregate supply but have a greater impact on supply.
1) Keynesians are described as activists because these economists
A) see an active role for markets in directing the economy.
B) believe that government should play an active role in directing the economy’s aggregate
performance.
C) participate actively in politics and community affairs.
D) attempt to stay physically fit.
2) Monetarists believe that
A) discretionary monetary policy should be relied on to guide the economy’s aggregate
performance.
B) discretionary fiscal policy is largely ineffective due to crowding out.
C) discretionary monetary policy is not subject to significant lags.
D) All of the above
3) Monetarists advocate a monetary rule. This means that
A) policymakers should rely on discretionary monetary policy instead of discretionary fiscal
policy.
B) policymaker should abandon discretionary changes and increase the money supply at a
constant annual rate.
C) Fed policymakers should be more concerned about inflation and less concerned about
unemployment.
D) None of the above.
4) If the lags associated with discretionary monetary policy are sufficiently long
A) by the time a policy change is felt, it may no longer be the appropriate policy for the state of
the economy.
B) the Fed’s policies may be counterproductive.
C) the self-correcting mechanism will have changed the status of the economy before the policy
change has its impact.
D) All of the above
5) The new classical economics assumes that
A) wages and prices are highly flexible in the short run.
B) prices are flexible in the short run, but wages are not.
C) wages are flexible in the short run, but prices are not.
D) wages and prices are both inflexible in the short run.
6) The theory of rational expectations suggests that individuals
A) base their expectations about the future on what is happening now (in the present).
B) fail to learn from their mistakes.
C) use all available information in forming their expectations about the future.
D) base their expectations about the future on what has happened in the past, particularly the
recent past.
7) According to the policy ineffectiveness theorem,
A) monetary policy is more effective than fiscal policy.
B) discretionary policy can alter output and employment, but not the price level.
C) discretionary policy can alter the price level, but cannot alter output or employment.
D) discretionary policy cannot affect output, employment, or the price level.
8) According to the new classical economists, discretionary policy
A) is more effective than automatic stabilizers.
B) is ineffective or counterproductive because of lags.
C) becomes more effective the more often it is used.
D) is ineffective because individuals alter their behavior in anticipation of these policies.
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Use the following diagram in answering the following question(s).
9) Based on the figure above, if the economy was in short-run equilibrium at an output of $700
billion and a price level of 80, which of the following would a Keynesian be likely to
recommend?
A) Institute a monetary rule.
B) Wait for the economy to self-correct.
C) Have the Fed expand the money supply.
D) Balance the federal budget.
10) Based on the figure above, according to the monetarists, if the Fed used its discretion to
increase the money supply more rapidly, the economy would probably come to rest
A) at a GDP of $700 billion and a price level in excess of 80.
B) at a GDP of $900 billion and a price level of 100.
C) at a GDP greater than $900 billion and a price level in excess of 60.
D) at a GDP less than $700 billion.
11) Based on the figure above, according to the new classical economists, if the Fed used its
discretion to increase the money supply more rapidly, the economy would probably come to rest
A) at a GDP of $700 billion and a price level in excess of 80.
B) at a GDP of $900 billion and a price level of 100.
C) at a GDP greater than $900 billion and a price level in excess of 60.
D) at a GDP less than $700 billion.
12) One advantage of supply-side policies is that
A) none of these policies affect the federal budget.
B) these policies can reduce both unemployment and the price level.
C) they tend to work more quickly than demand-side policies.
D) All of the above.
13) Which of the following is true?
A) Monetarists believe that the economy is inherently unstable and returns to potential GDP very
slowly when deviations occur.
B) Keynesians believe that the economy’s self-correcting mechanism works very rapidly.
C) Supply-siders believe that higher marginal tax rates are necessary to convince individuals to
work harder.
D) None of the above.
14) Which of the following is a point of agreement among modern economists?
A) The self-correcting mechanism works quickly.
B) Discretionary policies are subject to lags.
C) Wages and prices are highly flexible, even in the short run.
D) The short-run impact of supply-side measures is substantial.
15) Which of the following is an example of a supply-side policy?
A) Reduce marginal tax rates to encourage individuals to work harder and longer.
B) Use tax credits to encourage investment spending and spur economic growth.
C) Streamline government regulations to reduce the cost of doing business.
D) All of the above.
16) “Policymakers should cut taxes to encourage consumption spending and get the economy
going.” This suggestion would be most likely to come from
A) a Keynesian.
B) a monetarist.
C) a new classical economist.
D) a supply-side economist.
17) When monetarists call for a “monetary rule,” what they really want is
A) greater reliance on discretionary monetary policy and less reliance on discretionary fiscal
policy.
B) legislation to provide Fed policymakers with more power to guide the economy’s
performance.
C) legislation that would require the Fed to increase the money supply at a constant rate.
D) bigger paychecks for monetarist economists.
18) The new classical economists believe that an anticipated increase in the money supply will
A) expand output and employment.
B) be immediately offset by a reduction in aggregate supply.
C) immediately cause potential GDP to expand.
D) lead to an immediate reduction in the price level with no change in output or employment.
1) Monetarists and Keynesians are nonactivists.
2) Keynesians oppose the use of activist policies because they believe the economy self-corrects
very quickly.
3) Keynesians generally agree that the economy will self-correct in the long run.
4) Keynesians generally agree that the economy will self-correct in the long run, but they still
advocate government intervention to combat unemployment or inflation.
5) Monetarists support the use of discretionary monetary policy but oppose the use of
discretionary fiscal policy.
6) Monetarists believe that fiscal policy is largely ineffective due to crowding out.
7) The “monetary rule” states that policymakers will rely on monetary policy rather than on fiscal
policy.
8) According to the monetary rule, the money supply should be increased at a constant annual
rate.
9) If the Fed adopted the monetary rule, it would no longer be able to pursue discretionary
monetary policy.
10) The adoption of a monetary rule would mean that the Fed would no longer be able to use
changes in the money supply as a policy tool for combating unemployment or inflation.
11) Like the monetarists, the new classical economists favor the adoption of a monetary rule.
12) The monetarists favor the adoption of a monetary rule because they believe that the public’s
rational expectations tend to make discretionary monetary policies ineffective.
13) Monetarists favor a monetary rule because they believe that the lags associated with the
discretionary monetary policy make it destabilizing rather than stabilizing.
14) The monetarists believe the economy is inherently stable while Keynesians see it as
inherently unstable.
15) Robert Lucas is regarded as the father of monetarism.
16) Like Keynesians, the new classical economists believe that wages and prices tend to be rigid
downward.
17) According to the new classical economists, discretionary policies are ineffective because
they are predictable.
18) The new classical economists believe that discretionary policies can succeed in altering the
price level but not the level of real GDP.
19) According to the new classical economists, predictable discretionary policies will alter only
GDP, not the price level.
20) According to the new classical economists, discretionary policies tend to be ineffective
because the public, acting on its rational expectations, takes actions that offset them.
21) According to the new classical economists, if policy-makers act in a predictable manner,
whenever they increase aggregate demand, the public will take actions to increase aggregate
supply.
22) According to the “policy ineffectiveness theorem,” systematic monetary and fiscal policies
can alter the level of real GDP but not the price level.
23) Supply-side policies can be used to reduce unemployment and inflation at the same time.
24) Supply-side economists believe that tax increases can be effective in stimulating aggregate
supply.
25) By encouraging individuals to work harder, supply-side economists believe that cuts in
marginal tax rates may stimulate aggregate supply.
26) Keynesian economists argue that in the short run, tax cuts tend to increase aggregate supply
more than aggregate demand.
27) Monetarists and new classical economists advocate the use of discretionary monetary policy
to guide the economy’s aggregate performance.
28) Monetarists believe that discretionary monetary policy is subject to lags, but Keynesians
disagree.
29) Even though discretionary monetary policy is subject to lags, Keynesians support its use, in
part because they believe the self-correcting mechanism works slowly.
30) Policies that eliminated unnecessary government regulations would tend to shift the AS
curve to the left.
1) Explain what is meant by a “monetary rule” and why the monetarists support such a rule.
2) Explain the policy ineffectiveness theorem and how it is related to the theory of rational
expectations.
3) The monetarists and new classical economists both oppose the use of discretionary monetary
policy but for quite different reasons. Compare and contrast their positions.
4) According to the new classical economists, discretionary policies tend to be ineffective
because they are predictable. Explain this conclusion and supplement your explanation with the
appropriate graph.
5) Explain what is meant by supply-side economics and fully discuss at least three policies that
supply-siders would support.