DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Debate: The Shape of the Aggregate Supply Curve
180. When will stabilization policy be most effective in combating recessions?
a.
when AS is flat
b.
when AS is very steep
c.
when AS has a moderately upward slope
d.
when AS has a moderately downward slope.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Debate: The Shape of the Aggregate Supply Curve
181. What is the shape of the AS in the short run and the long run?
a.
AS is relatively flat in both the short and long run.
b.
AS is relatively flat in the short run, but steeper in the long run.
c.
AS is relatively steep in both the short and long run.
d.
AS is relatively steep in the short run, but flatter in the long run.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Debate: The Shape of the Aggregate Supply Curve
182. Which of the following is correct?
a.
Policy lags are normally much shorter for fiscal policy than for monetary policy.
b.
Congress usually makes major fiscal policy changes in a fairly short period of time.
c.
Expenditure lags are much longer for investment, the main way in which monetary policy affects aggregate
demand.
d.
Monetary policy affects aggregate demand more quickly than fiscal policy, such as tax or government
spending changes.
183. Which of the following leads to a fundamental difficulty for stabilization policy?
a.
Time lags in policy decisions
b.
Presence of shock absorbers in the economy
c.
Absence of data on the effectiveness of policy measures
d.
Existence of self-correcting mechanism
184. What role does ideology play in the debate on stabilization?
a.
A large role, because there are conservative and liberal economists.
b.
A primary role, because there are no economic aspects to the debate at all.
c.
A minor role, because economists are fairly uniform in their political views.
d.
No role at all, because this is purely a technical question.
185. The Fed’s quick response to the threat to the economy after September 11, 2001, makes a strong case for
a.
a rules-based monetary policy regime.
b.
a discretionary-based monetary policy regime.
c.
the superiority of fiscal policy.
d.
the dominant role of Congress in activist policy.
186. Advocates of active stabilization policies, in defense of their views, argue that
a.
stabilization is less necessary than is commonly advocated by monetarists.
b.
discretionary policy in not necessary because automatic stabilizers are sufficient.
c.
perfect stabilization is not possible, but moderate improvements in economic performance are possible, such
as the response to the events of September 11, 2001.
d.
All of the above are correct.
187. The “Taylor rule” for monetary policy provides the Fed with a
a.
mechanical prescription for monetary policy.
b.
benchmark to guide policy decisions.
c.
time frame for discount rate changes.
d.
rule for changing the M1 money supply.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
188. What is inflation targeting?
a.
Making sure inflation is reduced to zero.
b.
Increasing the required reserve ratio when there is inflation.
c.
Increasing the supply of money in the economy.
d.
Aiming for a particular inflation level.
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
189. The alternatives of the active versus passive view of stabilization policy are usually expressed as
a.
fiscal versus monetary policy.
b.
internal versus external.
c.
present value versus future value.
d.
discretion versus rules.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
190. One of the strongest arguments against active stabilization policy is
a.
that recognition lags make timely intervention very difficult.
b.
the economy corrects itself very slowly.
c.
the inability of economic theory to suggest appropriate policy.
d.
the difficulty of obtaining agreement on monetary policy.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
191. According to Baumol and Blinder, the lag between the time a policy is implemented and the time it affects aggregate
demand is
a.
longer for fiscal than monetary policy.
b.
longer for monetary than fiscal policy.
c.
approximately equal for both.
d.
influenced mainly by the size of the multiplier.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
192. Believers in a fixed-rule approach to stabilization policy propose that
a.
Congress should balance the high employment budget.
b.
the Fed should keep the money supply growth constant.
c.
the economy be stabilized by automatic mechanisms.
d.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
193. Believers in fixed rules maintain that
a.
with accurate forecasts, we can see inflation coming at least one year ahead of time.
b.
the length of stabilization lags is not important because fiscal policy actions are taken quickly and the
economy feels the effect on aggregate demand quickly.
c.
we should forget about discretionary policy and put the economy on autopilot, relying instead on automatic
stabilizers and the economy’s self-correcting mechanism.
d.
the economy’s self-correcting mechanism is slow and not very reliable, even with automatic stabilizers.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
194. How rapidly does the economy’s self-correcting mechanism work? Most economists agree that it
a.
works quickly and reliably.
b.
works slowly and not very reliably.
c.
works reliably, but not very quickly.
d.
does not work at all.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
195. Many economists believe that stabilization policy should be limited in scope until
a.
Keynesians and monetarists agree on policy.
b.
inflation is brought under control.
c.
the economy is operating near capacity.
d.
forecasting becomes more reliable.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
196. In a typical year, how accurate are forecasts of inflation and real GDP?
a.
within 8-10 percentage points
b.
within 2-3 percentage points
c.
within 3/4 of 1 percentage point
d.
within 1/4 of 1 percentage point
c
Moderate
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Dimensions of the Rules vs. Discretion Debate
197. Attempts to keep the economy always within a hair’s breadth of full employment is called
a.
shock absorption.
b.
lagging.
c.
fine tuning.
d.
crowding out.
c
Moderate
DISC: Measuring the Economy
United States – BPROG: Analytic
Measuring the Economy
Dimensions of the Rules vs. Discretion Debate
198. Are forecasts of economic activity accurate enough to permit “fine-tuning” of the economy?
a.
No, forecasting is so inaccurate that it should be abandoned.
b.
No, forecasts are not accurate enough for this.
c.
Yes, forecasts are accurate and reliable enough for this.
d.
Yes, at least most of the time.
Moderate
DISC: Measuring the Economy
United States – BPROG: Analytic
Measuring the Economy
Dimensions of the Rules vs. Discretion Debate
199. When recessions occur, advocates of small government should recommend
a.
reductions in the number of federal employees.
b.
reductions in transfer payments.
c.
reductions in taxes.
d.
increases in transfer payments and government spending.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
200. Some economists believe that policy makers should avoid stabilization policy because
a.
lags make the policy impact unpredictable.
b.
no tax cut ever stimulated demand.
c.
stabilization policies are rarely signed into law.
d.
it never works.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
201. Economists who believe that the economy has a strong self-correcting mechanism argued that, after September 11,
2001, the economy needed
a.
a quick and expansionary fiscal policy stimulus.
b.
a quick and expansionary monetary stimulus.
c.
only a short time to return to equilibrium full employment.
d.
President Bush to propose a large budget stimulus package.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
202. The monetary stimulus enacted in the fall of 2001 provides support for those economists who favor
a.
stable money supply growth.
b.
activist monetary policy.
c.
rules-governed monetary policy.
d.
fixed rates of growth for the money supply.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
203. How do critics of discretionary stabilization policy view frequent changes in spending and tax policy?
a.
The changes make the economy smoother, although it may not look that way to individual firms.
b.
The changes make life more difficult and hectic for Congress and the Fed.
c.
The changes smooth out the business cycle, making planning easier.
d.
The changes cause more instability in the economy and make planning more difficult.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
204. How do advocates of discretionary stabilization policy view frequent changes in spending and tax policy?
a.
The changes make the economy more difficult to forecast.
b.
The changes make life more difficult and hectic for Congress and the Fed.
c.
The changes smooth out the business cycle, making planning easier.
d.
The changes cause more instability in the economy and make planning more difficult.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
205. How do critics of stabilization policy view the “political business cycle”?
a.
They suggest shorter election cycles would improve stabilization.
b.
They believe that politicians cause economic instability, due mainly to the election schedule.
c.
They believe that the Fed can resist political pressure and stabilize the economy.
d.
They believe that politicians do not know enough economics in order to stabilize the economy.
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Dimensions of the Rules vs. Discretion Debate
206. Advocates of discretionary policy make these criticisms of the economy’s “self-correcting” mechanism:
a.
it is slow
b.
it is not very reliable
c.
it works only when supplemented by automatic stabilizers
d.
All of the above are correct.
e.
a and b only are correct.
e
Difficult
DISC: Monetary and fiscal policy
United States – BPROG: Reflective Thinking – BPROG: Analysis
Monetary and fiscal policy
Dimensions of the Rules-versus-Discretion Debate
207. Regarding government intervention in the economy, which of the following statements is not true?
a.
Liberals tend to favor intervention.
b.
Conservatives are inclined to adhere to fixed rules.
c.
There is no guarantee that government intervention will have the desired effect.
d.
The effect of government actions on interest rates and spending is unknown.
e.
All of the above are true.
a
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Reflective Thinking – BPROG: Analysis
Monetary and fiscal policy
Debate: Should the Government Intervene at All?
Essay
208. Define the following terms and explain their importance to the study of macroeconomics.
a.
the relationship between interest rates and velocity
b.
lags in stabilization policy
c.
rules versus discretion
rates fall.
stabilization policy, although not perfect, can smooth the economy.
Moderate
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
209. Define the following terms and explain their importance to the study of macroeconomics:
a.
velocity
b.
equation of exchange
c.
monetarism
d.
automatic stabilizer
macroeconomy.
Easy
economics
United States – BPROG: Analytic
210. What are the important factors which determine the velocity of money?
211. How does government expenditure discourage some private investment?
212. Advocates of stabilization policy prefer quick medicine for economic ills. This leads some observers to favor fiscal
policy while others endorse monetary policy. Describe the positions of each side in the debate and what seems to be the
current consensus.
213. The quantity theory of money builds on the equation of exchange. What specific assumptions are made that turn the
equation of exchange from an accounting identity into an economic theory?
214. Explain the importance of the shape of supply curve for undertaking stabilization policies.
215. What are some examples of the unconventional monetary policy from the Federal Reserve in response to the 2007–
2009? Why were opponents concerned about these measures?
216. List the reasons why the actual multiplier, which is estimated to be less than 2 for the U.S. economy, is much less
than what the oversimplified formula suggests.
217. How do lags affect stabilization policy? Your answer should include three specific types of lags.
218. How does the shape of the aggregate supply curve affect macroeconomic analysis and policy making? Illustrate your
answer with the appropriate graphs.
219. Describe an asset price bubble and give examples. Explain why it is extremely difficult if not impossible for the
Federal Reserve to prevent such bubbles.