Question 1

Explain why each of the following statements is a rationale for conducting active or passive policy: a. Economic circumstances can change dramatically between the time that an economic downturn begins and the time when policy actions have an effect on the economy.
b. Economists are not very accurate forecasters.
c. Increases in government spending generate increases in economic output.
d. Fluctuations in economic output have been less severe since World War II.

Accepted Answer

The answer of Explain why each of the following statements...

Question 2

Passive economic policy seeks to:

Accepted Answer

A)  offset fluctuations in real GDP. 
B)  use monetary and fiscal policy to shift aggregate demand. 
C)  respond to changing economic conditions. 
D)  take a hands-off approach to macroeconomic policy.

Question 3

Policymakers may be better able to achieve their goals using a fixed policy rule rather than using discretion if they face the problem of:

Accepted Answer

A)  short and predictable inside lags. 
B)  time-inconsistent policy. 
C)  short and predictable outside lags. 
D)  weak automatic stabilizers.

Question 4

Many times a monetary policy does not have the effect on the economy that is desired by the regulator. Why does this happen?

Accepted Answer

The answer of Many times a monetary policy does not...

Question 5

A central bank operating with discretion can achieve the same outcome as the central bank committed to a fixed rule of zero inflation if:

Accepted Answer

A)  there are no inside lags. 
B)  there are no outside lags. 
C)  the central bank dislikes unemployment much more than inflation. 
D)  the central bank dislikes inflation much more than unemployment.

Question 6

Conducting fiscal policy so that G = T, where G is government expenditures and T is tax revenue, is an example of a(n):

Accepted Answer

A)  active rule. 
B)  passive rule. 
C)  discretionary policy. 
D)  automatic stabilizer.

Question 7

What are two types of tools that economists use to forecast future economic developments?

Accepted Answer

A)  leading indicators and computer models 
B)  direct imputations and indirect attributions 
C)  visual assessment and global positioning 
D)  monetary instruments and fiscal instruments

Question 8

Although real variables such as unemployment and real GDP are the best measures of economic performance, most economists do not advocate manipulating money supply directly to hit a real target because:

Accepted Answer

A)  they believe a constant growth rate of the money supply is the best way to stabilize real GDP or unemployment. 
B)  if the Fed chose a target that was not natural output or the natural unemployment rate, the result would be accelerating inflation or deflation. 
C)  if the Fed chose a target for the unemployment rate above the natural rate, the result would be accelerating inflation. 
D)  if the Fed chose a target for the unemployment rate below the natural rate, the result would be accelerating deflation.

Question 9

Arguments in favor of active economic policy include all of the following except:

Accepted Answer

A)  failing to use monetary and fiscal policy leads to inefficient fluctuations in output and employment. 
B)  the Great Depression could have been avoided if the Federal Reserve had pursued a policy of steady money growth. 
C)  fluctuations in real GDP have been less severe following World War II than prior to World War I. 
D)  failure of policymakers to respond to large contractionary shocks to private spending caused the Great Depression.

Question 10

Active economic policy seeks to do all of the following except:

Accepted Answer

A)  offset fluctuations in real GDP. 
B)  use monetary and fiscal policy to shift aggregate demand. 
C)  respond to changing economic conditions. 
D)  take a hands-off approach to macroeconomic policy.

Question 11

The differing interpretations of the historical record of the Great Depression provide support for using:

Accepted Answer

A)  active macroeconomic policy only. 
B)  passive macroeconomic policy only. 
C)  either active or passive macroeconomic policy. 
D)  neither active nor passive macroeconomic policy.

Question 12

According to Christina Romer, the reduction in real economic volatility in the period since World War II compared to the period before World War I is the result of improved economic:

Accepted Answer

A)  policy. 
B)  performance. 
C)  data. 
D)  forecasting.

Question 13

All of the following could be considered automatic stabilizers except:

Accepted Answer

A)  transfer payments that increase during recessions. 
B)  discretionary changes in taxes. 
C)  a system of unemployment insurance. 
D)  the federal income tax.

Question 14

Automatic stabilizers start stabilizing the economy as soon as it deviates from its normal course. Explain with an example how this works in a recession.

Accepted Answer

The answer of Automatic stabilizers start stabilizing the economy as...

Question 15

According to advocates of rational expectations, traditional estimates of the sacrifice ratio are unreliable because they:

Accepted Answer

A)  ignore inside lags. 
B)  overestimate outside lags. 
C)  are based on adaptive expectations. 
D)  are time inconsistent.

Question 16

A situation where policymakers have the incentive to deviate from their initial course of action once other agents in the economy have acted is called a(n):

Accepted Answer

A)  rational expectation. 
B)  outside lag. 
C)  time-inconsistent policy. 
D)  active policy rule.

Question 17

The following notice appeared on a full page of the Wall Street Journal on February 9, 2009:
"There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy." -President-Elect Barack Obama, January 9, 2009
With all due respect Mr. President, that is not true. Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the United States today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.
The statement was signed by over 200 economists, including 3 Nobel Laureates. a. Comment on the extent to which the disagreement between the President and the economists involves a disagreement about whether policy should be passive or active.
b. Identify the rationale(s) used to support the economists' position.

Accepted Answer

The answer of The following notice appeared on a full...

Question 18

An argument in favor of allowing discretionary macroeconomic policy is that:

Accepted Answer

A)  policymakers may make erratic shifts in policy in response to changing political situations. 
B)  uninformed policymakers may choose incorrect policies. 
C)  the objectives of policymakers may be in conflict with the well-being of the public. 
D)  giving policymakers flexibility will allow them to respond to changing conditions.

Question 19

The fact that traditional methods of policy evaluation do not take into account the impact of policy on expectations is known as:

Accepted Answer

A)  stabilization policy. 
B)  the political business cycle. 
C)  the Lucas critique. 
D)  Okun's law.

Question 20

The Phillips curve describing an economy takes the form u = un - $\alpha$( $\pi$ - E $\pi$). The central bank directly sets the inflation rate to minimize the following loss function, L(u,  $\pi$) = u + $\gamma$ $\pi$2. The symbol u denotes the unemployment rates, un is the natural rate of unemployment,  $\pi$ is the inflation rate, E $\pi$ is the expected inflation rate, and $\alpha$ and$\gamma$ are behavioral response parameters of the economy. Private agents form their expectations rationally before the central bank sets the inflation rate. The optimal inflation rate when the central bank operates using a fixed rule will be ______. The optimal inflation rate when the central bank operates with discretion will be ______.

Accepted Answer

A)  un; 0 
B)  0; un 
C)  0; $\alpha$/(2$\gamma$) 
D)  $\alpha$/(2$\gamma$); 0

Exam 18: Alternative Perspectives on Stabilization Policy