Deck 9: How Has Macroeconomic Policy Changed in an Era of Uncertainty

Question 1

Why is it important to control inflation?

Answer 1

$\bullet$ Consider the definition of inflation.
$\bullet$ Adverse effects of an increase in inflation on output and employment, i.e. price system may become less efficient as a coordinating mechanism; increased uncertainty may cause a fall in consumption and investment; potential adverse effect on international competitiveness.
$\bullet$ Low and stable inflation conducive to increased business activity.
$\bullet$ Distributive effects, i.e. arbitrary and unplanned changes in the distribution of income and wealth.

Question 2

What are the main costs associated with unemployment?

Answer 2

$\bullet$ Consider the definition of unemployment.
$\bullet$ Financial impact on the unemployed and their families, i.e. potential source of hardship and poverty.
$\bullet$ Wider psychological and social consequences, e.g. boredom; loss of self-respect, skill, personal motivation, etc.
$\bullet$ Loss of tax revenue which would be generated if the unemployed were in work, plus the cost of various benefits paid to the unemployed and their families by the state.
$\bullet$ Wide range of potential social and political consequences, e.g. higher unemployment associated with increased crime, drug abuse, etc.

Question 3

In the view of Keynesian economists, when an economy settles below full employment, expansionary fiscal policy will result in:

A) An increase in output and employment
B) A fall in both inflation and employment
C) An increase in inflation and a fall in employment
D) None of the above

Answer 3

A

Question 4

Which one of the following is not a measure intended to reduce the natural rate of unemployment?

A) Currency depreciation or devaluation
B) Reducing the power of trade unions
C) Reducing the minimum wage
D) Making unemployment-related benefits conditional on active job-search

Question 5

Which one of the following policy measures is not available to countries that are members of the euro area?

A) An improvement of their international price competitiveness through currency depreciation
B) Reducing taxes on individuals and firms
C) Labour market reform
D) Reductions in interest rates

Question 6

The conventional objective for economic growth is best described by which one of the following?

A) Economic growth should be stable and satisfactory
B) Economic growth should be as fast as possible
C) Economic growth should be at an average rate that is close to long-term potential
D) Economic growth should be stable at 2.5 per cent

Question 7

Which two of the following are economically active individuals?

A) People of working age, not seeking work
B) Unemployed people, not actively seeking work
C) People who are employed
D) Unemployed people, actively seeking work

Question 8

Which three of the following are inflows to the unemployment pool?

A) Redundancies
B) Quits
C) New entrants
D) Withdrawals

Question 9

Suppose the economy is initially operating at its potential GDP. In the Keynesian view, which two of the following will occur after the economy is hit by an adverse aggregate demand shock?

A) Output and employment will increase, as will inflationary pressures
B) The economy will take a long time to revert to its former state
C) Both output and employment will fall
D) The economy will not be affected and will remain at its potential GDP

Question 10

Which two of the following are examples of expansionary fiscal policy?

A) Lower interest rates
B) An increase in VAT
C) An increase in government expenditure
D) A cut in the basic rate of income tax

Question 11

Which two of the following are factors affecting a country's capacity to efficiently produce goods and services in the long term?

A) Its willingness to run budget deficits
B) The flexibility of its monetary policy
C) Its investment in human capital
D) Its level of institutional sophistication and institutional reliability

Question 12

Macroeconomics is concerned with the study of the behaviour of individual households and firms within the economy.

Question 13

Economic growth refers to an increase in money GDP.

Question 14

Low and stable inflation is an important pre-condition for achieving a sustainable growth of output and employment.

Question 15

The famous British economist John Maynard Keynes argued that the Great Depression was a result of a sharp fall in the level of investment and that unemployment reflected a state of deficient aggregate demand.

Question 16

Keynes introduced the concept of there being a natural rate of unemployment in his 1936 book, The General Theory of Employment, Interest and Money.

Question 17

The late American economist Milton Friedman's contribution to the debate over stabilization policy may be summarized as follows: governments do not need to stabilize the economy, they cannot do so, and they should not try.

Question 18

According to Friedman, governments need to, can, and therefore should seek to stabilize their economies through aggregate demand management.

Question 19

Inflation has always been a major and active concern of the world's macroeconomic policymakers.

Question 20

Which two of the following are characteristics of the European single market?

A) Free movement of goods and services
B) The euro as a common currency
C) A unified macroeconomic policy
D) Free movement of labour