Question 1

"Automatic stabilizers" played a part in reducing the length and severity of the recession of 1953-54.  This term refers to

Accepted Answer

Automatic stabilizers are government programs that automatically increase spending or decrease taxes in response to economic downturns without the need for explicit action by policymakers. Programs like unemployment insurance and Social Security, which provide people with income when they lose their jobs or retire, are examples of automatic stabilizers. They help to maintain demand in the economy during downturns, mitigating the severity of recessions.

Question 2

The term "dirty float" is used to describe

Accepted Answer

The term "dirty float" refers to a system of exchange rates where the value of a currency is determined by market forces (supply and demand) but with the central bank or government occasionally intervening to stabilize or influence the currency's value. This is in contrast to a pure float, where the currency's value is determined entirely by market forces without any government intervention, and a fixed exchange rate, where the government sets and maintains the currency's value relative to another currency or a basket of currencies.

Question 3

Beginning in 1971, the Nixon administration enacted a series of price controls in hopes of reducing inflation.  The first of these, known as Phase I,

Accepted Answer

Phase I of the Nixon administration's price controls, enacted in 1971, consisted of a complete price freeze on all wages and prices in an effort to combat inflation.

Question 4

During which Presidential administration did the United States both end its commitment to Bretton Woods and institute significant wage and price controls?

Accepted Answer

The United States ended its commitment to the Bretton Woods system and instituted significant wage and price controls during the administration of President Richard Nixon. This period marked a significant shift in U.S. economic policy, including the suspension of the dollar's convertibility into gold in 1971.

Question 5

Which of the following historical events is often cited as an example of the successful implementation of Keynesian theory?

Accepted Answer

The Kennedy-Johnson tax cut of 1964 is often cited as a successful example of Keynesian economic theory in action. This policy aimed to stimulate economic growth and reduce unemployment by increasing consumer demand through tax reductions, aligning with Keynesian principles of using fiscal policy to manage economic cycles.

Question 6

Stagflation is defined as

Accepted Answer

Stagflation is characterized by the simultaneous occurrence of high inflation and high unemployment, reflecting a period where economic growth is stagnant or declining while prices continue to rise.

Question 7

The Bretton Woods system

Accepted Answer

The Bretton Woods system, established in 1944, fixed currencies to the US dollar, which was convertible to gold. This system led to a strain on the U.S. gold reserves as countries began to demand gold for their dollar holdings, contributing to a balance of payments deficit for the U.S. This system did not allow for market-determined exchange rates (A is incorrect), it did not end the use of the gold standard but rather defined the dollar in terms of gold (B is incorrect), and it resulted in a decrease, not an increase, of the U.S. gold supply in the 1960s (D is incorrect).

Question 8

The entrance of the U.S. into the Korean War in June of 1950 led to

Accepted Answer

The entrance of the U.S. into the Korean War led to increased military spending, which in turn stimulated the economy, leading to a surge in consumer demand.

Question 9

Fiscal policy aims to influence the overall health of the economy through changes in

Accepted Answer

Fiscal policy involves changes in government spending and tax rates to influence the economy, unlike monetary policy, which deals with the money supply and interest rates.

Question 10

Milton Friedman explained that increases in the money supply will temporarily reduce unemployment because

Accepted Answer

Milton Friedman, a prominent economist, argued that increases in the money supply can temporarily reduce unemployment because it takes time for wages to adjust to the inflationary effects of the increased money supply. This means that in the short term, real wages (wages adjusted for inflation) may fall, making labor cheaper and encouraging employers to hire more workers. However, once wages catch up to the inflation, this effect diminishes. This concept is part of Friedman's critique of the Phillips Curve, which posited a stable, inverse relationship between inflation and unemployment.

Question 11

The Laffer curve expresses a relationship between

Accepted Answer

The Laffer curve illustrates the relationship between tax rates and the total tax revenues collected by the government. It suggests that there is an optimal tax rate that maximizes revenue without discouraging economic activity.

Question 12

Under the leadership of Federal Reserve Chairman _______________, the double-digit inflation of the 1970s and early 1980s was finally reduced using policies advocated by monetarists.

Accepted Answer

Paul Volcker, serving as the Chairman of the Federal Reserve from 1979 to 1987, implemented tight monetary policies that successfully reduced the high inflation rates experienced during the late 1970s and early 1980s.

Question 13

The Reagan administration's experiment with supply-side economics produced a historic period of economic expansion that was accompanied by

Accepted Answer

The Reagan administration's experiment with supply-side economics, while leading to economic expansion, also resulted in a dramatic increase in the federal government's budget deficit due to significant tax cuts and increased military spending.

Question 14

The belief that government spending is necessary to offset sluggish private investment demand is associated with

Accepted Answer

This belief is a core principle of Keynesian economics, which argues that during periods of low private demand, government intervention through increased spending can help stabilize the economy.

Question 15

Which of the following economists is often credited with establishing the monetarist school of thought?

Accepted Answer

Milton Friedman is widely recognized as the leading figure in the establishment of the monetarist school of thought, which emphasizes the role of governments in controlling the amount of money in circulation.

Question 16

Following the lifting of price controls that had been implemented in the early 1970s, inflation skyrocketed.  Economists' explanations for this acceleration in the price level include

Accepted Answer

All of the choices provided are valid explanations for the acceleration in the price level following the lifting of price controls. The increase in the money supply, increases in the federal government deficit, supply-side shocks (especially in oil and food), and the release of inflationary pressures that had built up during the period of price controls all contributed to the skyrocketing inflation in the period mentioned.

Question 17

Monetary policy is primarily exercised by

Accepted Answer

Monetary policy is primarily exercised by the Federal Reserve, which is the central banking system of the United States. The Federal Reserve controls the money supply and interest rates to achieve macroeconomic objectives such as controlling inflation, managing employment levels, and stabilizing the financial system.

Question 18

For much of the 1940s, 50s and 60s, macroeconomic policymaking in the U.S. and abroad was dominated by

Accepted Answer

The ideas advanced in Keynes's General Theory were dominant in macroeconomic policymaking during the 1940s, 50s, and 60s. Keynesian economics, which emphasized the role of government spending and fiscal policy in managing economic activity, was particularly influential in shaping policies aimed at addressing the Great Depression and post-war economic challenges.

Question 19

Following World War II, the U.S. and most developed countries adopted a system of fixed exchange rates known as

Accepted Answer

The Bretton Woods system was established in 1944, creating a framework for fixed exchange rates that pegged currencies to the US dollar, which was in turn convertible to gold. This system was adopted by many developed countries after World War II to ensure financial stability and promote international trade.

Question 20

Policies adopted by the Truman administration effectively avoided inflation during the Korean War.  These policies included

Accepted Answer

The Truman administration implemented a combination of measures to avoid inflation during the Korean War, including increased personal and corporate tax rates, price and wage controls, reduced purchases of government debt by the Federal Reserve, and discontinuing the practice of "pegging" interest rates. These policies were aimed at controlling inflationary pressures that typically arise during periods of increased government spending, such as during a war.

Quiz 28: Monetary Policy, Fiscal Policy, and the Business Cycle After World War Ii

"Automatic stabilizers" played a part in reducing the length and severity of the recession of 1953-54. This term refers to