Question 1

Which of the following statements do opponents of active stabilization policy believe?

Accepted Answer

Opponents of active stabilization policy argue that the political process can create significant delays in implementing fiscal policy, which can reduce its effectiveness in stabilizing the economy.

Question 2

Which of the following policies would stabilization policy activists support when the economy is experiencing unemployment above the natural rate?

Accepted Answer

Stabilization policy activists would support a reduction in tax rates when the economy is experiencing unemployment above the natural rate. Lowering tax rates increases consumers' disposable income, which leads to an increase in consumer spending, stimulating economic growth and job creation.

Question 3

When making a case against active stabilization policies, what do some economists argue?

Accepted Answer

Monetary policy is one of the main tools used by central banks to stabilize the economy. Some economists argue that monetary policy should not be used for this purpose because it can lead to unintended consequences, such as inflation or deflation.

Question 4

Which of the following is consistent with the supply-side theories?

Accepted Answer

Supply-side theories focus on increasing the potential output of the economy, and a shift in aggregate supply (which represents the quantity of goods and services that firms are willing to produce and sell at any given price level) leads to a permanent increase in the natural rate of output. Option A is inconsistent with supply-side theories, as decreasing the money supply during a recession could worsen the economic situation. Option C is inconsistent as well since supply-side theorists believe that increasing the minimum wage and unemployment insurance benefits could have negative effects on labor markets and disincentivize work. Option D is not necessarily true, as aggregate demand can shift in the short run due to various factors such as changes in consumer or investor confidence.

Question 5

Which of the following statements do opponents of active stabilization policy believe?

Accepted Answer

Opponents of active stabilization policy often argue that the effects of monetary policy can be long-lived, leading to potential destabilization rather than stabilization. They believe that attempts to fine-tune the economy can result in unintended consequences due to the time lags and complexities involved.

Question 6

During expansions, what do automatic stabilizers make government expenditures and taxes do?

Accepted Answer

Automatic stabilizers during expansions make government expenditures fall and taxes rise. This is because during expansions, tax revenue increases naturally with the growth in the economy, and government spending on social welfare programs and unemployment benefits decreases due to decreased demand for such programs. This helps to counteract the expansionary pressure and prevent the economy from overheating.

Question 7

Which of the following do critics of stabilization policy argue?

Accepted Answer

Critics argue that stabilization policy can sometimes destabilize the economy by causing or exacerbating economic fluctuations, rather than preventing them.

Question 8

Which of the following is consistent with the supply-side theories?

Accepted Answer

Supply-side theories emphasize the importance of lowering taxes on businesses and individuals in order to increase investment and production, which in turn increases aggregate supply. Therefore, tax cuts are consistent with supply-side theories. Option A is more consistent with demand-side theories, which suggest that monetary policy can be used to stimulate demand and increase production. Option B is a general policy goal that may be consistent with both supply-side and demand-side theories. Option C is more consistent with demand-side theories that focus on supporting workers and increasing demand through increased spending power.

Question 9

Which of the following factors mostly determines the lag problem associated with monetary policy?

Accepted Answer

The lag problem associated with monetary policy is mostly determined by the fact that business firms make investment plans far in advance. It takes time for changes in monetary policy to affect the economic activity and for businesses to adjust their investment and spending plans accordingly.

Question 10

Which of the following is NOT an automatic stabilizer?

Accepted Answer

The minimum wage is not an automatic stabilizer because it does not automatically adjust based on economic conditions. Rather, it is typically determined by legislative action at either the state or federal level. The other choices are automatic stabilizers, meaning that they automatically provide economic support during times of economic downturns. For example, when unemployment rises, the unemployment compensation system automatically provides financial support to those who have lost their jobs. Similarly, the federal income tax and welfare system provide a counter-cyclical economic stimulus by automatically increasing or decreasing government spending based on economic conditions.

Question 11

If there are automatic stabilizers but no deliberate action by policymakers, how would government expenditures change as output changes?

Accepted Answer

Automatic stabilizers, such as unemployment benefits and welfare programs, increase government expenditures when output falls, as more people qualify for these benefits during economic downturns.

Question 12

Which of the following policies would someone who wants the government to follow an active stabilization policy recommend when the economy is experiencing unemployment above the natural rate?

Accepted Answer

Someone who wants the government to follow an active stabilization policy would recommend increasing government expenditures during a recession or when the economy is experiencing unemployment above the natural rate. This policy is often referred to as expansionary fiscal policy and is aimed at increasing demand and stimulating economic growth. Decreasing the money supply (A) and increasing taxes (C) are contractionary policies that would reduce demand and can potentially worsen a recession. Reducing the government deficit (D) can also be contractionary, as it involves reducing government spending and can also worsen a recession.

Question 13

What did Keynes use the term "animal spirits" to refer to?

Accepted Answer

Keynes used the term "animal spirits" to refer to arbitrary changes in the attitudes of households and firms that could lead to fluctuations in the economy, including changes in consumer confidence, willingness to invest, and risk-taking behavior.

Question 14

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve to the right away from long-run equilibrium?

Accepted Answer

Keynes's followers would support increasing taxes to counteract the increase in aggregate demand and bring the economy back to long-run equilibrium, preventing potential inflation.

Question 15

During recessions, what do taxes tend to do, and to what effect?

Accepted Answer

During recessions, governments often reduce taxes to stimulate the economy, which shifts aggregate demand to the right by increasing consumers' disposable income and encouraging spending.

Question 16

Which of the following policy alternatives would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

Accepted Answer

The answer of Which of the following policy alternatives would...

Question 17

Which of the following is consistent with the Keynesian theory?

Accepted Answer

According to the Keynesian theory, fluctuations in consumer and business confidence can cause changes in aggregate demand and result in cyclical unemployment. Therefore, irrational waves of pessimism that lead to a decrease in aggregate demand are consistent with this theory. Options B, C, and D are inconsistent with the Keynesian theory as they suggest that changes in consumer/business confidence would lead to different outcomes than those predicted by the theory.

Question 18

Economists agree on all of the following statements EXCEPT which one?

Accepted Answer

Economists do not universally agree that the government should use fiscal policy to stabilize the economy, as there are differing views on the effectiveness and timing of such interventions.

Question 19

What did Keynes argue about aggregate demand?

Accepted Answer

Keynes argued that aggregate demand is unstable due to waves of pessimism and optimism among consumers and investors that create fluctuations. He believed in the need for government intervention to stabilize aggregate demand and prevent economic downturns. Options A and B are incorrect, as they suggest that aggregate demand is stable, which goes against Keynes's theory. Option D is also incorrect, as seasonal variations only represent a small portion of the fluctuations in aggregate demand.

Question 20

Which of the following best defines automatic stabilizers?

Accepted Answer

Automatic stabilizers are policies in which changes in taxes and government spending occur automatically without requiring legislative action. They aim to stabilize the economy by offsetting fluctuations in aggregate demand. For example, during a recession, unemployment insurance and welfare benefits automatically increase, which leads to an increase in aggregate demand and a stabilizing effect on the economy. Similarly, during an expansion phase, tax revenues increase automatically, which reduces the government's budget deficit and helps to stabilize the economy. Therefore, option B correctly defines automatic stabilizers.

Quiz 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Which of the following statements do opponents of active stabilization policy believe?

Which of the following policies would stabilization policy activists support when the economy is experiencing unemployment above the natural rate?

When making a case against active stabilization policies, what do some economists argue?

Which of the following is consistent with the supply-side theories?

Which of the following statements do opponents of active stabilization policy believe?

During expansions, what do automatic stabilizers make government expenditures and taxes do?

Which of the following do critics of stabilization policy argue?

Which of the following is consistent with the supply-side theories?

Which of the following factors mostly determines the lag problem associated with monetary policy?

Which of the following is NOT an automatic stabilizer?

If there are automatic stabilizers but no deliberate action by policymakers, how would government expenditures change as output changes?

Which of the following policies would someone who wants the government to follow an active stabilization policy recommend when the economy is experiencing unemployment above the natural rate?

What did Keynes use the term "animal spirits" to refer to?

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve to the right away from long-run equilibrium?

During recessions, what do taxes tend to do, and to what effect?

Which of the following policy alternatives would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

Which of the following is consistent with the Keynesian theory?

Economists agree on all of the following statements EXCEPT which one?

What did Keynes argue about aggregate demand?

Which of the following best defines automatic stabilizers?