Question 1

The long and variable lag before a policy influences the economy makes the job of economic forecasters:

Accepted Answer

The long and variable lag between the implementation of a policy and its impact on the economy makes the job of economic forecasters more important. They must attempt to anticipate the effects of policy changes far in advance, often with limited information and uncertainty about future events. Therefore, it is essential to have skilled economic forecasters who can make accurate predictions about how economic policies will impact the economy.

Question 2

The Lucas critique argues that because the way people form expectations is based ______ on government policies,economists ______ predict the effect of a change in policy without taking changing expectations into account.

Accepted Answer

The Lucas critique posits that because people form their expectations based on government policies, economists cannot accurately predict the effects of policy changes without considering how these expectations might shift.

Question 3

All of the following could be considered automatic stabilizers except:

Accepted Answer

Discretionary changes in taxes are not automatic stabilizers because they require deliberate action by the government, unlike automatic stabilizers which work without new government intervention.

Question 4

If people's expectations of inflation are formed rationally rather than based on adaptive expectations and if policymakers make a credible policy move to reduce inflation,then the costs of reducing inflation will be ______ traditional estimates of the sacrifice ratio.

Accepted Answer

If expectations of inflation are rational, then people will adjust their behavior based on credible policy moves by the government. This means that they will not demand higher wages or prices to compensate for expected inflation, and therefore the costs of reducing inflation will be lower than traditional estimates of the sacrifice ratio, which assume adaptive expectations.

Question 5

The time between when a recession begins and when the central bank lowers interest rates to stimulate aggregate demand is an example of a(n):

Accepted Answer

The time between when a recession begins and when the central bank lowers interest rates to stimulate aggregate demand is an example of an inside lag of monetary policy. Inside lags of monetary policy refer to the time it takes for policymakers to recognize the need for a policy action and to implement it. In this case, it takes time for the central bank to gather information and analyze the state of the economy before deciding to lower interest rates.

Question 6

Advocates of passive policy argue that because monetary and fiscal policy lags are:

Accepted Answer

Advocates of passive policy argue that monetary and fiscal policy lags are long and variable, meaning that their effects on the economy may not be felt for several months or even years. Therefore, attempting to use these policies to offset short-term shocks may actually worsen economic conditions in the long run. Thus, passive policy suggests that policymakers should focus on creating a stable and predictable economic environment to minimize the need for intervention.

Question 7

Economic forecasters did:

Accepted Answer

Economic forecasters failed to predict both the Great Depression and the recession of the early 1990s accurately.

Question 8

Because monetary and fiscal lags are long and variable:

Accepted Answer

Monetary and fiscal lags are long and variable, which means that attempts to stabilize the economy through policy may not have immediate effects and could even have unintended consequences. Therefore, attempts to stabilize the economy are often destabilizing.

Question 9

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

Accepted Answer

Advocates of rational expectations argue that traditional estimates of the sacrifice ratio are unreliable because they are based on the assumption of adaptive expectations, which assumes that people are slow to adjust their expectations for inflation. In reality, rational expectations theory suggests that people are able to quickly adjust their expectations in response to changes in economic conditions. Therefore, traditional estimates of the sacrifice ratio are likely to be biased and may overestimate the costs of reducing inflation.

Question 10

If past economic fluctuations resulted from inept economic policies,then the historical evidence would support using:

Accepted Answer

The answer of If past economic fluctuations resulted from inept...

Question 11

If past policies kept the economy insulated from shocks to aggregate demand and supply,the historical evidence would support using:

Accepted Answer

The answer of If past policies kept the economy insulated...

Question 12

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

Accepted Answer

The answer of According to Christina Romer,the reduction in real...

Question 13

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

Accepted Answer

The differing interpretations of the historical record of the Great Depression, such as the debate between Keynesian economists and monetarists, indicate that there is no straightforward solution to economic crises. Therefore, active or passive macroeconomic policy can both potentially be effective depending on the circumstances, and should be considered on a case-by-case basis.

Question 14

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

Accepted Answer

The fact that traditional methods of policy evaluation do not take into account the impact of policy on expectations is known as the Lucas critique, named after economist Robert Lucas. This critique highlights the importance of considering how individuals and firms form expectations about future policy when evaluating the impact of policy changes.

Question 15

Automatic stabilizers:

Accepted Answer

Automatic stabilizers are built-in features of the economy that automatically stabilize output and income by reducing fluctuations in disposable income without any need for government action. They have no inside lag, meaning they take effect immediately whenever a shock occurs in the economy.

Question 16

Policies that stimulate or depress the economy without any deliberate policy change are called:

Accepted Answer

Automatic stabilizers are policies that automatically stimulate or depress the economy without any deliberate policy change by the government. These policies include progressive income tax, unemployment benefits, and welfare programs. As the economy slows down, people's incomes fall, leading to a decrease in tax revenue and an increase in government spending on social welfare programs. This increase in spending helps to stabilize the economy by increasing the overall demand for goods and services. Similarly, during an economic boom, tax revenues increase, leading to a decrease in government spending on social welfare programs, which helps to prevent overheating of the economy.

Question 17

The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a:

Accepted Answer

The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a monetary outside lag. This is because it takes time for individuals and firms to react to changes in the money supply and adjust their spending and investment decisions accordingly. This lag can vary depending on factors such as the health of the economy and the effectiveness of monetary policy tools.

Question 18

Computer models of the economy:

Accepted Answer

Computer models of the economy require assumptions about monetary and fiscal policy, as these policies have a significant impact on the behavior of consumers and producers. Therefore, these assumptions are necessary inputs for the models to produce accurate predictions.

Question 19

The time between when government spending increases and when aggregate demand starts to increase is an example of a(n):

Accepted Answer

The time between when government spending increases and when aggregate demand starts to increase is an example of an outside lag of fiscal policy. This lag occurs because it takes time for the government to implement and execute spending plans, and it takes time for the effects of this spending to filter through the economy and impact aggregate demand.

Question 20

According to the Lucas critique,when economists evaluate alternative policies they must take into consideration:

Accepted Answer

The Lucas critique argues that economic policies can change people's expectations and behavior, so economists must take this into consideration when evaluating alternative policies. Therefore, choice A is the correct answer. The other options are not directly related to the Lucas critique.

Quiz 15: Stabilization Policy