Question 1

Keynesians believed that the economy could get out of the Great Depression if:

Accepted Answer

Keynesians believed that the government should increase its spending to offset the decrease in private consumption and investment spending during a recession. This is known as expansionary fiscal policy. The idea was that the additional government spending would stimulate the economy, creating jobs, increasing income, and ultimately increasing consumption and investment by the private sector.

Question 2

According to the Great Moderation consensus, expansionary fiscal policy will shift the aggregate demand curve to the _____ and lead to a _____ level of output and a _____ level of employment in the short run.

Accepted Answer

According to the Great Moderation consensus, expansionary fiscal policy will shift the aggregate demand curve to the right and lead to a higher level of output and a higher level of employment in the short run.

Question 3

The belief that individuals and firms make their decisions optimally using all available information:

Accepted Answer

The belief that individuals and firms make their decisions optimally using all available information is referred to as rational expectations. It is a key concept in new classical economics and is based on the assumption that economic agents are rational and forward-looking. This has important implications for the effectiveness of monetary and fiscal policy, as it suggests that any attempt to manipulate the economy through discretionary policy is likely to be ineffective or even counterproductive.

Question 4

Discretionary fiscal policy:

Accepted Answer

Discretionary fiscal policy involves deliberate changes in government spending and taxation to influence the economy. This approach is favored by Keynesian economists, who believe that government intervention is necessary to stabilize the economy during times of recession or inflation. However, discretionary fiscal policy is subject to lags, as it takes time for government actions to affect the economy.

Question 5

Many economists believe that:

Accepted Answer

Many economists believe that discretionary fiscal policy should be used sparingly because political influence may manipulate its implementation and use. While both fiscal and monetary policy can have some impact on reducing unemployment, the effectiveness can vary and both policies can face limitations and political challenges. Therefore, carefully considering and using policy tools that are less susceptible to political influence, such as monetary rules, may be more effective for maintaining economic stability in the long run.

Question 6

A policy maker who aims at maintaining unemployment at 5% while the NAIRU for this economy is 4% will most likely find the economy running into:

Accepted Answer

The answer of A policy maker who aims at maintaining...

Question 7

The Great Moderation consensus in macroeconomics is that:

Accepted Answer

The Great Moderation consensus in macroeconomics is that in the long run, neither monetary nor fiscal policy can reduce unemployment below the natural rate. The natural rate of unemployment is the level of unemployment that exists when the economy is in a long-run equilibrium. This consensus emerged after the observed period of low volatility in macroeconomic indicators during the 1980s and 1990s, during which policymakers had less need to intervene in the economy.

Question 8

The belief that fluctuations in the rate of growth of factor productivity cause the business cycle is:

Accepted Answer

The statement is referring to the real business cycle theory, which suggests that fluctuations in productivity growth are the primary driver of the business cycle.

Question 9

The belief that government spending will crowd out private spending is part of:

Accepted Answer

The belief that government spending will crowd out private spending is a core principle of monetarism, which emphasizes the role of monetary policy and the importance of controlling the money supply to achieve macroeconomic stability.

Question 10

The political business cycle is MOST often found when:

Accepted Answer

The political business cycle is most often found when activist macroeconomic policies are followed. This is because politicians have an incentive to manipulate the economy during election cycles in order to improve their chances of re-election. They may enact policies such as stimulating the economy or increasing government spending in the lead-up to elections, and then tightening policies afterward to address any resulting inflation or economic instability. This can create a cycle of economic expansion and contraction that corresponds with the election cycle.

Question 11

Monetary policy:

Accepted Answer

Unlike fiscal policy, which requires political approval and often faces hurdles in implementation, monetary policy is largely conducted by the central bank and thus less hampered by the political process. The other choices are not accurate statements about monetary policy.

Question 12

According to the natural rate hypothesis:

Accepted Answer

The natural rate hypothesis states that there is a natural rate of unemployment (NAIRU) that is determined by structural factors in the economy and cannot be changed through monetary or fiscal policy. Once inflation is built into expectations, if policymakers try to lower unemployment below the natural rate, it will lead to accelerating inflation. Therefore, choice A is the correct answer.

Question 13

Keynes believed that "animal spirits," or confidence levels, had their greatest impact on:

Accepted Answer

Keynes believed that the decisions made by investors were heavily influenced by their level of confidence in the economy. This, in turn, influenced investment spending, making it the most impacted by "animal spirits."

Question 14

Someone who believes in macroeconomic policy activism is likely to suggest that:

Accepted Answer

Someone who believes in macroeconomic policy activism would argue that changes in monetary or fiscal policy would smooth out the business cycle by stimulating economic activity in a downturn and controlling inflation in an upswing. They would not suggest that changes in the money supply or changes in fiscal policy would destabilize the economy, nor would they prioritize balancing the government budget over addressing current economic problems. Keeping the money supply growing at a constant rate may not be sufficient for addressing economic fluctuations.

Question 15

Rational expectations theory suggests that:

Accepted Answer

Rational expectations theory suggests that individuals have access to all relevant information and use it to form expectations about the future. Therefore, policies that are expected will already be incorporated into individuals' decision-making processes, and will have no additional impact on output or unemployment.

Question 16

For the most part, Keynesians believe that:

Accepted Answer

Keynesians generally believe that fiscal policy, such as government spending and tax cuts, is better suited to combat recessions than monetary policy. Keynesians argue that during a recession, there is a lack of aggregate demand in the economy, so government intervention via fiscal policy can increase demand, stimulate economic activity, and decrease unemployment.

Question 17

A monetary policy rule:

Accepted Answer

A monetary policy rule is a predetermined formula or system used by a central bank to set monetary policy. This can provide greater transparency and predictability in the actions of the central bank. It is often favored by proponents of monetarism, which emphasizes the importance of stable and predictable growth in the money supply.

Question 18

For Keynes, changes in aggregate demand had their greatest impact:

Accepted Answer

Keynesian economics focuses on the short run, where changes in aggregate demand have the greatest impact on the level of aggregate output. In the long run, prices adjust to changes in aggregate demand, but in the short run, output can change due to changes in aggregate demand.

Question 19

Monetarists believe that:

Accepted Answer

Monetarists believe that steady growth in the money supply will lead to steady GDP growth in the long-run, and that changes in the money supply have a direct impact on the level of economic activity. They argue that monetary policy should focus on controlling the money supply rather than trying to stabilize short-term fluctuations in the economy.

Question 20

Keynes believed that:

Accepted Answer

Keynes believed that short-run effects were important and changes in aggregate demand could affect output and price levels. He advocated for government intervention in the economy through fiscal policies to stabilize output and employment, especially during economic downturns. He did not believe that monetary policies alone could effectively stabilize the economy.

Quiz 30: Macroeconomics- Events and Ideas