Question 1

Suppose that businesses and consumers become much more optimistic about the future of the economy.To stabilize output,the Federal Reserve could

Accepted Answer

When businesses and consumers are optimistic, demand increases, potentially leading to inflation. The Federal Reserve can sell bonds to raise interest rates, which helps cool down the economy by making borrowing more expensive and reducing spending.

Question 2

In 1961,President John F.Kennedy,acting upon advice from his economists,proposed tax cuts.The advice he received

Accepted Answer

Keynes's ideas had been widely disseminated and studied by economists by 1961, so option D is incorrect. Option B is also incorrect because Keynes did not teach that all attempts to stabilize the economy were futile; rather, he believed in government intervention in times of economic hardship. Option A is incorrect because Keynes did not believe that tax cuts were always counterproductive; rather, he believed that they could be an effective tool for stimulating aggregate demand during times of economic downturn, as was the case in the early 1960s when Kennedy proposed his tax cuts. Therefore, the correct answer is C, which suggests that Kennedy's economists had studied Keynesian economics when it was relatively new.

Question 3

Suppose an increase in interest rates causes rising unemployment and falling output.To counter this,the Federal Reserve would

Accepted Answer

Increasing the money supply would lead to lower interest rates, which would stimulate spending and investment, thus reversing the negative effects on employment and output. Increasing government spending would also have a similar effect, but it may not be feasible during times of economic downturn due to budget constraints. Decreasing the money supply or decreasing government spending would further exacerbate the negative effects on employment and output.

Question 4

Which U.S.president,when asked why he had proposed a tax cut,responded by saying "To stimulate the economy.Don't you remember your Economics 101?"

Accepted Answer

John F. Kennedy proposed a tax cut in the early 1960s to stimulate the economy, and he is known for making a statement about the basic economic principle of tax cuts boosting economic activity.

Question 5

In the early 1960s,the Kennedy administration made considerable use of

Accepted Answer

The Kennedy administration used fiscal policy to stimulate the economy, specifically through tax cuts and increased government spending on programs such as the space race and education. This was done in an effort to combat high levels of unemployment and promote economic growth.

Question 6

The Kennedy tax cut of 1964 included an investment tax credit that was designed to

Accepted Answer

The investment tax credit was intended to stimulate business investment, which would increase aggregate demand in the short run by boosting spending. In the long run, increased investment would enhance productive capacity, thus increasing aggregate supply.

Question 7

Monetary policy

Accepted Answer

Monetary policy can be implemented quickly, but its impact on aggregate demand usually takes several months to show up in the economy. The Federal Reserve, for example, usually takes several meetings to adjust the federal funds rate, and it can take some time for these rate changes to filter through the financial system and affect borrowing, spending, and investment decisions. Therefore, monetary policy is best thought of as a tool that can influence the economy's trajectory over time, rather than as a quick fix for short-term problems.

Question 8

If businesses and consumers become pessimistic,the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

Accepted Answer

If businesses and consumers become pessimistic, the Federal Reserve can attempt to stimulate aggregate demand by increasing the money supply, which lowers interest rates. This reduces the cost of borrowing and encourages businesses and consumers to spend and invest more, thereby boosting real GDP and offsetting the negative impact of pessimism on the economy.

Question 9

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"

Accepted Answer

Former chairman of the Federal Reserve System William McChesney Martin famously said, "The Federal Reserve, in taking away the punch bowl, has never been popular." This quote is often paraphrased as "The Federal Reserve's job is to take away the punch bowl just as the party gets going."

Question 10

Suppose there were a large decline in net exports.If the Fed wanted to stabilize output,it could

Accepted Answer

By buying bonds, the Fed increases the money supply, which lowers interest rates. Lower interest rates can stimulate investment and consumption, offsetting the decline in net exports and stabilizing output.

Question 11

Suppose there is an increase in government spending.To stabilize output,the Federal Reserve would

Accepted Answer

To stabilize output after an increase in government spending, the Federal Reserve would decrease the money supply to counteract potential inflationary pressures.

Question 12

The Employment Act of 1946

Accepted Answer

The Employment Act of 1946 implies that the government should avoid being a cause of economic fluctuations, respond to changes in the private economy to stabilize aggregate demand, and reflected the ideas promoted in Keynes's influential book, The General Theory of Employment, Interest, and Money. Therefore, all of the above options are correct.

Question 13

The Kennedy tax cut of 1964 was

Accepted Answer

The Kennedy tax cut of 1964 was successful in stimulating the economy by increasing consumer spending and investment, which shifted the aggregate demand curve to the right. It was not primarily aimed at shifting the aggregate supply curve.

Question 14

Keynes used the term "animal spirits" to refer to

Accepted Answer

Keynes used the term "animal spirits" to refer to arbitrary changes in attitudes of households and firms. He believed that economic decisions were not always rational and were often influenced by emotions, expectations, and other non-economic factors. These unpredictable changes in behavior could have a significant impact on the economy and were a key factor in his theory of business cycles.

Question 15

Keynes argued that aggregate demand is

Accepted Answer

Keynes argued that aggregate demand is unstable because of fluctuations in optimism and pessimism that lead to changes in spending and investment. He believed that these waves of sentiment could cause significant fluctuations in the economy, leading to periods of recession and unemployment.

Question 16

Suppose there was a large increase in net exports.If the Fed wanted to stabilize output,it could

Accepted Answer

To stabilize output in the face of increased net exports, the Fed might aim to counteract the inflationary pressure by decreasing the money supply, which would lead to higher interest rates, thereby cooling down the economy.

Question 17

Suppose households attempt to increase their money holdings.To stabilize output by countering this increase in money demand,the Federal Reserve would

Accepted Answer

If households attempt to increase their money holdings, it implies that they want to increase their savings. This increased demand for money can lead to a decrease in spending, which can ultimately decrease output. To stabilize output, the Federal Reserve can increase the money supply by buying government securities or lowering the reserve requirements for banks. This will increase the availability of money and lower interest rates, which can increase spending, and hence stabilize output. Therefore, Option B - increase the money supply is the best choice.

Question 18

The Employment Act of 1946 states that

Accepted Answer

The Employment Act of 1946 clearly states that the government should promote full employment and production, which means that the government should make sure that there are enough jobs available for everyone who wants to work and that the economy is functioning at its maximum potential. The Act does not mention anything about the Fed's use of monetary policy or periodic increases in minimum wage and unemployment insurance benefits.

Question 19

Keynes argued that

Accepted Answer

Keynes argued that irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment. This is a key tenet of his theory of macroeconomics, which asserts that fluctuations in aggregate demand play a significant role in economic growth and stability.

Question 20

Suppose there is a tax increase.To stabilize output,the Federal Reserve will

Accepted Answer

When there is a tax increase, people tend to have less disposable income, which can lead to a decrease in spending and a decrease in output. To stabilize output, the Federal Reserve can increase the money supply, which can encourage more spending and boost economic activity. Increasing government spending may also help to boost output, but this is not always the most effective approach and can lead to inflation if not carefully managed. Decreasing government spending or decreasing the money supply would likely have a contracting effect on the economy and could exacerbate the negative impacts of the tax increase.

Quiz 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand: Using Policy to Stabilize the Economy