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

Question 1

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

A) deficit spending by the federal government.
B) spending on education by local and state governments.
C) programs like unemployment insurance and Social Security.
D) actions by the Federal Reserve aimed at reducing interest rates.

Answer 1

programs like unemployment insurance and Social Security.

Question 2

The term "dirty float" is used to describe

A) international agreements about fishing rights that were developed in the 1960s.
B) the current system of exchange rates, which relies primarily on market forces with limited government intervention.
C) the inflation that followed price controls implemented by the Nixon administration.
D) unsound monetary policy.

Answer 2

the current system of exchange rates, which relies primarily on market forces with limited government intervention.

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,

A) consisted of a complete price freeze.
B) imposed a ceiling price on meat, but left other prices unregulated.
C) froze wages, but left other prices unregulated.
D) applied only to oil prices.

Answer 3

consisted of a complete price freeze.

Question 4

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

A) Dwight Eisenhower.
B) Richard Nixon.
C) Jimmy Carter.
D) William Clinton.

Question 5

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

A) the Kennedy-Johnson tax cut of 1964
B) the price controls of the Nixon administration
C) the anti-inflation policies of the Carter administration
D) the series of tax cuts implemented by the Reagan administration during the 1980s

Question 6

Stagflation is defined as

A) the simultaneous occurrence of high inflation and high unemployment.
B) high inflation accompanied by falling interest rates.
C) declining GDP accompanied by a stable price level.
D) a persistent decline in the price level that is unresponsive to monetary and fiscal policies.

Question 7

The Bretton Woods system

A) allowed for market-determined exchange rates.
B) ended the use of the gold standard in all participating countries.
C) led to a dramatic increase in the U.S. balance of payments deficit.
D) resulted in the rapid increase of the U.S. gold supply in the 1960s.
E) All of the above.

Question 8

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

A) deflation.
B) an increase in the unemployment rate.
C) a long and deep recession.
D) a surge in consumer demand.
E) All of the above.

Question 9

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

A) the money supply.
B) government spending and tax rates.
C) interest rates.
D) international exchange rates.
E) All of the above.

Question 10

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

A) wages do not respond to monetary policy.
B) unions support policies that increase inflation.
C) inflation benefits lenders.
D) prices rise faster than wages.

Question 11

The Laffer curve expresses a relationship between

A) tax rates and tax revenues.
B) inflation and unemployment.
C) interest rates and saving.
D) money supply and the price level.

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.

A) Milton Friedman
B) Alan Greenspan
C) Paul Volcker
D) Alfred Kahn

Question 13

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

A) falling real interest rates.
B) high unemployment rates.
C) a dramatic increase in the federal government's budget deficit.
D) a reduction in the U.S. trade deficit.
E) All of the above.

Question 14

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

A) monetarism.
B) supply-side economics.
C) Keynesianism.
D) rational expectations theory.

Question 15

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

A) John Maynard Keynes
B) Arthur Laffer
C) A. W. Phillips
D) Milton Friedman

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

A) the increase in the money supply that also occurred during the early 1970s.
B) increases in the federal government deficit, especially in 1971 and 1972.
C) supply-side shocks in oil and food.
D) the release of inflationary pressures that built up during the period of price controls.
E) All of the above.

Question 17

Monetary policy is primarily exercised by

A) Congress.
B) the President.
C) the Federal Reserve.
D) the Treasury Department.

Question 18

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

A) the ideas advanced in Keynes's General Theory .
B) the ideas advanced in Friedman's Monetary History of the U.S.
C) the supply-side theories of Arthur Laffer and David Stockman.
D) Robert Lucas's theories of business cycles.

Question 19

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

A) the Heller plan.
B) the new gold standard.
C) the Bretton Woods system.
D) the Geneva accord.

Question 20

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

A) increased personal and corporate tax rates.
B) price and wage controls.
C) reduced purchases of government debt by the Federal Reserve.
D) discontinuance of the practice of "pegging" interest rates.
E) All of the above.

Question 21

The Federal Reserve chair with the longest tenure is

A) Alan Greenspan.
B) Paul Volcker.
C) Milton Friedman.
D) Arthur Laffer.

Question 22

Alan Greenspan's overall approach to monetary policy

A) has been credited in part for the expansion of the 1990s.
B) relied heavily on the monetization of debt during economic downturns.
C) typically responded to economic downturns by lowering the federal funds rate.
D) Both a and b are correct.
E) both a and c are correct.

Question 23

The economic boom of the 1990s was caused in part by

A) America "getting wired."
B) low interest rates.
C) an investment boom as the use of personal computers and the Internet became ubiquitous.
D) All of the above are correct.
E) Only a and c are correct.

Question 24

According to the Fisher effect, if a lender and a borrower would agree on an interest rate of 8 percent when no inflation is expected, they should set a rate of _______ when an inflation rate of 3 percent is expected.

A) 2 percent
B) 5 percent
C) 8 percent
D) 11 percent

Question 25

Over time, the Phillips curve has

A) remained stable.
B) shifted downward.
C) shifted upward.
D) has become positively sloped.

Question 26

During his tenure as chair, Alan Greenspan has firmly adhered to

A) a policy of steady growth in the money supply at precisely the same rate over time.
B) policies designed to promote price stability.
C) policies that encouraged large and rapid increases in stock prices.
D) a policy of fixed interest rates.

Question 27

The economic boom of the 1990s

A) ended with a recession that lasted from early 2000 to the 2nd quarter of 2002.
B) ended with the financial crash of 2001, with unemployment reaching 7.5%.
C) ended with the stock market and real investment tumbling, and unmemployment near 9%
D) Both a and b are correct.
E) None of the above are correct.

Question 28

The housing market of the early to mid 2000s did not feature

A) "teaser rates" on home mortgages.
B) a dramatic rise in housing prices.
C) widespread calls to end "predatory" lending practices.
D) "subprime" mortgages.

Question 29

The economic downturn of the early 2000s and its aftermath did not include.

A) tax cuts.
B) low interest rates.
C) a strong increase in employment.
D) a boom in real estate.

Question 30

When it was introduced in 1958, the Phillips curve presented policymakers with a "menu" from which they could choose the appropriate

A) combination of monetary and fiscal policy.
B) combination of inflation and unemployment.
C) level of aggregate money supply.
D) income tax rate.

Question 31

Robert Lucas and his followers have argued that the Philips curve appears to be

A) a vertical line.
B) a horizontal line.
C) a negatively-sloped curve.
D) a positively-sloped curve.