Question 1

The outside lag is the time:
A)before automatic stabilizers respond to economic activity.
B)when automatic stabilizers are not effective.
C)between a shock to the economy and the policy action responding to the shock.
D)between a policy action and its influence on the economy.

Accepted Answer

The outside lag refers to the delay between the implementation of a policy action (such as a change in fiscal or monetary policy) and the time when that action has its intended effect on the economy.

Question 2

The concerns of economists who favor passive over active policy are most closely associated with their:
A)preference for using monetary policy rather than fiscal policy for stabilization.
B)view that policy made by rules is superior to policy made by discretion.
C)belief that shocks to modern economies are not large enough to require any policy response.
D)doubt that the correct policy will be implemented at the correct time.

Accepted Answer

D

Question 3

The time between a shock to the economy and the policy action responding to that shock is called the:
A)automatic stabilizer.
B)time inconsistency of policy.
C)inside lag.
D)outside lag.

Accepted Answer

The time between a shock to the economy (such as a recession) and the policy action responding to that shock (such as an interest rate cut or fiscal stimulus) is called the inside lag. This lag can be caused by various factors such as the time it takes for policymakers to recognize the problem, gather data, reach a consensus, and implement a policy.

Question 4

The lags involved in implementing monetary and fiscal policy are:
A)short and predictable.
B)long and predictable.
C)short and variable.
D)long and variable.

Accepted Answer

The lags involved in implementing monetary and fiscal policy are generally long and variable. It takes time to gather and analyze economic data needed for policy decisions, and there can also be delays in implementing new policies. Additionally, the impact of policy changes on the economy can be unpredictable and take time to materialize.

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 an:
A)inside lag of monetary policy.
B)outside lag of monetary policy.
C)inside lag of fiscal policy.
D)outside lag of fiscal policy.

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

Increasing government spending when the economy is in a recession is an example of:
A)active monetary policy.
B)active fiscal policy.
C)passive monetary policy.
D)passive fiscal policy.

Accepted Answer

Increasing government spending during a recession is an example of active fiscal policy, which involves the use of government spending and taxation to stimulate economic activity or dampen inflation. Active monetary policy, on the other hand, involves changing interest rates and money supply to achieve similar goals. Passive fiscal or monetary policy, in contrast, refers to a more hands-off approach to economic management.

Question 7

Economists who view the economy as inherently unstable generally argue that:
A)stabilization policy is too dangerous to be used.
B)the economy should be stimulated when it is depressed and slowed when it is overheated.
C)the economy should be slowed when it is depressed and stimulated when it is overheated.
D)monetary and fiscal policies should follow rigid rules of constant growth.

Accepted Answer

Economists who view the economy as inherently unstable believe in the business cycle, where the economy experiences ups and downs. In order to stabilize the economy, they advocate for the use of stabilization policies that stimulate the economy during depressions and slow it down when it is overheated.

Question 8

The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a:
A)fiscal inside lag. fiscal
B)outside lag. monetary
C)inside lag. monetary
D)outside lag.

Accepted Answer

The lag between increasing the money supply and investment expenditures increasing is typically referred to as the monetary policy outside lag. This is because it takes time for changes in the money supply to work their way through the economy and have an impact on investment spending. None of the other choices accurately describe this lag.

Question 9

The lawmakers who wrote the Employment Act of 1946 believed that:
A)the economy was naturally stable.
B)the Great Depression could not happen again.
C)without active government policy the Great Depression could occur again.
D)monetary policy should be conducted according to rules.

Accepted Answer

The Employment Act of 1946 was enacted to ensure that the federal government played an active role in promoting maximum employment, production, and purchasing power. Lawmakers who wrote this act believed that without active government policy, another Great Depression could occur. This shows that they did not believe the economy was naturally stable and were cautious about the possibility of another economic crisis. They did not specifically advocate for conducting monetary policy according to rules, so option D is not applicable.

Question 10

Economists who view the economy as naturally stable often argue that:
A)monetary and fiscal policies should not be used to "fine-tune" the economy.
B)the economy should be stimulated when it is depressed and slowed when it is overheated.
C)the economy should be slowed when it is depressed and stimulated when it is overheated.
D)economists should act to stimulate or slow the economy on the basis of forecasts in order to assure that the policy actions are timely.

Accepted Answer

If economists view the economy as naturally stable, they believe that it will eventually return to equilibrium on its own without the need for government intervention. Therefore, they would argue against using monetary and fiscal policies to fine-tune the economy.

Question 11

Keeping the money supply constant over the business cycle is an example of:
A)active monetary policy.
B)active fiscal policy.
C)passive monetary policy.
D)passive fiscal policy.

Accepted Answer

Keeping the money supply constant over the business cycle is an example of passive monetary policy because the central bank is not actively changing the money supply to influence the economy.

Question 12

Fiscal policy has a relatively long lag, and monetary policy has a relatively long lag.
A)inside; outside
B)outside; inside
C)inside; inside
D)outside; outside

Accepted Answer

The answer of Fiscal policy has a relatively long lag,...

Question 13

Active economic policy seeks to do all of the following except:
A)offset fluctuations in real GDP.
B)use monetary and fiscal policy to shift aggregate demand.
C)respond to changing economic conditions.
D)take a hands-off approach to macroeconomic policy.

Accepted Answer

Taking a "hands-off" approach is not a characteristic of active economic policy. Active economic policy involves government intervention to stabilize the economy and promote growth, which often requires using monetary and fiscal policy to adjust aggregate demand in response to changing economic conditions.

Question 14

The time between a policy action and its influence on the economy is called the:
A)automatic stabilizer.
B)time inconsistency of policy.
C)inside lag.
D)outside lag.

Accepted Answer

The time between a policy action and its influence on the economy is called the outside lag. It refers to the time it takes for a change in policy to have an effect on the economy, such as changes in interest rates or government spending. The outside lag can vary depending on the type of policy action and the complexity of the economic system, and can range from several months to several years.

Question 15

All of the following U.S. federal agencies are directly concerned with macroeconomic policy except the:
A)Council of Economic Advisers.
B)Congressional Budget Office.
C)Federal Reserve.
D)Department of Health and Human Services.

Accepted Answer

The Council of Economic Advisers, the Congressional Budget Office, and the Federal Reserve are all directly involved in macroeconomic policy. The Council of Economic Advisers advises the President on economic policy, the Congressional Budget Office analyzes and reports on the budget and economic forecasts, and the Federal Reserve sets monetary policy to stabilize the economy. However, the Department of Health and Human Services is not involved in macroeconomic policy, but rather focuses on health and welfare programs.

Question 16

Arguments in favor of passive economic policy include all of the following except:
A)monetary and fiscal policies work with long and variable lags, which can produce destabilizing results.
B)economic forecasts have too large a margin of error to be useful in formulating stabilization policy.
C)recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary.
D)the Great Depression could have been avoided if the Federal Reserve had pursued a policy of steady money growth.

Accepted Answer

The argument that recessions do not reduce economic well-being is not in favor of passive economic policy, as it suggests that stabilization policies are unnecessary. The other arguments support the idea of passive economic policy, as they imply that active attempts to stabilize the economy could be ineffective or even harmful.

Question 17

The inside lag is the time:
A)before automatic stabilizers respond to economic activity.
B)after automatic stabilizers respond to economic activity.
C)between a shock to the economy and the policy action responding to the shock.
D)between a policy action and its influence on the economy.

Accepted Answer

The inside lag refers to the delay between when an economic shock occurs and when policy actions (such as fiscal or monetary policy adjustments) are implemented in response to that shock.

Question 18

Passive economic policy seeks to:
A)offset fluctuations in real GDP.
B)use monetary and fiscal policy to shift aggregate demand.
C)respond to changing economic conditions.
D)take a hands-off approach to macroeconomic policy.

Accepted Answer

Passive economic policy refers to an approach in which the government takes a hands-off approach to macroeconomic policy. This means that the government does not actively intervene in the economy to stabilize fluctuations in real GDP or shift aggregate demand through monetary or fiscal policy. Instead, it allows market forces to determine economic outcomes.

Question 19

Arguments in favor of active economic policy include all of the following except:
A)failing to use monetary and fiscal policy leads to inefficient fluctuations in output and employment.
B)the Great Depression could have been avoided if the Federal Reserve had pursued a policy of steady money growth.
C)fluctuations in real GDP have been less severe following World War II than prior to World War I.
D)failure of policymakers to respond to large contractionary shocks to private spending caused the Great Depression.

Accepted Answer

The answer of Arguments in favor of active economic policy...

Question 20

The lag between the time that economic stimulus is needed and the time that a tax cut is passed by Congress is an example of a:
A)fiscal inside lag. fiscal
B)outside lag. monetary
C)inside lag. monetary
D)outside lag.

Accepted Answer

Fiscal inside lag refers to the time it takes for policymakers to recognize the need for economic stimulus and to implement the necessary fiscal policy (such as tax cuts or government spending increases). The lag between the need for stimulus and the passage of a tax cut by Congress is an example of a fiscal inside lag because it takes time for policymakers to reach agreement on the best course of action, draft legislation, and ultimately pass it into law.

Quiz 13: Stabilization Policy

The outside lag is the time:

The concerns of economists who favor passive over active policy are most closely associated with their:

The time between a shock to the economy and the policy action responding to that shock is called the:

The lags involved in implementing monetary and fiscal policy are:

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

Increasing government spending when the economy is in a recession is an example of:

Economists who view the economy as inherently unstable generally argue that:

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

The lawmakers who wrote the Employment Act of 1946 believed that:

Economists who view the economy as naturally stable often argue that:

Keeping the money supply constant over the business cycle is an example of:

Fiscal policy has a relatively long lag, and monetary policy has a relatively long lag.

Active economic policy seeks to do all of the following except:

The time between a policy action and its influence on the economy is called the:

All of the following U.S. federal agencies are directly concerned with macroeconomic policy except the:

Arguments in favor of passive economic policy include all of the following except:

The inside lag is the time:

Passive economic policy seeks to:

Arguments in favor of active economic policy include all of the following except:

The lag between the time that economic stimulus is needed and the time that a tax cut is passed by Congress is an example of a: