Question 1

Non-activists believe that postwar instability is primarily the result of
A)erratic growth of private investment.
B)uneven changes in real government expenditures.
C)uneven changes in private consumption of durables.
D)A and C are both correct.

Accepted Answer

Non-activists believe that postwar instability is primarily the result of uneven changes in real government expenditures, as this can have a significant impact on the economy and create instability. The other choices, A and C, may also contribute to instability, but they are not seen as the primary cause according to the perspective of non-activists.

Question 2

According to the new classical macroeconomists,each of the following statements is true EXCEPT:
A)Disinflation will be harder to bring about because of the time-inconsistency problem.
B)Policymakers are tempted to deviate from the preannounced policy once the public changes its expectations.
C)Feedback rules are preferred to discretionary rules.
D)Disinflation will be painless if the restrictive policies announced by the government are credible.

Accepted Answer

New classical macroeconomists do not prefer feedback rules over discretionary rules. In fact, they argue that discretionary policies can cause more harm than good because of time-inconsistency problems and the difficulty in correctly anticipating the reactions of economic agents. Instead, they advocate for clear and credible pre-announced policies.

Question 3

One of describing the debate between activists and non-activists is that
A)activists are pessimistic about the self-correcting powers of the economy but non-activists are optimistic.
B)activists tend to be oriented to the long-run but non-activists are short-run oriented.
C)non-activists are optimistic about the efficacy of stabilization policy but activists are pessimistic.
D)A and B are both correct.

Accepted Answer

Activists are generally skeptical about the market's ability to correct itself and thus advocate for policy interventions, whereas non-activists have more faith in the market's self-correcting mechanisms and are cautious about the unintended consequences of intervention.

Question 4

A study of estimated multipliers in the major econometric models shows that
A)the government-spending multiplier tends to increase and then later decrease over time.
B)the monetary multiplier is much larger than the government spending multiplier.
C)there is quite a bit of variation in the value of the multipliers among the models.
D)A and C are both correct.

Accepted Answer

The statement "there is quite a bit of variation in the value of the multipliers among the models" is true, indicating choice C is correct. Additionally, the statement "the government-spending multiplier tends to increase and then later decrease over time" is also true, indicating choice A is correct. Therefore, both A and C are both true, making choice D the correct answer. The statement in choice B, "the monetary multiplier is much larger than the government spending multiplier," is not supported by the information given in the question.

Question 5

Activists-believe that AD is unstable because
A)business and consumer attitudes and expectations shift.
B)monetary policy is variable.
C)fiscal policy effects are unpredictable.
D)Both B and C are correct.

Accepted Answer

Changes in business and consumer attitudes and expectations can lead to fluctuations in aggregate demand (AD), making it unstable.

Question 6

The length of money or commodity demand disturbances is important to the "policy activism" debate between non-activists and activists because
A)changing the money supply affects the economy with a lag.
B)changes in private spending must be offset by policy debate.
C)Both A and B are correct.
D)None of the above is correct.

Accepted Answer

The answer of The length of money or commodity demand...

Question 7

A major problem in developing an activist policy is
A)uncertainty about the magnitude of the dynamic multiplier.
B)uncertainty about the length and variability of policy lags.
C)uncertainty about the costs of various policies.
D)All of the above are correct.

Accepted Answer

Developing an activist policy involves making decisions about the appropriate level and timing of government intervention in the economy. However, there are several uncertainties that make it challenging to formulate effective activist policies. These include uncertainty about the size and timing of the multiplier effect, uncertainty about the lags between implementing a policy and its effects on the economy, and uncertainty about the costs and effectiveness of different policy options. Therefore, all of the above options are correct in identifying major problems in developing an activist policy.

Question 8

A policymaker would prefer that the lag in the effect of a policy be
A)long and variable in magnitude or size.
B)short and fixed in magnitude or size.
C)long and fixed in magnitude or size.
D)short and variable in magnitude or size.

Accepted Answer

Policymakers prefer short and fixed lags in the effect of a policy because this allows them to see the impact of the policy quickly and make adjustments as needed. A long lag would mean that the policy may not have the intended effect until much later, making it difficult to assess its effectiveness and make changes. A variable or unpredictable lag would make it difficult to plan and allocate resources effectively.

Question 9

The "policy ineffectiveness proposition" of the new classical attack on policy activism is based on the idea that
A)people will anticipate policy changes particularly those based on a feedback rule.
B)people will anticipate the effects of policy changes and act to offset these effects.
C)Both A and B are correct.
D)None of the above is correct.

Accepted Answer

The "policy ineffectiveness proposition" posits that rational expectations lead people to anticipate policy changes and their effects, thereby neutralizing the intended impact of such policies. This encompasses both anticipating policy changes and acting to offset their effects.

Question 10

To be successful in stabilizing AD,the application of a constant growth-rate rule for the money supply requires
A)a constant velocity of money.
B)a steady and predictable rate of growth of the velocity of money.
C)a steady and predictable rate of growth of the velocity of income.
D)Both B and C are correct.

Accepted Answer

A constant growth-rate rule for the money supply can only lead to stabilization of AD if the velocity of money also grows at a steady and predictable rate. However, a constant velocity of money is not necessarily required. Therefore, option A is incorrect. Option D is also incorrect as the velocity of income is not directly related to the stabilization of AD. Thus, the correct option is B.

Question 11

Economists who support a monetary rule as opposed to an activist monetary policy believe that the effectiveness lag in monetary policy is
A)short and variable,policy changes affect AD quickly and are predictable.
B)zero,policy changes have an immediate effect on expenditures.
C)long and variable,policy changes affect AD slowly over time and are unpredictable.
D)long,but predictable.

Accepted Answer

Economists who support a monetary rule argue that the effectiveness lag in monetary policy is long and variable because policy changes affect aggregate demand (AD) slowly over time and the outcomes of such changes are unpredictable. This unpredictability and delay make it difficult to time interventions correctly, hence their preference for a rule-based approach to monetary policy.

Question 12

The "effectiveness lag" in monetary policy is the amount of time it takes
A)to collect the data to determine if a policy change is required.
B)for monetary policy to have an impact on inflation and unemployment.
C)for monetary policy to affect the money supply.
D)to collect the data to determine what effect monetary policy has had on the economy.

Accepted Answer

The effectiveness lag refers to the amount of time it takes for monetary policy to have an impact on inflation and unemployment. This is because changes in monetary policy need time to be fully implemented and transmitted through the economy. The lag can be anywhere from a few months to a year, depending on the specific policy and economic conditions. The other options, such as collecting data or affecting the money supply, may be part of the process but do not specifically refer to the effectiveness lag.

Question 13

According to the New Classical macroeconomic school,
A)active policy intervention is ineffective.
B)active policy intervention is undesirable and perverse.
C)active policy intervention's benefits exceed its costs.
D)active policy intervention's benefits are less than its costs.

Accepted Answer

According to the New Classical macroeconomic school, active policy intervention is ineffective. This school argues that the economy is inherently stable, and any deviations from full employment will be self-correcting through market forces without the need for government intervention. Therefore, any attempts by policymakers to stimulate the economy through fiscal or monetary policy will be ineffective and only lead to inflationary pressures.

Question 14

Which of the following is NOT an argument of non-activists?
A)private spending may show some instability but monetary or fiscal policy designed to stabilize it will just make things worse
B)private spending is stable partly because consumption spending is based on permanent income
C)even if prices are not completely flexible in the short-run,given time there is enough flexibility for the system to return to the natural level of real GNP
D)it is true that monetary and fiscal policy have destabilizing in the past,but economic knowledge is now advanced enough to permit effective countercyclical policy

Accepted Answer

Non-activists typically argue against the effectiveness of monetary and fiscal policies in stabilizing the economy, suggesting that these interventions can often make things worse or are unnecessary due to the market's natural adjustments. Choice D, which suggests that current economic knowledge allows for effective countercyclical policy, contradicts the non-activist stance that generally doubts the efficacy of such interventions.

Question 15

In general,activists are ________ about the ability of the economy to remain stable and non-activists are ________.
A)pessimistic;optimistic
B)optimistic;optimistic
C)pessimistic;pessimistic
D)optimistic;pessimistic

Accepted Answer

The answer of In general,activists are ________ about the ability...

Question 16

If both money demand and commodity demand are unstable,as many activists believe,which type of policy target(s)would most likely lead to a stable economy (assuming supply-side shocks are likely to occur)?
A)money supply target
B)real GDP target
C)interest rate target
D)nominal GDP

Accepted Answer

The answer of If both money demand and commodity demand...

Question 17

In general,activists are ________ about the ability of fiscal and monetary policies to stabilize AD and non-activists are ________.
A)pessimistic;optimistic
B)optimistic;optimistic
C)pessimistic;pessimistic
D)optimistic;pessimistic

Accepted Answer

Activists believe that fiscal and monetary policies can effectively stabilize aggregate demand (AD) and achieve full employment. On the other hand, non-activists are skeptical of the effectiveness of these policies and may prefer to rely on market forces to adjust the economy. Thus, activists are optimistic while non-activists are pessimistic about the ability of fiscal and monetary policies.

Question 18

The non-activists believe that
A)the government has been a stabilizing force in the economy.
B)much of the existing unemployment voluntary.
C)the velocity of money is unstable.
D)policymakers are able to accurately forecast the future effect of current policy actions.

Accepted Answer

Non-activists often believe that much of the existing unemployment is voluntary, as they tend to emphasize the role of individual choice and market adjustments rather than government intervention.

Question 19

Because of the lag of the effects of changes in monetary policy and the failure of forecasters to anticipate supply-side shocks as well as changes in money demand or velocity,activist policy changes have tended at times during the mid-1970s to
A)accelerate inflation during expansions.
B)increase unemployment during recessions.
C)accelerate inflation and increased unemployment.
D)dampen inflation and decrease unemployment.

Accepted Answer

Activist policy changes, which attempt to manipulate monetary policy to stabilize economic activity, tend to have a delayed effect and can be difficult to predict. As a result, policy changes during the mid-1970s often had unintended consequences of both accelerating inflation and increasing unemployment. This is known as stagflation, where high inflation coexists with stagnant or sluggish economic growth. Therefore, the best choice is C, which reflects the combined negative impact of activist policy changes during this time period.

Question 20

The time between the policy decision and the subsequent change in policy instruments is called the
A)data lag,the time required to collect and analyze data.
B)effectiveness lag,the time required for the change in money supply to affect real output.
C)legislative lag,the time required for policymaking body to make decisions.
D)transmission lag,the time between the change in policy and the change in policy instruments.

Accepted Answer

The transmission lag refers to the time between the policy decision and the subsequent change in policy instruments. It refers to the time required for the policy to be fully implemented and have an effect on the economy. The other options are not directly related to this specific lag.

Quiz 14: The Goals, tools, and Rules of Monetary Policy

Non-activists believe that postwar instability is primarily the result of

According to the new classical macroeconomists,each of the following statements is true EXCEPT:

One of describing the debate between activists and non-activists is that

A study of estimated multipliers in the major econometric models shows that

Activists-believe that AD is unstable because

The length of money or commodity demand disturbances is important to the "policy activism" debate between non-activists and activists because

A major problem in developing an activist policy is

A policymaker would prefer that the lag in the effect of a policy be

The "policy ineffectiveness proposition" of the new classical attack on policy activism is based on the idea that

To be successful in stabilizing AD,the application of a constant growth-rate rule for the money supply requires

Economists who support a monetary rule as opposed to an activist monetary policy believe that the effectiveness lag in monetary policy is

The "effectiveness lag" in monetary policy is the amount of time it takes

According to the New Classical macroeconomic school,

Which of the following is NOT an argument of non-activists?

In general,activists are about the ability of the economy to remain stable and non-activists are .

If both money demand and commodity demand are unstable,as many activists believe,which type of policy target(s) would most likely lead to a stable economy (assuming supply-side shocks are likely to occur) ?

In general,activists are about the ability of fiscal and monetary policies to stabilize AD and non-activists are .

The non-activists believe that

Because of the lag of the effects of changes in monetary policy and the failure of forecasters to anticipate supply-side shocks as well as changes in money demand or velocity,activist policy changes have tended at times during the mid-1970s to

The time between the policy decision and the subsequent change in policy instruments is called the