Question 1

The lag problem associated with monetary policy is due mostly to
A) the fact that business firms make investment plans far in advance.
B) the political system of checks and balances that slows down the process of determining monetary policy.
C) the time it takes for changes in government spending to affect the interest rate.
D) All of the above are correct.

Accepted Answer

The lag problem associated with monetary policy is mostly due to the fact that business firms make investment plans far in advance. Changes in monetary policy can take several months to take effect, meaning that businesses may not respond to changes in interest rates or money supply until it is too late. The other options listed (B and C) are not as significant in causing the lag problem.

Question 2

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?
A) decrease taxes
B) increase government expenditures
C) increase the money supply
D) None of the above is correct.

Accepted Answer

The answer of Which of the following policies would Keynes's...

Question 3

Opponents of active stabilization policy
A) generally don't believe,even in theory,that fiscal policy can stabilize the economy.
B) generally agree that fiscal policy has no impact in the long run.
C) believe some effects of monetary policy may be long-lived.
D) think the Fed should simply try to fine tune the economy.

Accepted Answer

Opponents of active stabilization policy believe that some effects of monetary policy may be long-lived, but they do not necessarily believe that fiscal policy has no impact in the long run, nor do they necessarily think the Fed should simply try to fine tune the economy.

Question 4

Some economists argue that
A) monetary policy should actively be used to stabilize the economy.
B) fiscal policy should actively be used to stabilize the economy.
C) fiscal policy can be used to shift the AD curve.
D) All of the above are correct.

Accepted Answer

All of the statements are correct. Some economists argue that both monetary and fiscal policies should actively be used to stabilize the economy. Monetary policy can be used to adjust interest rates and the money supply to influence aggregate demand (AD) and stabilize the economy. Fiscal policy, on the other hand, involves government spending and taxation policies that can be used to shift the AD curve and stabilize the economy.

Question 5

Opponents of active stabilization policy
A) advocate a monetary policy designed to offset changes in the unemployment rate.
B) argue that fiscal policy is unable to change aggregate demand or aggregate supply.
C) believe that the political process creates lags in the implementation of fiscal policy.
D) None of the above is correct.

Accepted Answer

Opponents of active stabilization policy believe that the political process creates lags in the implementation of fiscal policy, making it ineffective in addressing short-term economic fluctuations. This is because the process of decision-making and enacting policies through the government can be slow and bureaucratic, making it difficult to respond quickly to changes in the economy.

Question 6

For the following questions,use the diagram below:
Figure 34-6. 
-Refer to Figure 34-6.If the economy is at point b,a policy to restore full employment would be
A) an increase in the money supply.
B) a decrease in government purchases.
C) an increase in taxes.
D) All of the above are correct.

Accepted Answer

At point b, the economy is experiencing a recessionary gap, which means that the actual real GDP is below the potential GDP, resulting in high unemployment levels. To restore full employment, the government should implement expansionary policies, such as increasing the money supply, which would lead to lower interest rates and boost investment and consumption. Thus, the correct choice is A, an increase in the money supply. Decreasing government purchases or increasing taxes would have contractionary effects, which could exacerbate the recessionary gap.

Question 7

For the following questions,use the diagram below: Figure 34-6. -Refer to Figure 34-6.The aggregate-demand curve could shift from AD₁ to AD₂ as a result of A) an increase in government purchases. B) a decrease in stock prices. C) consumers and firms becoming more optimistic about the future. D) an increase in the price level.

Accepted Answer

The answer of For the following questions,use the diagram below:
Figure...

Question 8

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?
A) decrease the money supply
B) increase government expenditures
C) increase taxes
D) All of the above are correct.

Accepted Answer

An active stabilization policy in response to severe unemployment would involve increasing government expenditures in order to stimulate demand and create job opportunities. Decreasing the money supply or increasing taxes would have the opposite effect and could potentially worsen the unemployment problem.

Question 9

The lag problem associated with fiscal policy is due mostly to
A) the fact that business firms make investment plans far in advance.
B) the political system of checks and balances that slows down the process of implementing fiscal policy.
C) the time it takes for changes in government spending or taxes to affect the interest rate.
D) All of the above are correct.

Accepted Answer

The answer of The lag problem associated with fiscal policy...

Question 10

For the following questions,use the diagram below: Figure 34-6. -Refer to Figure 34-6.Which of the following is correct? A) A wave of optimism could move the economy from point a to point B) If aggregate demand moves from AD₁ to AD₂,the economy will stay at point b in both the short run and long run. C) It is possible that either fiscal or monetary policy might have caused the shift from AD₁ to AD₂. D) All of the above are correct.

Accepted Answer

The diagram shows the short-run and long-run effects of a shift in aggregate demand from AD₁ to AD₂. It is possible that either fiscal or monetary policy caused the shift, so option C is correct. Option A is incorrect because a wave of optimism is not shown in the diagram. Option B is incorrect because the economy will move from point b in the short run to point c in the long run.

Question 11

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?
A) increase taxes
B) increase the money supply
C) increase government expenditures
D) All of the above are correct.

Accepted Answer

The answer of Which of the following policy alternatives would...

Question 12

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?
A) a decrease in the money supply
B) a reduction in tax rates
C) a decrease in government purchases
D) None of the above is correct.

Accepted Answer

Proponents of stabilization policy argue in favor of government intervention to stabilize the economy during times of economic fluctuations. During severe unemployment, the government may implement expansionary fiscal policies such as reducing tax rates to increase disposable income and boost consumer spending. This increased spending will encourage business investment and create employment opportunities, thereby reducing unemployment. A decrease in the money supply (A) would have a contractionary effect on the economy and likely exacerbate unemployment. A decrease in government purchases (C) would also have a contractionary effect, reducing aggregate demand and further contributing to unemployment. Therefore, the best choice is B.

Question 13

What actions could be taken to stabilize output in response to a large decrease in U.S.net exports?
A) increase government expenditures or increase the money supply
B) increase government expenditures or decrease the money supply
C) decrease government expenditures or increase the money supply
D) decrease government expenditures or decrease the money supply

Accepted Answer

A decrease in net exports means a decrease in demand for U.S. products, which may lead to a decrease in economic output. To stabilize output, expansionary policies such as increasing government expenditures or increasing the money supply can be used to boost aggregate demand and counteract the negative effects of the decrease in net exports. Option B, decreasing the money supply, would be contractionary and could worsen the situation. Option C, decreasing government expenditures, would also be contractionary and may further reduce aggregate demand. Option D, decreasing both government expenditures and the money supply, would be even more contractionary and would likely worsen the situation.

Question 14

The price of imported oil rises.If the government wanted to stabilize output,which of the following could it do?
A) increase government expenditures or increase the money supply
B) increase government expenditures or decrease the money supply
C) decrease government expenditures or increase the money supply
D) decrease government expenditures or decrease the money supply

Accepted Answer

The answer of The price of imported oil rises.If the...

Question 15

Critics of stabilization policy argue that
A) there is a lag between the time policy is passed and the time policy has an impact on the economy.
B) the impact of policy may last longer than the problem it was designed to offset.
C) policy can be a source of,instead of a cure for,economic fluctuations.
D) All of the above are correct.

Accepted Answer

All of the above options are correct in terms of criticisms of stabilization policy. Choice A is correct because there is often a time lag between policy implementation and its impact on the economy. Choice B is correct because, in some cases, the impact of policy measures may continue beyond the point at which the problem they were designed to address has been resolved. Finally, choice C is correct because policy actions can sometimes exacerbate rather than mitigate economic fluctuations.

Question 16

Suppose aggregate demand shifts to the left and policymakers want to stabilize output.What can they do?
A) repeal an investment tax credit or increase the money supply
B) repeal an investment tax credit or decrease the money supply
C) institute an investment tax credit or increase the money supply
D) institute an investment tax credit or decrease the money supply

Accepted Answer

The answer of Suppose aggregate demand shifts to the left...

Question 17

Macroeconomic forecasts are
A) precise;this makes policy lags less relevant.
B) precise;this makes policy lags more relevant.
C) imprecise;this makes policy lags less relevant.
D) imprecise;this makes policy lags more relevant.

Accepted Answer

Macroeconomic forecasts are typically imprecise due to the complex nature of the economy and the various factors that can impact it. As a result, policy lags (the time it takes for implemented policies to affect the economy) become more relevant since policymakers cannot rely on precise forecasts to make accurate and timely decisions.

Question 18

When the Fed lowers the growth rate of the money supply,it must take into account
A) only the short-run effect on production.
B) only the short-run effects on inflation and production.
C) only the long-run effect on inflation.
D) the long-run effect on inflation as well as the short-run effect on production.

Accepted Answer

When the Fed lowers the growth rate of the money supply, it must consider both the long-run effect on inflation as well as the short-run effect on production. In the short run, reducing the growth rate of the money supply can lead to lower inflation but may also lead to a decrease in production. However, in the long-run, a lower growth rate of the money supply will lead to lower inflation without affecting production. Therefore, the Fed must consider both the short-run and long-run effects when making decisions about the growth rate of the money supply.

Question 19

Which of the following statements generates the greatest amount of disagreement among economists?
A) Increases in the money supply shift aggregate demand to the right.
B) In the long run,increases in the money supply increase prices,but not output.
C) Recessions are associated with decreases in consumption,investment,and employment.
D) Government should use fiscal policy to try to stabilize the economy.

Accepted Answer

While there may be some disagreement among economists about the specific actions the government should take with fiscal policy, the general consensus is that there is a role for government intervention in stabilizing the economy. The other statements are generally accepted concepts in macroeconomics, with some minor variations in interpretation.

Question 20

Critics of stabilization policy argue that
A) policy affects aggregate demand quickly,but the effects on aggregate demand are long-lived.
B) policy affects aggregate demand with a lag,and the effects on aggregate demand are long-lived.
C) policy affects aggregate demand with a lag,but the effects are short-lived.
D) policy does not affect aggregate demand.

Accepted Answer

Critics of stabilization policy argue that the effects of policy on aggregate demand are long-lived, but there is a lag in the time it takes for policy to affect aggregate demand. Therefore, choice B correctly summarizes their argument.

Quiz 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

The lag problem associated with monetary policy is due mostly to

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

Opponents of active stabilization policy

Some economists argue that

Opponents of active stabilization policy

For the following questions,use the diagram below: Figure 34-6. -Refer to Figure 34-6.If the economy is at point b,a policy to restore full employment would be

For the following questions,use the diagram below: Figure 34-6. -Refer to Figure 34-6.The aggregate-demand curve could shift from AD1 to AD2 as a result of

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

The lag problem associated with fiscal policy is due mostly to

For the following questions,use the diagram below: Figure 34-6. -Refer to Figure 34-6.Which of the following is correct?

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

What actions could be taken to stabilize output in response to a large decrease in U.S.net exports?

The price of imported oil rises.If the government wanted to stabilize output,which of the following could it do?

Critics of stabilization policy argue that

Suppose aggregate demand shifts to the left and policymakers want to stabilize output.What can they do?

Macroeconomic forecasts are

When the Fed lowers the growth rate of the money supply,it must take into account

Which of the following statements generates the greatest amount of disagreement among economists?

Critics of stabilization policy argue that

For the following questions,use the diagram below: Figure 34-6. -Refer to Figure 34-6.The aggregate-demand curve could shift from AD₁ to AD₂ as a result of