Question 1

All of the following are arguments against stabilization policy except
A)Economic forecasting is highly imprecise.
B)Long lags may cause stabilization policies to in fact destabilize the economy.
C)Monetary policy affects aggregate demand by changing interest rates.
D)Fiscal policy must go through a long political process.

Accepted Answer

Choice C is actually an argument in favor of stabilization policy. A is an argument against it because of uncertainty in economic forecasting. B is an argument against it because of the time lags involved. D is an argument against it because of the delay involved in the political process.

Question 2

A policymaker against stabilizing the economy would be likely to believe
A)policymakers should "do no harm".
B)there are no obstacles to the practical application of policy in real life.
C)policy lags are short enough that implementing policy changes in response to recession is not too risky.
D)policy mitigates the magnitude of economic fluctuations.

Accepted Answer

A policymaker against stabilizing the economy would likely believe that intervention could cause more harm than good, aligning with the idea that policymakers should "do no harm".

Question 3

Critics of active monetary and fiscal policy emphasize
A)that policy affects the economy with a lag and our ability to forecast future economic conditions is poor.
B)"leaning against the wind" of economic change to stabilize the economy.
C)cutting government spending, raising taxes, and reducing the money supply when aggregate demand is excessive.
D)boosting government spending, lowering taxes, and increasing the money supply when aggregate demand is low.

Accepted Answer

Critics argue that active policies can be ineffective or destabilizing due to the time lags in implementation and the difficulty in accurately forecasting future economic conditions.

Question 4

Which of the following is correct?
A)Economic forecasts are precise and aggregate spending responds almost immediately to interest rate changes.
B)Economic forecast are precise and aggregate spending responds to interest rate changes with a lag.
C)Economic forecasts are imprecise and aggregate spending responds almost immediately to interest rate changes.
D)Economic forecast are imprecise and aggregate spending responds to interest rate changes with a lag.

Accepted Answer

Economic forecasts are typically imprecise and aggregate spending does not respond immediately to interest rate changes. It usually takes some time for changes in interest rates to be reflected in the spending behavior of consumers and businesses.

Question 5

Which of the following is an argument against trying to use policy to stabilize the economy?
A)Recessions represent a waste of resources.
B)Pessimism on the part of households and firms may become a self-fulfilling prophecy.
C)"Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms.
D)Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time.

Accepted Answer

This argument suggests that policymakers may not have the necessary information to implement policies that effectively stabilize the economy. Without accurate forecasting, attempts to manipulate aggregate demand may result in unintended consequences or may simply be ineffective.

Question 6

A policymaker against stabilizing the economy would be likely to believe
A)policymakers should "do no harm".
B)there are no obstacles to the practical application of policy in real life.
C)policy lags are short enough that implementing policy changes in response to recession is not too risky.
D)policy mitigates the magnitude of economic fluctuations.

Accepted Answer

A policymaker who is against stabilizing the economy would believe in the principle of "do no harm," meaning that they do not want government intervention in the economy, and would prefer to let it run its natural course without interference. They may believe that policy actions, such as fiscal or monetary policy, can do more harm than good and lead to unintended consequences.

Question 7

Opponents of using policy to stabilize the economy generally believe that
A)neither fiscal nor monetary policy have much impact on aggregate demand.
B)attempts to stabilize the economy decrease the magnitude of economic fluctuations.
C)unemployment and inflation are not cause for much concern.
D)economic conditions can easily change between the start of policy action and when it takes effect.

Accepted Answer

Opponents of using policy to stabilize the economy believe that economic conditions can easily change between the start of policy action and when it takes effect, making it difficult to achieve the desired results. They may argue that such policies can even worsen economic outcomes by creating unintended consequences.

Question 8

The principal lag for monetary policy
A)and fiscal policy is the time it takes to implement policy.
B)and fiscal policy is the time it takes for policy to change spending.
C)is the time it takes to implement policy. The principal lag for fiscal policy is the time it takes for policy to change spending.
D)is the time it takes for policy to change spending. The principal lag for fiscal policy is the time it takes to implement it.

Accepted Answer

The answer of The principal lag for monetary policy
A)and fiscal...

Question 9

Which of the following should be kept in mind when policymakers consider efforts to stabilize the economy?
A)The economy responds very quickly to changes in the interest rate and changes in economic conditions are easy to predict.
B)The economy responds very quickly to changes in the interest rate and changes in economic conditions are nearly impossible to predict.
C)The economy responds to changes in the interest rate with a lag and changes in economic conditions are easy to predict.
D)The economy responds to changes in the interest rate with a lag and changes in economic conditions are nearly impossible to predict.

Accepted Answer

The answer of Which of the following should be kept...

Question 10

A policymaker in favor of stabilizing the economy would be likely to believe
A)recessions are a waste of resources.
B)economies must suffer through the booms and busts of the business cycle.
C)the long policy lags make implementing policy changes in response to recession too risky.
D)policy increases the magnitude of economic fluctuations.

Accepted Answer

A policymaker in favor of stabilizing the economy would believe that recessions are a waste of resources and would want to implement policies to prevent or mitigate them.

Question 11

The principal reason that monetary policy has lags is that it takes a long time for
A)changes in the interest rate to change aggregate demand.
B)changes in the money supply to change interest rates.
C)the Fed to make changes in policy.
D)Congress and the President to approve Fed policy.

Accepted Answer

Changes in interest rates affect spending and investment decisions of households and firms, which then affect aggregate demand. These decisions take time to be made and implemented, resulting in a lag between monetary policy actions and their impact on the economy. Changes in the money supply also affect interest rates, but the transmission mechanism is not as direct, and the impact on aggregate demand occurs with a lag. The Fed can make policy changes quickly, and there is no need for approval from Congress or the President for monetary policy decisions to be implemented.

Question 12

Part of the lag in monetary policy effects is due to
A)the long political process of monetary policy decisions.
B)precise economic forecasts.
C)the time required for firms and households to alter their spending plans.
D)changes in the unemployment rate.

Accepted Answer

The time required for firms and households to alter their spending plans is a key factor in the lag in monetary policy effects. It takes time for individuals and firms to adjust their behavior in response to changes in interest rates, money supply, and other monetary policy tools. The lag can range from a few months to a year or more, depending on the nature of the shock and the responsiveness of different sectors of the economy. The other options do not adequately explain the lag in monetary policy effects.

Question 13

If aggregate demand shifts right and the President and Congress want to use fiscal policy to reverse the change in output, they could
A)increase government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will raise output above its long-run level.
B)increase government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will reduce output to below its long-run level.
C)decrease government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will raise output above its long-run level.
D)decrease government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will reduce output to below its long-run level.

Accepted Answer

If aggregate demand shifts right, output will increase above its long-run level. To reverse this change in output, the government needs to decrease government expenditures. This will shift the aggregate demand curve back to the left, reducing output to below its long-run level.

Question 14

For which of the following policies is there a significant implementation lag?
A)fiscal policy and monetary policy
B)fiscal policy but not monetary policy
C)monetary policy but not fiscal policy
D)neither monetary policy nor fiscal policy

Accepted Answer

Fiscal policy involves passing legislation, which can take time to pass through the government process before it is implemented. This can result in a significant implementation lag. On the other hand, monetary policy can be implemented relatively quickly and does not typically experience significant lags.

Quiz 36: Six Debates Over Macroeconomic Policy

All of the following are arguments against stabilization policy except

A policymaker against stabilizing the economy would be likely to believe

Critics of active monetary and fiscal policy emphasize

Which of the following is correct?

Which of the following is an argument against trying to use policy to stabilize the economy?

A policymaker against stabilizing the economy would be likely to believe

Opponents of using policy to stabilize the economy generally believe that

The principal lag for monetary policy

Which of the following should be kept in mind when policymakers consider efforts to stabilize the economy?

A policymaker in favor of stabilizing the economy would be likely to believe

The principal reason that monetary policy has lags is that it takes a long time for

Part of the lag in monetary policy effects is due to

If aggregate demand shifts right and the President and Congress want to use fiscal policy to reverse the change in output, they could

For which of the following policies is there a significant implementation lag?