Deck 34: 3:sec 343 Mc Using Policy to Stabilize the Economy

Question 1

Suppose that businesses and consumers become much more optimistic about the future of the economy.To stabilize output,the Federal Reserve could

A)buy bonds to raise interest rates.
B)buy bonds to lower interest rates.
C)sell bonds to raise interest rates.
D)sell bonds to lower interest rates.

Answer 1

B

Question 2

In 1961,President John F.Kennedy,acting upon advice from his economists,proposed tax cuts.The advice he received

A)was opposed to the teaching of Keynes,who had taught that tax cuts were counterproductive.
B)was opposed to the teaching of Keynes,who had taught that all attempts to stabilize the economy were futile.
C)came from economists who had studied Keynes's ideas when those ideas were only a few years old.
D)came from economists who were unaware of Keynes's ideas because those ideas had not yet been widely disseminated at that time.

Answer 2

D

Question 3

Suppose an increase in interest rates causes rising unemployment and falling output.To counter this,the Federal Reserve would

A)increase government spending.
B)increase the money supply.
C)decrease government spending.
D)decrease the money supply.

Answer 3

A

Question 4

Which U.S.president,when asked why he had proposed a tax cut,responded by saying "To stimulate the economy.Don't you remember your Economics 101?"

A)Dwight D.Eisenhower
B)John F.Kennedy
C)Ronald Reagan
D)Bill Clinton

Question 5

In the early 1960s,the Kennedy administration made considerable use of

A)fiscal policy to stimulate the economy.
B)fiscal policy to slow down the economy.
C)monetary policy to stimulate the economy.
D)monetary policy to slow down the economy.

Question 6

The Kennedy tax cut of 1964 included an investment tax credit that was designed to

A)increase aggregate demand in the short run and aggregate supply in the long run.
B)increase aggregate supply in the short run and aggregate demand in the long run.
C)only increase aggregate supply in the long run.
D)only increase aggregate demand in the short run.

Question 7

Monetary policy

A)can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is implemented.
B)can be implemented quickly,but most of its impact on aggregate demand occurs months after policy is implemented.
C)cannot be implemented quickly,but once implemented most of its impact on aggregate demand occurs very soon afterward.
D)cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is implemented.

Question 8

If businesses and consumers become pessimistic,the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

A)increasing the money supply,which raises interest rates.
B)increasing the money supply,which lowers interest rates.
C)decreasing the money supply,which raises interest rates.
D)decreasing the money supply,which lowers interest rates.

Question 9

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"

A)president George W.Bush
B)president John F.Kennedy
C)economist John Maynard Keynes
D)former chairman of the Federal Reserve System William McChesney Martin

Question 10

Suppose there were a large decline in net exports.If the Fed wanted to stabilize output,it could

A)buy bonds to raise interest rates.
B)buy bonds to lower interest rates.
C)sell bonds to raise interest rates.
D)sell bonds to lower interest rates.

Question 11

Suppose there is an increase in government spending.To stabilize output,the Federal Reserve would

A)increase government spending.
B)increase the money supply.
C)decrease government spending.
D)decrease the money supply.

Question 12

The Employment Act of 1946

A)implies that the government should avoid being a cause of economic fluctuations.
B)implies that the government should respond to changes in the private economy to stabilize aggregate demand.
C)reflected the ideas promoted in Keynes's influential book,The General Theory of Employment,Interest,and Money.
D)All of the above are correct

Question 13

The Kennedy tax cut of 1964 was

A)successful in stimulating the economy.
B)designed to shift the aggregate demand curve to the right.
C)designed to shift the aggregate supply curve to the right.
D)All of the above are correct.

Question 14

Keynes used the term "animal spirits" to refer to

A)policy makers harming the economy in the pursuit of self interest.
B)arbitrary changes in attitudes of household and firms.
C)mean-spirited economists who believed in the classical dichotomy.
D)firms' relentless efforts to maximize profits.

Question 15

Keynes argued that aggregate demand is

A)stable,because the economy tends to return to its long-run equilibrium quickly after any disturbance to aggregate demand.
B)stable,because changes in consumption are mostly offset by changes in investment and vice versa.
C)unstable,because waves of pessimism and optimism create fluctuations in aggregate demand.
D)unstable,because of long and variable policy lags that worsen economic fluctuations.

Question 16

Suppose there was a large increase in net exports.If the Fed wanted to stabilize output,it could

A)increase the money supply,which will reduce interest rates.
B)decrease the money supply,which will reduce interest rates.
C)increase the money supply,which will increase interest rates.
D)decrease the money supply,which will increase interest rates.

Question 17

Suppose households attempt to increase their money holdings.To stabilize output by countering this increase in money demand,the Federal Reserve would

A)increase government spending.
B)increase the money supply.
C)decrease government spending.
D)decrease the money supply.

Question 18

The Employment Act of 1946 states that

A)the Fed should use monetary policy only to control the rate of inflation.
B)the government should promote full employment and production.
C)the government should periodically increase the minimum wage and unemployment insurance benefits.
D)All of the above are correct.

Question 19

Keynes argued that

A)irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.
B)irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply.
C)changes in business and consumer expectations generally stabilize the economy.
D)All of the above are correct.

Question 20

Suppose there is a tax increase.To stabilize output,the Federal Reserve will

A)increase government spending.
B)increase the money supply.
C)decrease government spending.
D)decrease the money supply.

Question 21

Figure 34-9
Refer to Figure 34-9.Suppose the economy is currently at point A.To restore full employment,the appropriate fiscal response

A)requires the central bank to purchase government bonds,which will increase the money supply.
B)is a reduction in government purchases.
C)is a reduction in taxes.
D)requires the central bank to sell government bonds,which will reduce the money supply.

Question 22

For the following questions,use the diagram below:
Figure 34-7.
Refer to Figure 34-7.The aggregate-demand curve could shift from AD₁ to AD₂ as a result of

A)an increase in government purchases.
B)a decrease in net exports.
C)households saving a smaller fraction of their income.
D)a decrease in the price level.

Question 23

Suppose households attempt to decrease their money holdings.To counter this decrease in money demand and stabilize output,the Federal Reserve will

A)increase government spending.
B)increase the money supply.
C)decrease government spending.
D)decrease the money supply.

Question 24

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

Question 25

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.

Question 26

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

Question 27

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.

Question 28

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)an increase in tax rates
C)an increase in government purchases
D)an increase in interest rates.

Question 29

Figure 34-9
Refer to Figure 34-9.Suppose the economy is currently at point A.To restore full employment,the Federal Reserve should

A)purchase government bonds,which will increase the money supply.
B)purchase government bonds,which will reduce the money supply.
C)sell government bonds,which will increase the money supply.
D)sell government bonds,which will reduce the money supply.

Question 30

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.

Question 31

A policy that results in slow and steady growth of the money supply is an example of

A)an "easy" monetary policy.
B)a "passive" monetary policy.
C)a "practical" monetary policy.
D)an "active" monetary policy.

Question 32

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.

Question 33

For the following questions,use the diagram below:
Figure 34-7.
Refer to Figure 34-7.Which of the following is correct?

A)A wave of optimism could move the economy from point a to point b.
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.

Question 34

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)increase taxes
B)increase government expenditures
C)increase the money supply
D)All of the above are correct.

Question 35

For the following questions,use the diagram below:
Figure 34-7.
Refer to Figure 34-7.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.

Question 36

Most recessions and depressions

A)are accurately forecasted.
B)usually occur with ample advance warning.
C)cause falling unemployment.
D)occur with little advance warning.

Question 37

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.

Question 38

A reduction in U.S net exports would shift U.S.aggregate demand

A)rightward.In an attempt to stabilize the economy,the government could increase expenditures.
B)rightward.In an attempt to stabilize the economy,the government could decrease expenditures.
C)leftward.In an attempt to stabilize the economy,the government could increase expenditures.
D)leftward.In an attempt to stabilize the economy,the government could decrease expenditures.

Question 39

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.

Question 40

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

A)increase taxes or increase the money supply
B)increase taxes or decrease the money supply
C)decrease taxes or increase the money supply
D)decrease taxes or decrease the money supply

Question 41

During periods of expansion,automatic stabilizers cause government expenditures

A)and taxes to fall.
B)and taxes to rise.
C)to rise and taxes to fall.
D)to fall and taxes to rise.

Question 42

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.

Question 43

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.

Question 44

It is likely that a constitutional amendment that required the government always to run a balanced budget would

A)contribute to a more stable level of output.
B)mitigate the crowding-out effect.
C)eliminate the economy's automatic stabilizers.
D)All of the above are correct.

Question 45

During recessions,taxes tend to

A)rise and thereby increase aggregate demand.
B)rise and thereby decrease aggregate demand.
C)fall and thereby increase aggregate demand.
D)fall and thereby decrease aggregate demand.

Question 46

The most important automatic stabilizer is

A)open-market operations.
B)the tax system.
C)unemployment compensation.
D)welfare benefits.

Question 47

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.

Question 48

Other things the same,during recessions taxes tend to

A)rise.The rise in taxes stimulates aggregate demand.
B)rise.The rise in taxes contracts aggregate demand.
C)fall.The fall in taxes stimulates aggregate demand.
D)fall.The fall in taxes contracts aggregate demand.

Question 49

An example of an automatic stabilizer is

A)unemployment benefits.
B)a lowering of interest rates by the Fed.
C)a decrease in money demand.
D)a decrease in tax rates in response to a recession.

Question 50

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.

Question 51

Critics of stabilization policy argue that

A)"animal spirits" must be offset by active monetary policy.
B)active monetary policy is necessary for steady economic growth.
C)the lag problem ends up being a cause of economic fluctuations.
D)active fiscal policy is required for steady economic growth.

Question 52

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.

Question 53

Monetary policy affects the economy with a long lag,in part because

A)proposals to change monetary policy must go through both the House and Senate before being sent to the president.
B)monetary policy works through changes in interest rates,and the Fed does not have the ability to change interest rates quickly.
C)changes in interest rates primarily influence consumption spending,and households make consumption plans far in advance.
D)changes in interest rates primarily influence investment spending,and firms make investment plans far in advance.

Question 54

Which of the following reduces the interest rate?

A)an increase in government expenditures and an increase in the money supply
B)an increase in government expenditures and a decrease in the money supply
C)a decrease in government expenditures and an increase in the money supply
D)a decrease in government expenditures and a decrease in the money supply

Question 55

Automatic stabilizers

A)increase the problems that lags cause in using fiscal policy as a stabilization tool.
B)are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
C)are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession.
D)All of the above are correct.

Question 56

During recessions,automatic stabilizers tend to make the government's budget

A)move toward deficit.
B)move toward surplus.
C)move toward balance.
D)not necessarily move the budget in any particular direction.

Question 57

Other things the same,automatic stabilizers tend to

A)raise expenditures during expansions and recessions.
B)lower expenditures during expansions and recessions.
C)raise expenditures during recessions and lower expenditures during expansions.
D)raise expenditures during expansions and lower expenditures during recessions.

Question 58

Which of the following is not an automatic stabilizer?

A)the minimum wage
B)the unemployment compensation system
C)the federal income tax
D)the welfare system

Question 59

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.

Question 60

The primary argument against active monetary and fiscal policy is that

A)attempts to stabilize the economy do not constitute a proper role for government in a democratic society.
B)these policies affect the economy with a long lag.
C)these policies affect the economy too quickly and with too much impact.
D)history demonstrates that interest rates respond unpredictably to active policies,leading to unpredictable effects on income.

Question 61

Suppose investment spending falls.To offset the change in output the Federal Reserve could

A)increase the money supply.This increase would also move the price level closer to its value before the decline in investment spending.
B)increase the money supply.However,this increase would move the price level farther from its value before the decline in investment spending.
C)decrease the money supply.This decrease would also move the price level closer to its value before the decline in investment spending.
D)decrease the money supply.However,this increase would move the price level farther from its value before the decline in investment spending.

Question 62

A 2009 article in The Economist noted that

A)recent research has allowed economists to estimate the values of fiscal multipliers with a great deal of precision.
B)research on multipliers indicates that multipliers for permanent tax cuts tend to be smaller than multipliers for temporary tax cuts.
C)most of the evidence on multipliers for government spending is based on changes in military expenditures.
D)All of the above are correct.

Question 63

A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009.At that time,the president's economists estimated the multiplier to be

A)3.2 for government purchases and 2.0 for tax cuts.
B)2.4 for government purchases and 1.4 for tax cuts.
C)1.6 for government purchases and 1.0 for tax cuts.
D)1.6 for government purchases and 0.4 for tax cuts.

Question 64

A​ccording to the IGM poll,what percentage of economists polled agreed that the benefits of ARRA exceeded the costs?

A)​75%
B)​19%
C)​6%
D)​97%

Question 65

One of President Obama's first fiscal policy initiatives was​

A)​ARRA.
B)​TARP.
C)​QE1.
D)​QE2.

Question 66

A tax cut targeted at ---- people may have a bigger effect because ​

A)​poorer;poorer people tend to spend a higher share of their income.
B)​poorer;poorer people tend to spend a lower share of their income.
C)​wealthier;wealthier people tend to spend a higher share of their income.
D)​wealthier;wealthier people tend to spend a lower share of their income.

Question 67

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

A)smaller in closed economies than in open economies.
B)larger in closed economies than in open economies.
C)smaller in capitalist economies than in socialist economies.
D)larger in capitalist economies than in socialist economies.

Question 68

Suppose stock prices rise.To offset the resulting change in output the Federal Reserve could

A)increase the money supply.This increase would also move the price level closer to its value before the rise in stock prices.
B)increase the money supply.However,this increase would move the price level farther from its value before the rise in stock prices.
C)decrease the money supply.This decrease would also move the price level closer to its value before the rise in stock prices.
D)decrease the money supply.However,this decrease would move the price level farther from its value before the rise in stock prices.

Question 69

The G20 countries introduced stimulus packages that averaged ---- of GDP in 2009 and ---- in 2010.

A)​2%;1.6%
B)​1.6%;2%
C)​3%;2%
D)​2%;3%

Question 70

Suppose foreigners find U.S.goods and services more desirable for some reason other than a change in the exchange rate.Which policies could be used to offset the resulting change in output?

A)an increase in the money supply and an increase in government purchases.
B)an increase in the money supply and a decrease in government purchases.
C)a decrease in the money supply and an increase in government purchases.
D)a decrease in the money supply and a decrease in government purchases.

Question 71

If it were not for the automatic stabilizers in the U.S.economy,

A)the Federal Reserve would have less reason than it has now to monitor stock prices.
B)it would be more desirable than it is now for the Federal Reserve to target an interest rate.
C)a strict balanced-budget rule would be more desirable than it is now.
D)output and employment would probably be more volatile than they are now.

Question 72

According to a 2009 article in The Economist,the multiplier effect and crowding-out effect would exactly offset each other when the economy is

A)operating at full capacity.
B)in recession.
C)experiencing zero inflation.
D)experiencing high rates of inflation.

Question 73

According to the IGM poll,what percentage of economists polled agreed that the unemployment rate at the end of 2010 was lower with ARRA than without?

A)​97%
B)​75%
C)​19%
D)​3%