MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 15, Problem 5DQ
To determine
To describe:The reason for contrasting views on the shape of the
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Which of the following statements about the debate over stabilization policy are correct? Check all that apply.
Advocates of active stabilization policy believe that the government can adjust monetary and fiscal policy to counteract waves of excessive optimism and pessimism among consumers and businesses.
Opponents of active stabilization policy believe that significant time lags in both fiscal and monetary policy often exacerbate economic fluctuations.
Opponents of active stabilization believe that active fiscal and monetary policies have no effect on aggregate demand.
Advocates of active stabilization believe that implementation lags for fiscal and monetary policy do not exist.
Explain what kind of monetary policy and fiscal policy tools can be used to fight against inflation
X
8. Using policy to stabilize the economy
The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to
whether the government should attempt to stabilize the economy.
Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply.
The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.
Businesses make investment plans many months in advance.
Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president.
The current tax system acts as an automatic stabilizer.
Which of the following are examples of automatic stabilizers? Check all that apply.
Unemployment insurance benefits
Corporate income taxes
The discount rate
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- A monetary policy that reduces the amount of money and loans in the economy is a contractionary monetary policy or a “tight” monetary policy. A monetary policy that expands the quantity of money and loans is known as an expansionary monetary policy or a “loose” monetary policy. Tight or contractionary monetary policy that leads to higher interest rates and a reduced quantity of loanable funds will reduce two components of aggregate demand. Conversely, a loose or expansionary monetary policy that leads to lower interest rates and a higher quantity of loanable funds will tend to increase business investment and consumer borrowing for big-ticket items. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins. Note:- Do not provide handwritten solution. Maintain…arrow_forwardAnswer the following questions about stabilization policy. What do we mean by stabilization policy? Why do some policymakers support active stabilization policy? Why do some policymakers prefer a passive approach?arrow_forwardWhich of the following is a policy tool used to combat demand-pull inflation? a) Contractionary fiscal policy b) Expansionary monetary policyarrow_forward
- The "rational expectations" school of economists, including Robert Lucas and Thomas Sargent, argue that changes in monetary policy cannot affect unemployment rates in the short run or long run. True Falsearrow_forwardSuppose that government spending is increased at the same time when an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?arrow_forwardIf the Fed indicates that inflation is likely to be a concern in the near future, the public would expect that it might Lower interest rates at its next meeting Not change interest rates at its next meeting Raise interest rates at its next meeting Lower interest rates before its next meeting Decrease the federal budget deficit at its next meetingarrow_forward
- If the federal government runs large deficits it could cause crowding out through interest rates. However, the Federal Reserve could try to keep interest rates down by increasing the growth of the monetary base. What will be the long-run result of these two policies? high inflation and high nominal interest rates low unemployment rate and low inflation high national debt and low interest rates low nominal interest rates and low unemployment ratearrow_forwardWhy is there no upward or downward pressure on the inflation rate when the economy is at full employment?arrow_forwardThe link relates these questions https://thenewdaily.com.au/finance/finance-news/2020/06/11/gambling-consumer-spending/ Draw an AS-AD diagram for Australia’s economy, showing an initial long run equilibrium. Explain the impact of the weak consumer spending on output and inflation in the short-run, including showing this on your AS-AD diagram. Use a new diagram to help explain what happens to output and inflation in Australia in the short run when federal government introduces a fiscal stimulus package. Describe some of the policy recommendations to help the economy recover from the pandemic in the article?arrow_forward
- In an effort to stabilize the economy, is it best for policymarkers to use monetary policy, fiscal policy, or a combination of both? The following questions address the ways monetary and fiscal policies impact the economy and the pros and cons associated with using these tools to ease economic fluctuations. The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (AS), and long-run aggregate supply curve (LRAS) for the economy in May 2025. According to the graph, this economy is in (a recession/an expansion) . To bring the economy back to the natural level of output, the government could use (an expansionary/a contractionary) monetary or fiscal policy such as (decreasing taxes/increasing taxes). Shift the appropriate curve on the following graph to illustrate the effects of the policy you chose. Suppose that in May 2025, policymakers undertake the type of policy that is necessary to bring the economy back to the natural…arrow_forwardWhich of the following is an effective fiscal tool to control inflation in boom times?a) Reducing government spendingb) Increasing government spendingc) Decreasing taxationd) Increasing money supplyarrow_forwardThe government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Businesses make investment plans many months in advance. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. Which of the following are examples of automatic stabilizers? Check all that apply. Personal income taxes The federal funds rate Unemployment insurance benefitsarrow_forward
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