Chapter 18. Alternative Perspectives on Stabilization Policy

Chapter 18. Alternative Perspectives on Stabilization Policy 1.Economists who view the economy as inherently unstable generally argue that: A) stabilization policy is too dangerous to be used. B) the economy should be stimulated when it is depressed and slowed when it is overheated. C) the economy should be slowed when it is depressed and stimulated when it is overheated. D) monetary and fiscal policies should follow rigid rules of constant growth. 2.Economists who view the economy as naturally stable often argue that: A) monetary and fiscal policies should not be used to “fine-tune” the economy. B) the economy should be stimulated when it is depressed and slowed when it is overheated. C) the economy should be slowed when it is depressed and stimulated when it is overheated. D) economists should act to stimulate or slow the economy on the basis of forecasts in order to assure that the policy actions are timely. 3.All of the following U.S. federal agencies are directly concerned with macroeconomic policy except the: A) Council of Economic Advisers. B) Congressional Budget Office. C) Federal Reserve. D) Department of Health and Human Services. 4.The lawmakers who wrote the Employment Act of 1946 believed that: A) the economy was naturally stable. B) the Great Depression could not happen again. C) without active government policy the Great Depression could occur again. D) monetary policy should be conducted according to rules. 5.Active economic policy seeks to do all of the following except: A) offset fluctuations in real GDP. B) use monetary and fiscal policy to shift aggregate demand. C) respond to changing economic conditions. D) take a hands-off approach to macroeconomic policy. 6.Passive economic policy seeks to: A) offset fluctuations in real GDP. B) use monetary and fiscal policy to shift aggregate demand. C) respond to changing economic conditions. D) take a hands-off approach to macroeconomic policy. 7.Arguments in favor of passive economic policy include all of the following except: A) monetary and fiscal policies work with long and variable lags, which can produce destabilizing results. B) economic forecasts have too large a margin of error to be useful in formulating stabilization policy. C) recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary. D) the Great Depression could have been avoided if the Federal Reserve had pursued a policy of steady money growth. 8.Arguments in favor of active economic policy include all of the following except: A) failing to use monetary and fiscal policy leads to inefficient fluctuations in output and employment. B) the Great Depression could have been avoided if the Federal Reserve had pursued a policy of steady money growth. C) fluctuations in real GDP have been less severe following World War II than prior to World War I. D) failure of policymakers to respond to large contractionary shocks to private spending caused the Great Depression. 9.Increasing government spending when the economy is in a recession is an example of: A) active monetary policy. B) active fiscal policy. C) passive monetary policy. D) passive fiscal policy. 10.Keeping the money supply constant over the business cycle is an example of: A) active monetary policy. B) active fiscal policy. C) passive monetary policy. D) passive fiscal policy. 11.The concerns of economists who favor passive over active policy are most closely associated with their: A) preference for using monetary policy rather than fiscal policy for stabilization. B) view that policy made by rules is superior to policy made by discretion. C) belief that shocks to modern economies are not large enough to require any policy response. D) doubt that the correct policy will be implemented at the correct time. 12.The lags involved in implementing monetary and fiscal policy are: A) short and predictable. B) long and predictable. C) short and variable. D) long and variable. 13.The time between a shock to the economy and the policy action responding to that shock is called the: A) automatic stabilizer. B) time inconsistency of policy. C) inside lag. D) outside lag. 14.The time between a policy action and its influence on the economy is called the: A) automatic stabilizer. B) time inconsistency of policy. C) inside lag. D) outside lag. 15.The inside lag is the time: A) before automatic stabilizers respond to economic activity. B) after automatic stabilizers respond to economic activity. C) between a shock to the economy and the policy action responding to the shock. D) between a policy action and its influence on the economy. 16.The outside lag is the time: A) before automatic stabilizers respond to economic activity. B) when automatic stabilizers are not effective. C) between a shock to the economy and the policy action responding to the shock. D) between a policy action and its influence on the economy. 17.Fiscal policy has a relatively long lag, and monetary policy has a relatively long lag. A) inside; outside B) outside; inside C) inside; inside D) outside; outside 18.The lag between the time that economic stimulus is needed and the time that a tax cut is passed by Congress is an example of a: A) fiscal inside lag. B) fiscal outside lag. C) monetary inside lag. D) monetary outside lag. 19.The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a: A) fiscal inside lag. B) fiscal outside lag. C) monetary inside lag. D) monetary outside lag.