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Transcript
Macro Section IV, Clicker Review – Text Version Consumer confidence drops. If the government was to use DASK monetary policy it would: a. Spend more b. Tax more and reduce the deficit c. Tax more and increase the deficit d. Increase the money supply e. Increase interest rate targets Answer: d. Monetary policy means money (and interest rate targets). To counter the drop in aggregate demand, the government should increase the money supply and reduce interest rate targets. Consumer confidence drops. If the government was to use DASK fiscal policy it would: a. Spend more b. Tax more and reduce the deficit c. Tax more and increase the deficit d. Increase the money supply e. Increase interest rate targets Answer: a. Fiscal policy is spending, taxes, and the deficit. So, if there’s a drop in AD, the government should spend more, tax less, and increase the deficit. Investment demand is rising and inflation is increasing. If the government was to use DASK monetary policy it would: a. Spend more b. Tax more and reduce the deficit c. Tax more and increase the deficit d. Increase the money supply e. Increase interest rate targets Answer: e. There’s an increase in AD. Counter that by reducing the money supply and increasing interest rate targets. Investment demand is rising and inflation is increasing. If the government was to use DASK fiscal policy it would: a. Spend more b. Tax more and reduce the deficit c. Tax more and increase the deficit d. Increase the money supply e. Increase interest rate targets Answer: b. Counter the drop in AD by taxing more and reducing the deficit. Which of the following is not part of a DASK policy? a. Stimulate Aggregate Demand during a recession b. Stabilize unemployment c. Assumes inflation-unemployment trade-off d. Follows policy rules e. Allowing policy makers to determine the best action Answer: d. “D” in DASK stands for discretionary which means policy makers don’t follow rules, they have discretion. Why shouldn’t a government use a DASK policy? a. Government can’t act fast enough b. Economy doesn’t function as they think it does c. Policy doesn’t effect the economy as planned d. Discretion leads to manipulation e. All the above Answer: e. 1 12% 8% 3 2 5 4 ExI =12% 7 6 4% ExI =8% ExI =4% 4% Which movement would be most undesirable? a. Upward b. Downward c. To the left d. To the right 6% 8% Answer: d. To the right is higher unemployment, the least desirable. People expect inflation to be 8%, and it really is 8%. The economy will be at which point? Answer: #4 People expect inflation to be 12%, and it really is 8%. The economy will be at which point? Answer: #5 People expect inflation to be 12%, and it really is 8%. Unemployment will be? Answer: about (a little more) than 8% Inflation is 4% and people expect it. The Fed increases inflation which surprises people. The economy would head towards? Answer: #3. The economy would start at #6 but the increase in inflation which surprises people would move the economy towards point #3. Inflation is 4% and people expect it. The Fed increases inflation which people expect. The economy would head towards? Answer: #4 The economy moves from point 6 to point 3. This supports this concept: a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation Answer: b. Since going from 6 to 3 raises inflation but lowers unemployment The economy moves from point 6 to point 4. This supports this concept: a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation Answer: a. Since moving from 6 to 4 would increase inflation and have no impact on unemployment. This change represents a tighter monetary policy which surprises people a. 2 to 1 b. 2 to 3 c. 2 to 4 d. 2 to 5 Answer: d. Tighter policy means inflation will decrease. If it surprises people it will move along the same PC and head towards #5. Original Keynesian Theory supported which concept? a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation d. Multiple Phillips Curves Answer: b. During the 1950’s, higher inflation was found to be correlated with lower unemployment. This supports this concept: a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation d. Multiple Phillips Curves Answer: b. During the 1960’s, the government engineered higher inflation. Unemployment fell. This supports this concept: a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation d. Multiple Phillips Curves Answer: b. A single downward sloping Phillips Curve suggests a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation d. Multiple Phillips Curves Answer: b. The Long Run Vertical Phillips Curve suggests a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation d. Multiple Phillips Curves Answer: a. This might be the most notable and unexpected macroeconomic phenomenon of the 1970’s. a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation d. Multiple Phillips Curves Answer: c. In 1982, the government reduced inflation rapidly. The unemployment rate rose. This supports which concept: a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation d. Multiple Phillips Curves Answer: b. The economic experiences of the 1950’s, 60’s, 70’s and 80’s suggest this concept is true: a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation d. Multiple Phillips Curves Answer: d. Government policy activists necessarily believe in this a. Money Neutrality b. Inflation-Unemployment Trade-off c. Stagflation d. Multiple Phillips Curves Answer: b. The next set of questions uses the following answers Delays or Lags Unintended Consequences Mistakes As the government runs a deficit, crowding out occurs Answer: Mistakes. It was believed that a deficit would stimulate the economy but it crowded out instead. That’s a mistake about the effect of the deficit. An inflationary bias occurs Answer: Unintended Consequences. A result of the Fed’s attempt to manipulate the economy. The Political Cycle Answer: Unintended Consequences. A result of manipulation The government debates spending cuts for several years as the economy recovers Answer: Delays or Lags People expect the Fed’s new loose money policy which results in higher inflation and no effect on unemployment Answer: Mistakes The recession is supply driven and not Keynesian Demand driven Answer: Mistakes The government provides tax cuts to pharmaceutical companies who provide large campaign contributions Answer: Unintended Consequences. This is rent seeking behavior which is manipulation.