Contrast the circumstances in which economists prefer monetary policy and those in which they prefer fiscal policy for stabilization and explain why they hold these preferences.
What will be an ideal response?
Student responses will vary. They should make clear that most economists feel that monetary policy is the best approach in most circumstances because it can be implemented relatively quickly. Answers should also state that fiscal policy is preferred mainly in special situations where monetary policy alone is not effective, such as in a liquidity trap. Automatic stabilizers are an aspect of fiscal policy that can be established in advance of problems and then be implemented automatically.
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When there is a recessionary gap, inflation will ________, in response to which the Federal Reserve will ________ real interest rates, and output will ________.
A. decline; lower; decline B. increase; raise; decline C. decline; lower; expand D. decline; raise; decline
Pat Robertson, a TV evangelist and former Republican Party candidate for president, once said that “debt is an affront to God,” so good Christians should not spend beyond their incomes. Indeed, Robertson wants Christians to save more. If more Americans, Christians as well as others, took his message seriously, how would we represent the result using a Keynesian macroeconomic model?
A. A downward movement along the consumption function B. An upward movement along the consumption function C. A downward shift of the consumption function D. An upward shift of the consumption function
In the short run, if a firm operates, it earns a profit of $500. The fixed costs of the firm are $100. This firm has a producer surplus of
A) $500. B) $100. C) $400. D) $600.
Which of the following will NOT cause market supply to increase?
A) an increase in the number of firms supplying the product in the market B) a change in technology which allows a larger level of production at every price C) an increase in the costs of resources used to produce the product D) a decrease in labor costs