In your opinion do government policies to stabilize real domestic production have a larger role to play in the IS-LM-FE model or in the monetary approach to the balance of payments? Why? (Note: This question is an extension of the analysis. It is not covered explicitly in the book.)
What will be an ideal response?
POSSIBLE RESPONSE: In the IS-LM-FE model, there is a role to play for government stabilization policies because an economy can have real domestic production (the IS-LM intersection) that does not result in full employment. In the monetary approach, because prices are perfectly flexible, the economy adjusts automatically to any given shocks, so the economy quickly returns to full employment. No government stabilization policy is needed.
You might also like to view...
Gooey Flakes is the only ready-to-eat cereal that has chocolate syrup injected into each flake. The machine that injects the syrup into the flakes can do nothing else. Which of the following is true?
a. All of the machine's earnings are economic rent. b. All of the machine's earnings are opportunity cost. c. The supply curve for this machine is horizontal. d. The demand curve for this machine is horizontal. e. The demand curve for this machine is vertical.
In the four-sector Keynesian model,
a. increased government spending reduces aggregate expenditure. b. increased taxes increase aggregate expenditure. c. increased exports increase aggregate expenditure. d. increased imports increase aggregate expenditure.
The stock of unused goods held by a firm is called a(n):
a. depreciation. b. supplement. c. deadweight loss. d. excess capacity. e. inventory.
According to the permanent income hypothesis, when income rises above the permanent income level, the household saves at a lower rate than the long-run MPS
a. True b. False Indicate whether the statement is true or false