Macroecon Chap 16: Fiscal vs Monetary

Expansionary fiscal policy will cause which of the following?

A rise in interest rates.

What happens to the investment demand function during inflation?

Does not get steeper or shift leftward.

How does lowering interest rates affect businesses?

It may help businesses who are willing to spend money to update technology or purchase new capital goods.

What is the implementation lag for fiscal policy?

It suffers from an implementation lag.

A temporary income tax cut will be ______________ effective as a fiscal policy than a permanent change ______________.

Less; because future income is not affected

Why was monetary policy slow in bringing about the recovery from the Great Recession?

Investment demand curve shifted leftward and became steeper.

If an economy appears to be growing rapidly and inflation appears to be becoming a serious problem, which of the following fiscal policies would be appropriate?

A decrease in government spending

What is more quickly implemented: a decrease in taxes or an increase in government spending?

A decrease in taxes.

What did fiscal programs implemented during the Great Depression do?

Allowed thousands of men and women back to work.

Which of the following groups would prefer monetary policy to ameliorate a recession, as opposed to fiscal policy?

Borrowers

How does monetary policy fight inflation?

By raising interest rates to decrease spending

What is monetary policy?

Government's control of money supply and interest rates

What is the appropriate policy response for rising inflation and decreasing GDP?

Cannot solve both problems at once

What is monetary policy?

Central bank policies to influence the economy through interest rates and money supply.

What happens when the AD curve shifts to the left?

Decreases GDP and inflation

What is the effect of a rise in interest rates?

Decreases spending by firms and households

What is the main difference between fiscal and monetary policy?

Fiscal policy involves government spending and taxation, while monetary policy involves central bank policies.

Assume that we are currently producing less than the potential level of GDP. Which of the following is a valid argument for active use of monetary policy instead of fiscal policy?

Fiscal policy may cause crowding out of investment

What is the appropriate policy response if resource prices fall at full employment?

Fiscal policy, increase spending and decrease taxes

Is fiscal policy or monetary policy more effective during a recession?

Fiscal policy.

Which policy has a longer implementation lag?

Fiscal policy.

Which policy has a shorter effectiveness lag?

Fiscal policy.

Which policy is more effective in fighting recession?

Fiscal policy.

What is fiscal policy?

Government spending and taxation policies to influence the economy.

What is more likely to induce spending: government spending or a decrease in taxes?

Government spending.

What is the solution to low inflation and falling GDP?

Increase government spending, decrease taxes, and increase money supply.

What is the response to run-away inflation caused by excessive spending?

Increase taxes and decrease government spending.

According to the advocates of crowding out, an increase in government spending will cause the demand for money to ______________, then interest rates to ______________, which in turn causes investment spending to ______________.

Increase, increase, decrease

Which of the following accurately refers to "crowding in"?

Increased investment in response to expansionary fiscal policy.

What are the four problems with monetary policy during a recession?

Long effective lag, zero bound interest rate, lower inflation/deflation, and concentration of production and wealth.

What was the implementation lag for fiscal policy during the Great Recession?

Longer than monetary policy.

What is the time frame for effectiveness of monetary policy?

Many months.

What is the time frame for implementing fiscal policy?

Many months.

Which policy is more effective in fighting inflation?

Monetary policy.

What is the effectiveness of monetary policy during inflation?

More effective due to quick implementation.

An economy is producing at a level of output that is equal to the full-employment level of output. Prices of a fundamental resource, such as oil, decrease significantly. What would be the best monetary policy?

No monetary or fiscal policy would be required.

What is the main tool the Fed has to lower interest rates?

Raising the money supply.

Consider the following quote: "Over one and a half million people were laid off from jobs following the doubling of oil prices in 1979." What was the policy dilemma faced by monetary and fiscal policy makers?

Rising prices and rising unemployment

What is the implementation lag for monetary policy?

Short, can be implemented within a day

Which of the following is not a sufficient reason for the preference of fiscal policy over monetary policy in a recession?

The implementation lag.

What is the zero bound interest rate?

The point at which interest rates cannot go any lower than 0.

Which of the following statements comparing the lags of monetary and fiscal policy is accurate?

The policy-making lag for fiscal policy is longer than monetary policy.

An economy is producing at a level of output that is equal to the full-employment level of output. Prices of a fundamental resource, such as oil, increase significantly. What would be the best monetary policy?

There is no obviously correct policy, unless you can specify your goals.

Assume the economy faces high unemployment but stable inflation. Which combination of government policies is most likely to reduce unemployment?

The purchase of government securities in the open market and an increase in government spending.

What is implementation lag?

The time it takes for a policy to be agreed upon and set into motion.

What is effectiveness lag?

The time it takes for a policy to have an effect on the economy.

What is the role of the government in fiscal policy?

To control government spending and taxation.

What is the role of the central bank in monetary policy?

To control interest rates and money supply.

Why do people and businesses hold off spending during a recession?

To see if prices will fall more.

Once decisions have been made to use monetary policy and fiscal policy to solve a problem, it will take more time for monetary policy to have an effect on real GDP and the inflation rate than would an increase in government spending.

True

What is the time frame for effectiveness of fiscal policy?

Up to a few weeks.

What is the time frame for implementing monetary policy?

Within a matter of hours.

"An increase in the budget deficit can be beneficial for the economy," said a member of Congress during the November budget debates. Could this statement be true?

Yes

Which of the following reasons make monetary policy preferable to fiscal policy in inflation?

a .A shorter implementation lag b. There is no limit on how high the interest rate can go up.

Which of the following statements make(s) the conduct of discretionary monetary policy difficult?

a. The Fed implements policy now that will affect the economy in the future Your answer b. The Fed has to make forecasts about the future based on current data Your answer c.The Fed is uncertain about how large the effect of a policy change will be

The effectiveness of monetary policy is limited by

a. the location of the investment demand function. b. the slope of the investment demand function. Your answer c.being able to put off interest-sensitive spending decisions.

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for

buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.

Monetary policy is thought to be

more effective in controlling demand-pull inflation than in moving the economy out of a recession.