A Comparison of Fiscal and Monetary Policy- Review

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

Less; because future income is not affected

The effectiveness of monetary policy is limited by

all of the above.

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

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

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.

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

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

The implementation lag.

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.

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.

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.

"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

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.

With rising inflation and decreasing GDP, your advice as the head of the council of economic advisors would be

that this is not a win-win scenario. No matter what you do you cannot solve both rising inflation and falling GDP at the same time. You can only fix one problem at a time. Good luck with that Sir!