Whitman ECON 102 - Macroeconomic Issues and Policy

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The Federal Reserve will likely increase the money supply to decrease interest rates.The Federal Reserve will likely decrease the money supply to increase interest rates.The economy will experience lower inflation and a lower level of output.Household wealth and consumption both rise.20. What would be the Federal Reserve's expansionary response to offset the effects of a decrease in government spending?21. Explain the nature of the implementation lag for fiscal policy.22. What is the most important determinant of the response lag for monetary policy?23. What does the recognition lag imply about how well economic policy might work?24. Explain why the time lags, in general, pose a challenge to policy makers.25. Identify the time lags that are associated with stabilization policies.26. Explain why the implementation lag of fiscal policy is generally greater than the implementation lag of monetary policy.27. Explain why is the response lag for monetary policy likely longer than the response lag for fiscal policy?28. Explain the important policy objectives of Federal Reserve monetary policies.29. Explain the relationship between changes in the money supply, interest rates, spending, and prices.30. Explain the Federal Reserve's policy that is often called to "lean against the wind."31. Explain stagflation and the policy dilemma it presents.It is the amount by which the deficit changes with a one-dollar change in GDP.DRI x $60 billion = $10 billion. Thus the DRI = $10 billion/$60 billion = 1/6 or .16.The impact is to provide more moderate expansionary growth.The impact on the economy is to moderate contractionary pressures.Test Item File 3: Principles of Macroeconomics 15(28) Macroeconomic Issues and Policy Time Lags Regarding Monetary and Fiscal Policy1. When is the Fed more likely to increase the money supply and why?The Fed is likely to increase the money supply during times of low output and low inflation.Difficulty: E Type: C2. Suppose that there is a stock market crash in which the market loses twenty percent ofits value in one day. Furthermore, assume that the crash leads to further pessimism thatthe market will crash again. What likely impact will this have on GDP and why?If the market were to crash by twenty percent and the public became even more pessimistic this could generate another wave of selling which would drive the market down even further. The loss of wealth will likely have the effect of drivingconsumption down which will cause GDP to contract through the force of the multiplier.Difficulty: E Type: C3. When is the Fed more likely to decrease the money supply and why?The Fed is likely to decrease the money supply during times of high output and high inflation. The reason is that this gives the Fed opportunity to keep inflation in check without doing much harm to output.Difficulty: E Type: C296Test Item File 3: Principles of Macroeconomics4. How is the Fed likely to respond during periods of recessionary decline? Make sure to include in your answer the change in the money supply and interest rates.The Federal Reserve will likely increase the money supply to decrease interest rates.Difficulty: E Type: C5. How is the Fed likely to respond during periods of excessive expansionary growth thatis characterized by strong inflationary pressures? Make sure to include in your answer the change in the money supply and interest rates.The Federal Reserve will likely decrease the money supply to increase interest rates.Difficulty: E Type: C6. Explain why stagflation is a more difficult problem to solve for the Fed than others.If the Fed expands the money supply, output will rise, but so will the inflation rate. If the Fed contracts the money supply, the inflation rate will fall, but so will output. The Fed is faced with a trade-off. It either must fight the inflation with the certain risk of raising unemployment or fight the unemployment with the risk of facing further inflation.Difficulty: E Type: C297Chapter 15 (28): Macroeconomic Issues and Policy 7. Assume two different economies: one represented by AD1 and one represented by AD2. Which economy would the Fed be more inclined to expand the money supply andwhy? Demonstrate your answer by drawing in the new demand curve that would result.The Fed would be more willing to expand the money supply if the economy were at AD1. The reason is that it will result in an increase in output with very little increase in the price level.Difficulty: E Type: A8. What kind of impact on the economy will there be from a contractionary monetary policy when the economy is suffering from stagflation?The economy will experience lower inflation and a lower level of output.Difficulty: E Type: C9. Explain what economists mean by the Fed “leaning against the wind”.This practice refers to the Fed’s use of open market operations to raise interest rates gradually to try to prevent the economy from expanding too quickly. Whenthe economy contracts, the Fed lowers interest rates gradually to lessen the contraction. Difficulty: E Type: C298Test Item File 3: Principles of Macroeconomics10. According to the above graph what kind of action is the Fed likely to take and why? You may assume at Po is highly inflationary and that Yo represents full-employment output. Draw in the new aggregate demand curve to support your answer.The Fed is likely to contract the money supply when the economy is experiencinga high level of output coupled with high inflation. The aggregate demand curve will shift to the left as pictured below:299Chapter 15 (28): Macroeconomic Issues and Policy Difficulty: M Type: A11. If an increase in government spending had a multiplier expanded effect upon GDP of $200 billion and the deficit response index is .15, calculate the amount by which the deficit will rise.The deficit will increase by the amount of the increased government spending less the decrease of $200 billion x .15 = $30 billion brought about by increased tax revenue.Difficulty: E Type: A12. When stock prices rise, what generally happens to the level of household wealth and consumption?Household wealth and consumption both rise.Difficulty: E Type: F13. Explain the use of stabilization policy.Describes both monetary and fiscal policy, the goals of which are to smooth out fluctuations in output and employment and to keep prices as stable as possible.Difficulty: E Type: D14. What did Milton Friedman mean by his criticism of stabilization policy when be compared it to a “fool


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