MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 15, Problem 3TY
To determine
To evaluate: The argument that satisfies the meaning of discretionary policy and rules.
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As you have learned in Unit 8 (this week), monetary and fiscal policy play important roles in economic stimulation and or stabilization. In this regard:
Start with a brief introduction that explains use of Government policy to control the economy.
When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy? Look at both.
When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy? Look at both.
What specific fiscal policy tools would you use to stimulate aggregate demand and how?
What specific monetary policy tools would you use to stimulate aggregate demand and how?
What is your conclusion, should policymakers use the monetary and or fiscal policy, or a combination of both, to stimulate aggregate demand? Explain your reasoning.
With discretionary policy making, fiscal and monetary policies are usually
immune to any lag times that might counter their effectiveness.
undertaken in response to or anticipation of some change in the overall economy.
set according to pre-established standards that do not take into account any changes in the
economy.
immune to any political overtones.
The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to
whether the government should attempt to stabilize the economy.
Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply.
The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.
The current tax system acts as an automatic stabilizer.
Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president.
Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses.
Which of the following are examples of automatic stabilizers? Check all that apply.
O Unemployment insurance benefits
The federal funds rate
Corporate income taxes
O O O
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Similar questions
- Differentiate between monetary and fiscal policy.arrow_forwardWhich of the following accurately compares discretionary fiscal polícy and monetary policy? a) They both directly impact the aggregate demand, while only monetary policy can ever affect the aggregate supply in the economy. b) They both suffer from a lag between the problem, its recognition, and the impact of a policy remedy. c) Monetary policy can be very controversial, while discretionary fiscal policy is generally not subject to politics. d) Fiscal policy deals with the amount of currency available, while monetary policy is made up of government spending and taxing. e) Fiscal policy deals with aggregate supply, and monetary policy addresses aggregate demand.arrow_forwardAssume the economy has entered a recession. Identify two fiscal and two monetary policy actions that could be used to alleviate the recession and explain how each policy would improve the economy.arrow_forward
- Use the following scenarios to compare the effectiveness of monetary and fiscal policies with respect to the following: (a) An increase in aggregate demand to recover from a recession. (b) An increase in aggregate supply to increase employment.arrow_forwardUse of discretionary policy to stabilize the economyarrow_forwardThe following parameters describe the structure of a hypothetical economy: Autonomous consumption=240 Autonomous investment=1000 Autonomous taxes=100 Autonomous government expenditure=400 Real money supply (M/P)=600 Tax rate=0.25 Marginal propensity to consume=0.8 Interest elasticity of investment=50 Interest elasticity of demand for money=62.5 Income elasticity of demand for money=0.25 a) Determine and explain the relative effectiveness of fiscal and monetary policies. Use your answer to determine equilibrium income and interest rate. b) State the values of the fiscal and monetary policy multipliers if the economy is in a liquidity trap. Explain. c) If government expenditure is increased by 150 units, show how equilibrium interest rate and equilibrium income will change. Can you determine the extent to which investment is crowded out as a result? Explain.arrow_forward
- Which economic policies affect a government's budget and include the increase or decrease the money supply?arrow_forwardIn an attempt to promote renewable energy, the government provides an annual rebate to those who install solar panels on their roofs. What type of economic policy would this represent? a) Fiscal policy b) Monetary policy c) Both fiscal policy and monetary policy d) Neither fiscal nor monetary policy Asap.arrow_forwardIf a policy is carried out by a rule, then we have an example of discretionary policy making. natural policy making. active policy making. nondiscretionary policy making.arrow_forward
- Q7. Name at least one fiscal policy and one monetary policy the federal government enacted in response to Coronavirus. • Label the policy as fiscal or monetary.arrow_forwardIf the U.S. government's budget deficits are increasing aggregate demand, and the economy is producing at a level that is substantially less than potential GDP, then: a) government borrowing is likely to crowd out private investment. b) an inflationary increase in the price level is in real danger. c) the central bank might react with an expansionary monetary policy. d) higher interest rates will crowd out private investment.arrow_forwardKeynesian economics defends budget balance. However, according to economists, budget balance may exacerbate the effects of the business cycle. Isn't it also a Keynesian view to use discretionary policy to smoothen the business cycles? Aren't those two views contradictory?arrow_forward
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