chapter: ©2009  Worth Publishers >> Krugman/Wells Macroeconomics: Events and Ideas 17 CHECK YOUR UNDERSTANDING

Check Your Understanding 17-1 Question 1 The following figure shows the behavior of M1 before, during, and after the 2001 recession.

1ai) “Aggressive monetary policy can reduce the depth of a recession” is a quote taken from the 2004 Economic Report of the President. Was this policy of aggressive monetary policy pursued by the Fed during and following the 2001 recession? 1.yes 2.no 3.not enough information

1aii) “Aggressive monetary policy can reduce the depth of a recession” is a quote taken from the 2004 Economic Report of the President. Was this policy effective in reducing the depth of the 2001 recession? 1.yes 2.no 3.not enough information

1b) “Aggressive monetary policy can reduce the depth of a recession” is a quote taken from the 2004 Economic Report of the President. Classical macroeconomists would agree with that statement. 1.True 2.False

Check Your Understanding 17-2 Question 1

1a) Keynes would agree that tax cuts can boost economic activity. 1.True 2.False

1b) The basis for Keynes argument that tax cuts would boost economic activity is that the tax breaks increase the incentive for people to work, save, and invest. 1.True 2.False

1c) The key ideas of Keynesian economics is the emphasis on the short-run aggregate supply curve which is vertical, rather than upward-sloping. 1.True 2.False

Check Your Understanding 17-3 Question 1

1) Monetarists pursue policies that allow the growth rate in M1 to fluctuate even during a recession. 1.True 2.False

Check Your Understanding 17-3 Question 2 The figure below shows how the velocity of M1 has fluctuated since 1960.

2) Assuming that the Fed had pursued a monetarist policy during the entire time frame (instead of the policy that the Fed actually pursued) what problems would the U.S. economy have faced? 1.fluctuations in aggregate demand (economic activity) 2.rapid inflation 3.soaring interest rates 4.no problems, the US would have been better off

Check Your Understanding 17-3 Question 3

3a) Monetary policy is effected more by time lags than is monetary policy. 1.True 2.False

3b) Both fiscal and monetary policy are limited by concerns over the political business cycle. 1.True 2.False

Check Your Understanding 17-4 Question 1 In early 2001 the Fed stated that it would fight the recession with an aggressive monetary policy. By 2004 this aggressive monetary expansion was widely given credit for ending the recession.

1a) Given this information, a rational expectations theorist would say that this conclusion is true only if: 1.there was an expectation of the aggressive monetary policy by individuals. 2.the aggressive monetary policy was more aggressive than expected. 3.the aggressive monetary policy was less aggressive than expected. 4.individuals acted irrationally as a result of the Fed’s policy.

1b) A real business cycle theorist would say that this conclusion is false because: 1.they believe that the recession has not ended. 2.the monetary policy was not aggressive enough. 3.the monetary policy was too aggressive. 4.they believe that fluctuations in aggregate output are largely caused by changes in total factor productivity.

Check Your Understanding 17-5 Question 1

1a) Is expansionary monetary policy helpful in fighting recessions? A monetarist would say: 1.yes. 2.no.

1b) Is expansionary monetary policy helpful in fighting recessions? A classical macroeconomist would say: 1.yes. 2.no.

1c) Is fiscal policy effective in fighting recessions? The modern consensus is: 1.yes. 2.no.

1d) Can monetary and/or fiscal policy reduce unemployment in the long run? The modern consensus is: 1.yes. 2.no.

1e) Should fiscal policy be used in a discretionary way? A classical macroeconomist would say: 1.yes. 2.no.