An effective policy of governmental intervention in the economy requires all of the following except one. Which is the exception?
a. The will to reject sound policy if it gets in the way of political considerations
b. The ability to estimate the economy's potential level of output
c. The ability to predict what would happen without intervention
d. An assortment of effective tools of discretionary policy
e. The ability to achieve effective cooperation between fiscal and monetary policy makers
QUESTION 2Discretionary policy advocates believe:
a. that there is a high cost associated with the use of a discretionary policy.
b. that self-corrective forces in an economy work slowly.
c. that natural adjustments of wages and prices can help attain potential output.
d. in rational expectations.
e. that an active stabilization policy imposes troubling fluctuations in the price level and real GDP.
QUESTION 3Those who favor an active approach to policy believe that:
a. discretionary monetary policy cannot be used to help the economy since monetary policy lags are long.
b. discretionary fiscal policy cannot be used to help the economy since fiscal policy lags are long.
c. lags associated with implementing policies are too long and unstable for discretionary policy to be effective.
d. despite the lags involved, implementing discretionary policy is preferable to inaction.
e. the discretionary fiscal policy cannot be used to help the economy since it leads to inflation.
QUESTION 4Which of the following is a problem associated with an active policy such as a stimulus package?
a. Increase in the unemployment rate
b. Increase in inflationary pressure
c. Increase in the market interest rate
d. Decrease in the market interest rate
e. Decrease in money demand
QUESTION 5Which of the following statements supports the passive approach to close a recessionary gap?
a. It is likely that policies will be subject to time lags.
b. Prolonged unemployment may cause the economy's potential real GDP to fall.
c. Workers' skills may grow rusty during a prolonged recession.
d. It is likely that unemployed workers will drop out of the labor force.
e. Firms may neglect their capital stock during a prolonged recession.
QUESTION 6If the time for an economy to self-correct is shorter than the active policy lags, then:
a. active policy should be strengthened.
b. active policy is likely to destabilize the economy.
c. time is required to accumulate evidence that the economy is performing below its potential.
d. the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve.
e. active policy will work better than passive policy.
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