Stabilization Policy Quiz

The Keynesian view of economics gained great popularity during the 1930s, MAINLY because:

• NNP was not tending toward full employment as the classicists had predicted.
• it supported the crude quantity theory, which was just then gaining acceptance.
• the Keynesians expressed great faith in the economic power of the private sector.
• Keynesian economics stressed the importance of the equation of exchange.

During the late 1960s, the monetarists gained some ground over the Keynesians. This was probably due MAINLY to the fact that:

• the Keynesians continued to cling to the equation of exchange, which most economists considered an outdated tool of economic policy.
• during prosperous times, firms and consumers are apt to look less favorably on government policies and programs.
• the NNP was once again running at full-employment levels, casting doubt on the value of Keynesian philosophy.
• the tax increase of 1968 was delayed in Congress and ultimately less effective than Keynesians had predicted.

Professor E. Z. Clarity, in discussing the causes of the Great Depression with her economics students, made this statement: “After all, you have to realize that investment declined by about 90% during this period. The result was an incredible decrease in aggregate demand—with nothing to make up for that loss in demand.” The perspective that Professor Clarity presents here MAINLY reflects the view endorsed by the:

• rational expectations theorists.
• Keynesians.
• monetarists.
• supply-side economists.

Which of the following is probably the MOST PERSUASIVE argument in favor of a fixed-rate-of-growth rule to govern the money supply? The fixed-rate rule would:

• ensure that unemployment did not exceed natural employment levels.
• eliminate the lag between monetary policy enactment and impact.
• restrict the power of the Fed—an agency many people feel has grown too powerful.
• halt the rapid growth in NNP that has threatened the economy in recent years.

Which of the following statements would a rational expectationist MOST LIKELY agree with? The main cause of excess unemployment is:

• government’s inability to hold aggregate demand in check.
• workers’ unwillingness to accept jobs at lower pay.
• consumers’ inability to anticipate economic changes.
• a persistent problem of inflation that has plagued the economy for years.

A supply-side economist would probably favor which of the following?

• A lower tax burden for consumers, but higher taxes for large industries.
• A shift away from savings to more spending.
• Incentives to encourage more research and development among firms.
• Tighter money policies by the Fed.