In the case of a negative shock to aggregate demand, what should the central bank do?

A policy of inflation targeting

a. removes the need for discretionary decision making by central bankers.

b. frees central bankers from having to respond to shocks to aggregate demand.

c. makes central bank policy more transparent and accountable.

d. has been abandoned by most central banks around the world.

Indicate whether the following event describes $\bold{discretionary\ fiscal\ policy, mandatory\ spending}$, or an $\bold{automatic\ stabilizer}$.

• Tax rates for small businesses are lowered.

a. What is the difference between fiscal policy and monetary policy? b. What measures does the Federal Reserve take to control the amount of money in the economy, and why does it do so? c. How important are the actions of consumers in affecting the economy? Explain your answer.

Automatic stabilizers are government spending and taxation changes that:

A. cause the fiscal policy to be neutral when the economy contracts

B. cause fiscal policy to be contractionary when the economy contracts

C. cause fiscal policy to be expansionary when the economy contracts

D. cause fiscal policy to be ineffective when the economy contracts

In each of the following cases, determine whether the policy is an expansionary or contractionary fiscal policy:

Several military bases around the country, which together employ tens of thousands of people, are closed.

Suppose that a market is described by the following supply and demand equations:

$$\begin{aligned} &Q^5=2 P \\ &Q^{\mathrm{D}}=300-P \end{aligned}$$

The government now levies a tax of $\$ 200$ per unit on this good. Is this a good policy? Why or why not? Can you propose a better policy?

In what ways might monetary policy be superior to fiscal policy? In what ways might it be inferior?

Explain the difference between a pull policy and a push policy. Under what conditions should each policy be used?

Banks normally hold few excess reserves because this practice is:

a) subject to an excess reserves tax.

b) not profitable.

c) against Fed policy.

d) illegal.

Suppose that Congress is considering an investment tax credit, which subsidizes domestic investment.

Representatives of several large exporters oppose the policy. Why might that be the case?

What is the advantage of monetary policy compared to fiscal policy?

What is the difference between fiscal policy and monetary policy?

Match the term to the correct definition. A. Fiscal policy B. Macroeconomic equilibrium C. Disposable income D. Expansionary fiscal policy E. Contractionary fiscal policy F. Discretionary fiscal policy G. Automatic stabilizers H. Demand- side policy I. Supply- side policy J. Inside lag K. Recognition lag L. Implementation lag M. Classical economics N. Keynesian economics O. Outside lag

___________ Any combination of government spending cuts and tax increases meant to slow the economy down.