Consumer confidence drops. If the government was to use DASK monetary policy it would:

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Consumer confidence Consumer confidence drops. If the government drops. If the government was to use DASK was to use DASK monetary policy it would:monetary policy it would:

A.A. Spend moreSpend moreB.B. Tax more and reduce the deficitTax more and reduce the deficitC.C. Tax more and increase the Tax more and increase the

deficitdeficitD.D. Increase the money supplyIncrease the money supplyE.E. Increase interest rate targetsIncrease interest rate targets

Consumer confidence Consumer confidence drops. If the government drops. If the government was to use DASK fiscal was to use DASK fiscal policy it would:policy it would:



Investment demand is Investment demand is rising and inflation is rising and inflation is increasing. If the increasing. If the government was to use government was to use DASK monetary policy it DASK monetary policy it would:would:



Investment demand is Investment demand is rising and inflation is rising and inflation is increasing. If the increasing. If the government was to use government was to use DASK fiscal policy it DASK fiscal policy it would:would:



Which of the following is Which of the following is not not part of a DASK policy?part of a DASK policy?

A.A. Stimulate Aggregate Demand Stimulate Aggregate Demand during a recessionduring a recession

B.B. Stabilize unemploymentStabilize unemployment

C.C. Assumes inflation-unemployment Assumes inflation-unemployment trade-offtrade-off

D.D. Follows policy rulesFollows policy rules

E.E. Allowing policy makers to determine Allowing policy makers to determine the best actionthe best action

Why shouldn’t a Why shouldn’t a government use a DASK government use a DASK policy?policy?

A.A. Government can’t act fast enoughGovernment can’t act fast enough

B.B. Economy doesn’t function as they Economy doesn’t function as they think it doesthink it does

C.C. Policy doesn’t effect the economy Policy doesn’t effect the economy as plannedas planned

D.D. Discretion leads to manipulationDiscretion leads to manipulation

E.E. All the aboveAll the above

Which Which movement movement would be would be most most undesirable? undesirable?

A.A. UpwardUpwardB.B. DownwardDownwardC.C. To the leftTo the leftD.D. To the rightTo the right

4

21

3

6 7

5

4%

8%6%

ExI =4%

ExI =8%

ExI =12%

4%

8%

12%

People expect People expect inflation to be inflation to be 8%, and it 8%, and it really is 8%. really is 8%. The economy The economy will be at will be at which point?which point?

A. 2A. 2 B. 3B. 3 C.4 C.4 D. 5D. 5 E. 6E. 6

4

21

3

6 7

5

4%

8%6%

ExI =4%

ExI =8%

ExI =12%

4%

8%

12%

People expect People expect inflation to be inflation to be 12%, and it 12%, and it really is 8%. really is 8%. The economy The economy will be at will be at which point?which point?

A. 2A. 2 B. 3B. 3 C.4 C.4 D. 5D. 5 E. 6E. 6

4

21

3

6 7

5

4%

8%6%

ExI =4%

ExI =8%

ExI =12%

4%

8%

12%

People expect People expect inflation to be inflation to be 12%, and it 12%, and it really is 8%. really is 8%. UnemploymeUnemployment will be?nt will be?

A. 4%A. 4% B. 6%B. 6% C.8% C.8% D. More D. More than 8%than 8%

4

21

3

6 7

5

4%

8%6%

ExI =4%

ExI =8%

ExI =12%

4%

8%

12%

Inflation is 4% Inflation is 4% and people and people expect it. The expect it. The Fed increases Fed increases inflation which inflation which surprises surprises people. The people. The economy would economy would head towards?head towards?

A. 2A. 2 B. 3B. 3 C.4 C.4 D. 5D. 5 E. 6E. 6

4

21

3

6 7

5

4%

8%6%

ExI =4%

ExI =8%

ExI =12%

4%

8%

12%

Inflation is Inflation is 4% and 4% and people expect people expect it. The Fed it. The Fed increases increases inflation inflation which people which people expect. The expect. The economy economy would head would head towards?towards?

A. 2A. 2 B. 3B. 3 C.4 C.4 D. 5D. 5 E. 6E. 6

4

21

3

6 7

5

4%

8%6%

ExI =4%

ExI =8%

ExI =12%

4%

8%

12%

The economy The economy moves from moves from point 6 to point 6 to point 3. This point 3. This supports this supports this concept:concept:

A.A. Money NeutralityMoney Neutrality

B.B. Inflation-Unemployment Trade-Inflation-Unemployment Trade-offoff

C.C. StagflationStagflation

4

21

3

6 7

5

4%

8%6%

ExI =4%

ExI =8%

ExI =12%

4%

8%

12%

The economy The economy moves from moves from point 6 to point 6 to point 4. This point 4. This supports this supports this concept:concept:




4

21

3

6 7

5

4%

8%6%

ExI =4%

ExI =8%

ExI =12%

4%

8%

12%

This change This change represents a represents a tighter tighter monetary monetary policy which policy which surprises surprises peoplepeople

A.A. 2 to 12 to 1B.B. 2 to 32 to 3C.C. 2 to 42 to 4D.D. 2 to 52 to 5

4

21

3

6 7

5

4%

8%6%

ExI =4%

ExI =8%

ExI =12%

4%

8%

12%

Original Keynesian Theory Original Keynesian Theory supported which concept?supported which concept?




D.D. Multiple Phillips CurvesMultiple Phillips Curves

During the 1950’s, higher During the 1950’s, higher inflation was found to be inflation was found to be correlated with lower correlated with lower unemployment. This unemployment. This supports this concept:supports this concept:





During the 1960’s, the During the 1960’s, the government engineered government engineered higher inflation. higher inflation. Unemployment fell. This Unemployment fell. This supports this concept:supports this concept:





A single downward A single downward sloping Phillips Curve sloping Phillips Curve suggestssuggests





The Long Run Vertical The Long Run Vertical Phillips Curve suggestsPhillips Curve suggests





This might be the most This might be the most notable and unexpected notable and unexpected macroeconomic macroeconomic phenomenon of the phenomenon of the 1970’s.1970’s.





In 1982, the government In 1982, the government reduced inflation rapidly. reduced inflation rapidly. The unemployment rate The unemployment rate rose. This supports which rose. This supports which concept:concept:





The economic experiences The economic experiences of the 1950’s, 60’s, 70’s of the 1950’s, 60’s, 70’s and 80’s suggest this and 80’s suggest this concept is true:concept is true:





Government policy Government policy activists necessarily activists necessarily believe in thisbelieve in this





The next set of questions The next set of questions uses the following uses the following answersanswers

A.A. Delays or LagsDelays or Lags

B.B. Unintended ConsequencesUnintended Consequences

C.C. MistakesMistakes

As the government As the government runs a deficit, crowding runs a deficit, crowding out occursout occurs




A inflationary bias A inflationary bias occursoccurs




The Political CycleThe Political Cycle




The government debates The government debates spending cuts for several spending cuts for several years as the economy years as the economy recoversrecovers




People expect the Fed’s People expect the Fed’s new loose money policy new loose money policy which results in higher which results in higher inflation and no effect on inflation and no effect on unemploymentunemployment




The recession is supply The recession is supply driven and not driven and not Keynesian Demand Keynesian Demand drivendriven




The government provides The government provides tax cuts to tax cuts to pharmaceutical pharmaceutical companies who provide companies who provide large campaign large campaign contributionscontributions




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Consumer confidence drops. If the government was to use DASK monetary policy it would: