According to mainstream economists, what is the proper role for discretionary fiscal policy?
Explanation
While mainstream economists believe discretionary fiscal policy can be an effective tool, they also recognize its limitations, such as time lags and political complications. Therefore, the modern consensus is that monetary policy should be the primary tool for routine stabilization, with fiscal policy reserved as a powerful backup for severe economic downturns.
Other questions
According to the mainstream view of macroeconomics, what are the two primary sources of instability in the economy?
In the monetarist equation of exchange, MV = PQ, what does 'V' represent?
If an economy has a nominal GDP of $400 billion and the public desires to hold $100 billion of money, what is the velocity of money (V) according to the example provided in the text?
What does the real-business-cycle theory identify as the primary cause of macroeconomic instability?
Which concept describes a situation where people fail to reach a mutually beneficial equilibrium because they cannot coordinate their actions, leading to outcomes like a self-fulfilling recession?
What is the core belief of the new classical view regarding the economy's response to deviations from its full-employment output?
According to the rational expectations theory (RET), how do fully anticipated changes in the price level affect real output?
What is the primary point of disagreement between mainstream economists and new classical economists regarding the economy's self-correction mechanism?
What is an efficiency wage?
How does the insider-outsider theory explain downward wage inflexibility?
What is the monetary rule advocated by monetarist Milton Friedman?
What is the primary argument made by mainstream economists against a strict monetary rule?
According to the rational expectations theory (RET), why would an expansionary monetary policy be ineffective at increasing real output?
What is inflation targeting?
According to the Taylor rule, what is the Fed's assumed 'target rate of inflation' that it is willing to tolerate?
Based on the Taylor rule, if real GDP is 1 percent above potential GDP, by how much should the Fed raise the real Federal funds rate?
What distinguishes the mainstream view of macroeconomic instability from the monetarist view?
If nominal GDP rises from $400 billion to $440 billion after a $10 billion increase in the money supply, what does this imply about the velocity of money (V) in the monetarist model example?
According to the real-business-cycle theory, how does a decline in resource availability affect the economy?
What is the key implication of the efficiency wage theory for macroeconomic adjustment?
Which of the following is a reason a firm might pay an efficiency wage according to the text?
What is the mainstream economists' view on a constitutional amendment requiring the Federal government to balance its budget annually?
In the new classical view, how does an *unanticipated* increase in aggregate demand affect the economy in the short run?
Why do RET economists argue that discretionary monetary policy is ineffective?
Which summary point from the 'Summary of Alternative Views' table best describes the mainstream view on the cause of economic instability?
In the summary table of alternative macroeconomic views, how do monetarism and the mainstream view differ on the velocity of money?
What does the 'Last Word' section on the Taylor Rule suggest about its relationship with Friedman's simpler monetary rule?
Suppose a central bank is following the Taylor rule with a target inflation rate of 2 percent. If the economy is at its potential GDP but the actual inflation rate is 4 percent, how should the Fed adjust the real Federal funds rate?
Which school of thought would most likely attribute the Great Depression to a sharp reduction in the money supply?
According to the summary table of alternative views, what is the monetarist position on the effectiveness of fiscal policy?
What is the core argument of the RET perspective on the self-correcting nature of the economy?
In the context of macroeconomic theories, which term describes the view that people form their expectations based on present realities and only gradually change them as experience unfolds?
Which of these is NOT a source of downward wage inflexibility discussed in the chapter?
Monetarists argue that if the money supply (M) increases, what will be the ultimate effect in the economy?
What is the primary reason RET economists reject discretionary fiscal policy?
What policy action would a monetarist recommend if the economy is in a recession?
A key difference between the Taylor rule and the Friedman monetary rule is that the Taylor rule:
According to the mainstream economic view, one of the major successes of discretionary policy was:
Which of the following describes the monetarist interpretation of the economy?
What is a price-level surprise in the context of rational expectations theory?
What is the primary argument against the real-business-cycle theory's explanation of recessions?
If the Federal government has a balanced budget and then a recession occurs, what happens to the budget automatically under a system of built-in stabilizers?
Mainstream economists argue that, in response to a recession, discretionary policy should be used. In contrast, new classical economists argue that:
What is the 'crowding-out effect' that monetarists cite as a weakness of expansionary fiscal policy?
Which of the following would be an example of an adverse aggregate supply shock according to the mainstream view?
If a household saves more in anticipation of a future reversal of a temporary tax cut, this behavior is an example of what problem complicating fiscal policy?
According to the summary table (Table 36.1), how does the monetarist view explain the effect of a change in the money supply on the economy?
What is the mainstream critique of the real-business-cycle theory?
In the summary table of alternative views (Table 36.1), how is cost-push inflation viewed by monetarists and rational expectations theorists?