Week 15 Quiz

Which statement describes the Keynesian tradition?

Select one.

• Prices and wages adjust quickly, so an economy in a gap corrects itself without new policy
• Prices and wages are sticky, so an economy can stay stuck in a gap and active policy can help close it
• Money has no effect on real output even in the short run, so policy should never respond to a gap
• Policy should follow a steady money-growth rule because the lags of monetary policy are long and variable

In the course's illustrative economy, potential output is 1,000 and actual output is 950, a recessionary gap of 50 billion dollars. The MPC is 0.8, so the spending multiplier is 5, and the money multiplier is 10. In the simple model, how much new government spending closes the gap?

Select one.

• 250 billion dollars
• 500 billion dollars
• 10 billion dollars
• 5 billion dollars

The course's illustrative government collects revenue of 400 and spends 450 in one year, starts the year owing a debt of 1,000, and GDP is 1,250, all in billions of dollars. What is the deficit-to-GDP ratio?

Select one.

• 80%
• 5%
• 84%
• 4%

Using the same illustrative budget (a deficit of 50 added to a starting debt of 1,000, with GDP held at 1,250), what is the debt-to-GDP ratio at the end of the year?

Select one.

• 84%
• 80%
• 105%
• 4%

True or false: the debate over rules versus discretion is the same debate as fiscal policy versus monetary policy.

True or false.

• True
• False

Which statement belongs to the agreed ground that both the Keynesian and the classical and monetarist traditions accept?

Select one.

• Fiscal policy always closes a recessionary gap faster than monetary policy does
• A debt-to-GDP ratio above 80% always causes a financial crisis within a few years
• The long-run Phillips curve is vertical, so lasting low unemployment cannot be bought with inflation
• Wages in a slump fall so slowly that a gap always lasts for several years

On the question of whether a government should borrow to close a recessionary gap, which of these claims are normative? Select all that apply.

Select every option that applies.

• Shortening a spell of joblessness is worth a higher debt ratio
• A deficit of 50 raises the debt ratio from 80% to 84% when GDP is 1,250
• A lower debt burden is worth a slower recovery
• In the simple model, 10 of new spending closes a gap of 50 when the spending multiplier is 5

Which statement describes inflation targeting factually?

Select one.

• A central bank announces a numerical goal for the inflation rate and sets its tools to keep inflation near that goal over time
• A central bank fixes the price of every good so that measured inflation stays at the goal in every month
• The legislature sets the inflation rate each year by passing a law that limits price increases
• A central bank stops using its tools and lets inflation settle wherever the market takes it

A classmate says, "Whether prices are sticky or flexible is a matter of which political party you belong to." Which response best corrects the classmate?

Select one.

• The classmate is right, because each school of thought is tied to one political party
• How fast prices adjust is settled, so neither school still disagrees about it
• Sticky prices are a normative claim, so it should be labelled as a value judgment
• How fast prices and wages adjust is an empirical question that evidence can test

In the course's illustrative quantity equation, M = 500, V = 4, and Q = 1,000, so P = 2. The money supply rises to 550 while V and Q stay fixed. What is the new price level, the agreed-ground result both schools accept for the long run?

Select one.

• 2.0
• 2.2
• 2.5
• 1.8