Question

1) Some people believe that monetary policy should be made by rule rather than by discretion. One of their beliefs is that

setting a policy rule will limit the abuse of power of policymakers.

policymakers can better influence the political business cycle in their favor when following a policy rule.

a policy rule provides policymakers with the greatest flexibility to manage inflation.

if the Fed was required to follow a low-inflation policy, the economy would face a less favorable short-run trade-off between inflation and unemployment.

2) The six debates over macroeconomic policy exist mostly because

economists disagree over basic issues such as the importance of saving for economic growth.

there are tradeoffs and people disagree about the best way to deal with them.

politicians offer misleading information.

people fail to clearly see the benefits or the costs of most changes.

3) If the demand for bottled water increases dramatically but the price remains constant, then ___________ is greater than ____________.

: quantity supplied; quantity demanded

quantity demanded; quantity supplied

consumer surplus; producer surplus

producer surplus; consumer surplus

4) What has the Federal Reserve done in response to the coronavirus crisis?

lowered the discount rate.

lowered the reserve requirement.

purchased bonds.

All of the above are correct.

5) Because of ___________ the real value of a $1200 stimulus check is highest in _________.

regional differences in the cost of living; rural areas

regional differences in the cost of living; urban areas

hyperinflation; rural areas

hyperinflation; urban areas

Answer 1

1. Option A

setting a policy rule will limit the abuse of power of policymakers.

Discretionary policy does not limit incompetence and abuse of power. A central bank abuses its power when it manipulates monetary policy to favor a particular political candidate. It can increase the money supply prior to an election to benefit the incumbent and the resulting inflation doesn’t show up until after the election. This creates what is known as the political business cycle.

2.Option B

There are tradeoffs and people disagree about the best way to deal with them.

Trade-offs are central to economics. Many of our canonical models are designed to illustrate them, and economists are quick to point out trade-offs, or “unintended consequences,” when they are ignored by policy makers.Because of these trade-offs, reasonable people with a shared goal can disagree, simply because they have differing views. Some may agree for lockdowns to prevent spread of Covid 19 and others may say that such lockdowns will hamper economic growth as if people go to work economy will keep moving and healthcare costs spent will help in injecting money in the economy.

3.Option A

As per law of demand Quantity Demanded increases with fall in price and decreases with rise in price, other things being constant. If quantity Supplied is more than Quantity Demanded it means there is surplus bottled watervin the market. Due to this the price will remain constant.

4.Option D

Due to Covid 19, the aggregate demand and spending has refuced drastically. Inorder to stimulate the economy Fed has used Expansionary monetary policy involving lowering discount rate, lowering reserve requirements and purchasing bonds. All these measures will help in increasing money supply and boosting aggregate demand.