1. What it the best description of the U.S. Economy in the late 1970s? a. Growing...

1. What it the best description of the U.S. Economy in the late 1970s?

a. Growing at a stable rate with low inflation.

b. Increasing nominal interest rates which the Fed could not reduce.

c. experiencing rapid growth due to large tax cuts.

d. In a recession with falling prices and output.

2. Which is the best description of the Monetarist Classical View about monetary policy?

a. Since interest rates can not go blow 0%, fiscal policy is generally better to use when an economy is in a depression situation.

b. Monetary Policy has a smaller impact on the real economy than Fiscal policy.

c. Monetary and Fiscal policy can both have a powerful impact, but only if used together in the same direction.

d. Monetary Policy has a large impact on the real economy, but since the economy is inherently stable, the effect of monetary policy has long and variable lags, and Fed can not be trusted to use the correct policy at a specific time, "Active Policy" should not be used.

Solutions

Expert Solution

Question 1)

Answer :- Option ( D).In a recession with falling prices and output .

The US economy received several setbacks in 1970 including high oil prices as set by OPEC countries and shortage of the availability of gasoline resources . This was then called 'Oil embargo' . This resulted in stagflation characterised by high unemployment and low consumer demand .

Even in 1979 oil prices soared up because of the Iranian revolution . Inflation was high and Fed hadincreased the prices and interest rates to comply with the situation .

Question 2)

Answer :- Option D) Monetary Policy has a large impact on the real economy, but since the economy is inherently stable, the effect of monetary policy has long and variable lags, and Fed can not be trusted to use the correct policy at a specific time, "Active Policy" should not be used.

Monetarists think that monetary policy has greater impact on the economy as everything is related to money supply in the market which is controlled by federal reserve system. They believe aggregate demand depends on money supply and the costs ,wages ,prices will be modified easily so the economy can be self controlling .

On the other hand 'Active fiscal police ' that is used by Congress and president himself should not be used as it affects the whole economy .

Rahul Sunny answered 1 year ago

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