Question

2. Identify each of the following statements as “true” or “false”. Explain your response. Macroeconomists today agree:

a. that laws requiring a balanced budget can do more harm than good.

b. that fiscal policy is just as effective as monetary policy.

c. that the economy can be slow to self-correct.

d. that a liquidity trap can render monetary policy ineffective.

Answer 1

• that law requiring a balanced budget can do more harm than good.

True; the reason is that a balanced budget will control the expenditure of the government which will reduce the investment in the economy and thus creates the economic slowdown, in fact, most of the economist believes that a budget deficit within the permitted level is good for the economy.

• that fiscal policy is just as effective as monetary policy.

True; similar to monetary policy, fiscal policy can be used to affect both expansion and contraction of GDP as a measure of economic growth

• that the economy can be slow to self-correct

False; The economy does not correct itself as fast as new classical economists claim

• that a liquidity trap can render monetary policy ineffective.

True; A liquidity trap is a situation, described in Keynesian economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective