Question

In: Economics

20. Which of the following captures the idea that Keynesian policy recommendation to "lean against the...

20. Which of the following captures the idea that Keynesian policy recommendation to "lean against the wind"?
  
Use active fiscal and/or monetary policy to combat short run economic shocks      
laissez-faire
to push against public pressure for expansionary yet unsustainable growth
to be stubborn in the face of adversity

22. Which of the following is true during a liquidity trap?
monetary policy becomes highly effective  
both monetary and fiscal policy become ineffective
monetary policy becomes ineffective, but fiscal policy remains effective
Both fiscal and monetary policy have an increased effectiveness

23. investment demand is negatively related to and positively related to .
  
business expectations, the interest rate       
the interest rate, bullish expectations       
the interest rate, bearish expectations       
income, expectations

Solutions

Expert Solution

20. to be stubborn in the face of adversity

As per lean against the wind concept No policy measures are employed to combat short run economic shocks     

21.  monetary policy becomes ineffective, but fiscal policy remains effective

Mmonetary policy becomes ineffective because nominal interest rate is almost zero. when this happens the opportunity cost of holding money becomes nil even when the central bank enhances money supply to boost the economy. As a result money will be accumulated instead of being invested. Also the possibility of deflation can put the economy into the vicious cycle of output stagnation.

Expansionary fiscal policy is the Keynesian answer to liquidity trap as it can offset the increased private sector saving and inject money into the circular flow

22. the interest rate, bullish expectations    

High interest rate would mean higher cost of borrowing and hence investment will be lesser.

If market expectations are bullish investments will be more in hope of gaining higher returns in the future


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