Chapter 36, Problem 1FRQ

a)

To determine

The consensus view of macroeconomics in area of monetary policy/aggregate demand

Explanation of Solution

Because it implied that the responsibility for controlling the economy could be transferred away from fiscal policy, the consensus view of macroeconomics in the field of monetary policy or aggregate demand was viewed as positive. Therefore, economic management was not a concern for politicians. And, by relying on monetary policy, macroeconomics becomes a more technical and less controversial topic through which the aggregate demand curve can be shifted by monetary policy in short-run.

Economics Concept Introduction

Introduction: The monetary policy is used to control the supply of money in an economy to achieve the targeted economic growth.

b)

To determine

The consensus view of macroeconomics when monetary policy is ineffective

Explanation of Solution

In case of liquidity trap, the monetary policy cannot be effective under the consensus view of macroeconomics. It happens because a liquidity trap develops when investors select lower-yielding assets over hoarding cash due to a bleak outlook for the economy.

Economics Concept Introduction

Introduction: The monetary policy is used to control the supply of money in an economy to achieve the targeted economic growth.

c)

To determine

The consensus view of macroeconomics in area of fiscal policy and aggregate demand

Explanation of Solution

Most people concur that fiscal policy can change the aggregate demand curve because it has the power to affect the variables that are used to calculate it, including exports, imports, government spending on public goods and services, investment spending on capital goods, and consumer spending on goods and services.

Economics Concept Introduction

Introduction: The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth. And, fiscal policy is the use of public expenditure and taxation to affect the economy, particularly macroeconomic conditions.

d)

To determine

The consensus view of macroeconomics in area of the effectiveness of discretionary fiscal policy

Explanation of Solution

Many people argue that discretionary fiscal policy is typically ineffective because it takes time to change, which causes interventions meant to combat a downturn to worsen a boom. In exceptional situations where monetary policy is ineffectual, such as Japan in the 1990s, discretionary plays a crucial role.

Economics Concept Introduction

Introduction: The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth. And, fiscal policy is the use of public expenditure and taxation to affect the economy, particularly macroeconomic conditions.

e)

To determine

The consensus view of macroeconomics in area of balanced budget mandate

Explanation of Solution

Many people agreed that the budget's function as an automatic stabilizer helps maintain the economy on a level keel and that government should not aim to balance the budget regardless of the situation of the economy. Due to lag of inflation, it can be counterproductive too.

Economics Concept Introduction

Introduction: Automatic stabilizers are components of government budgets that, without the approval of lawmakers, raise expenditure or lower taxes when the economy weakens.