6.04 The Effects of Monetary and Fiscal Policy in the Macro Economy

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Monetary Policy Fill-in-the-Blank

Complete the sentences below.

1. According to Keynes, when there is high inflation, the federal government should ________ blank government spending and ________ blank taxes.

   Answer: decrease ; increase

2. According to Keynes, when there is a recession, the federal government should ________ blank government spending and ________ blank taxes.

   Answer: increase ; decrease

3. If the economy is in a recession, a(n) ________ blank policy should be instituted.

   Answer: expansionary

4. If the economy is experiencing inflation, a(n) ________ blank policy should be instituted.

   Answer: contractionary

5. If the country is experiencing high inflation, the Fed should ________ blank the discount rate, ________ blank the Reserve Requirement, and ________ blank bonds.

   Answer: raise ; raise ; sell

6. If the country is experiencing high recession, the Fed should ________ blank the discount rate, ________ blank the Reserve Requirement, and ________ blank bonds.

   Answer: lower ; lower ; buy

7. What is the Keynesian solution to a period of stagflation?

   Answer: There isn't one; any attempt to increase employment will make inflation worse.

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