1. In the 1960s, despite the successful application of expansionary fiscal polic
ID: 1116739 • Letter: 1
Question
1. In the 1960s, despite the successful application of expansionary fiscal policy in the United States, Milton Friedman argued that
a. aggregate demand is affected by money and not by fiscal policy, which is why policymakers should institute a policy of steady money growth and allow the economy to reach full employment through a process of self-correction.
b. fiscal policy must be combined with monetary policy to move the economy back to its potential output, without increasing inflationary pressure.
c. Keynesian supply-side policies were more effective at stimulating aggregate demand than expansionary fiscal policies.
2. Who was the economist who laid the foundations for classical economics?
a. John Locke
b. David Ricardo
c. John Maynard Keynes
3. Classical economists believed
I. there could be temporary periods of unemployment.
II. emphasis should be placed on the long run, and in the long run all would be set right
because of the smooth functioning of the price system.
III. the Great Depression would be a short-run aberration.
a. I and II only
b. I only
c. I, II, and III
4. John Maynard Keynes argued that _______
a. flexibility in wages and prices could block adjustments to full employment.
b. wage and price rigidities were caused by producer and consumer expectations about future prices.
c. stickiness in wages and prices could block adjustments to full employment.
Explanation / Answer
1. The right option is option a. aggregate demand is affected by money and not by fiscal policy, which is why policymakers should institute a policy of steady money growth and allow the economy to reach full employment through a process of self-correction.
Explanation: The 1960s saw the dominance of Keynesian economic policies. However, monetarists economists, led by Milton Friedman heavily criticized such policies. According to Friedman, the Fiscal policy had no effect on the economy because of the crowding out effect. He argued that the principal determinant of change in output is money supply. He advocated a stable increase in money supply would result in rise in output.
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