Check Your Understanding

1. Question

   The figure below shows the behavior of M1 before, during, and after the 2001 recession. What would a classical economist have said about the Fed’s policy?

   

2. Question

   What would the figure in Question 1 have looked like if the Fed had been following a monetarist policy since 1996?

3. Question

   Now look at Figure 35.3, which shows the path of the velocity of money. What problems do you think the United States would have had since 1996 if the Fed had followed a monetarist policy?

4. Question

   In addition to praising aggressive monetary policy, the 2004 Economic Report of the President says that “tax cuts can boost economic activity by raising after-tax income and enhancing incentives to work, save, and invest.” Which part of the report is a Keynesian statement and which part is not? Explain your answer.

5. Question

   In early 2001, as it became clear that the United States was experiencing a recession, the Fed stated that it would fight the recession with an aggressive monetary policy. By 2004, most observers concluded that this aggressive monetary expansion should be given credit for ending the recession.

   1. What would rational expectations theorists say about this conclusion?

   2. What would real business cycle theorists say?