What is the consensus view of macroeconomists on each of the following?
monetary policy and aggregate demand
when monetary policy is ineffective
fiscal policy and aggregate demand
a balanced budget mandate
the effectiveness of discretionary fiscal policy
1 point: Monetary policy can shift aggregate demand in the short run.
1 point: Monetary policy is ineffective when in a liquidity trap.
1 point: Fiscal policy can shift aggregate demand.
1 point: This is not a good idea. Fluctuations in the budget act as an automatic stabilizer for the economy.
1 point: It is usually counterproductive (for example, due to lags in implementation).
Draw a correctly labeled graph of the Laffer curve. Use an “x” to identify a point on the curve at which a reduction in tax rates would lead to increased tax revenue. (3 points)
Rubric for FRQ 2 (3 points)
1 point: The vertical axis is labeled “Tax revenue” and the horizontal axis is labeled “Tax rate.” (It is also acceptable to have these axes reversed, in which case the Laffer curve begins and ends on the vertical axis and the “X” is on the upper half of the curve.)
1 point: The Laffer curve begins at the origin, rises, and then falls back to the horizontal axis.
1 point: The “X” is to the right of the peak of the Laffer curve.