Question

1.Milton Friedman argued that:

the natural rate of unemployment will be lowered.

the effectiveness of expansionary fiscal policy is often limited by the effects of crowding out.

a discretionary monetary policy should be used to offset the fluctuations of the business cycle.

a central bank following a monetary policy rule would destabilize the economy.

2. If inventories in an economy increase unexpectedly, actual investment exceeds planned investment

True

False

3. In presenting his analogy of the “invisible hand,” Adam Smith argued that greed and selfishness always benefits society.

True

False

Answer 1

Answer 1. The effectiveness of Expansionary fiscal policy is often limited by the effects of crowding out

Reason- Milton Friedman agrued that when expansionary fiscal policy is undertaken, aggregate demand rises and output rises but interest rate falls and investment falls leading to a fall in Aggregate demand and output. This effect is knowm as crowding out. This lowers the effectiveness of Expansionary fiscal policy on rise of output.

Answer 2. TRUE-

Reason- when unplanned inventories rises ,actual investment is greater than planned investment. When aggregate output is greater than palnned spending than unolanned inventory investment is positive.

Answer 3. True-

Reason- Adam Smith agrued that if everyone in an economy acted in their own self interest, it would act as an invisible hand and will lead to best economic outcomes.