Question 1

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

Accepted Answer

A)  buy bonds. These purchases also move the price level closer to its original level.
B)  buy bonds. However these purchases move the price level farther from its original level.
C)  sell bonds. These purchases also move the price level closer to its original level.
D)  sell bonds. However these purchase move the price level farther from its original level.E) A) and D)
F) B) and D)

Question 2

Those who desire that policymakers stabilize the economy would advocate which of the following when aggregate demand is insufficient to ensure full employment?

Accepted Answer

A)  decrease the money supply
B)  increase taxes
C)  increase government expenditures
D)  Do nothing and let markets correct themselves.E) A) and C)
F) All of the above

Question 3

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

Accepted Answer

A) True 
 B)False

Question 4

The laws that created the Fed give it some specific recommendations about what goals it should pursue so it has little discretion in making policy.

Accepted Answer

A) True 
 B)False

Question 5

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. In practice, however, there are obstacles to the use of such policies. What are the primary difficulties with using monetary and fiscal policy to stabilize the economy?

Accepted Answer

Both monetary and fiscal policy work wit...

Question 6

Those who believe the central bank should aim for zero inflation argue that reducing inflation is a policy with temporary costs and permanent benefits. What are the primary costs and benefits they are referring to?

Accepted Answer

Reducing inflation is likely to result i...

Question 7

Suppose aggregate demand fell. In order to stabilize the economy, the government might

Accepted Answer

A)  decrease the money supply.
B)  decrease government expenditures.
C)  decrease taxes.
D)  do nothing.E) A) and D)
F) B) and D)

Question 8

The political business cycle refers to

Accepted Answer

A)  the fact that about every four years some politician advocates greater government control of the Fed.
B)  the potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected.
C)  the part of the business cycle caused by the reluctance of politicians to smooth the business cycle.
D)  changes in output created by the monetary rule the Fed must follow.E) B) and D)
F) B) and C)

Question 9

What is meant by the political business cycle?

Accepted Answer

Central banks sympathetic to i...

Question 10

Double taxation means that both

Accepted Answer

A)  the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in the United States.
B)  the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the U.S.
C)  wage income and employee benefits are taxed, which is not currently the case in the United States.
D)  wage income and employee benefits are taxed, which is currently the case in the United States.E) None of the above
F) C) and D)

Question 11

Which of the following is correct? Investment tax credits

Accepted Answer

A)  can increase investment, but stimulating investment is not a key to ending a recession.
B)  can increase investment, which is a key to ending a recession.
C)  can not increase spending on investment goods, but stimulating investment is not a key to ending a recession.
D)  can not increase spending on investment goods, but stimulating investment is a key to ending a recession.E) A) and B)
F) None of the above

Question 12

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged, then

Accepted Answer

A)  the central bank would have to raise interest rates which would decrease output.
B)  the central bank would have to raise interest rates which would increase output.
C)  the central bank would have to reduce interest rates which would decrease output.
D)  the central bank would have to reduce interest rates which would increase output.E) None of the above
F) A) and D)

Question 13

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Accepted Answer

A) True 
 B)False

Question 14

Economists

Accepted Answer

A)  agree that the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from reducing inflation will be smaller if inflation expectations remain high.
B)  agree that the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from reducing inflation will be larger if inflation expectations remain high.
C)  disagree about whether the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from reducing inflation will be smaller if inflation expectations remain high.
D)  disagree about whether the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from reducing inflation will be larger if inflation expectations remain high.E) B) and D)
F) A) and B)

Question 15

If a reduction in taxes on savings reduced the amount of private saving, then the

Accepted Answer

A)  income effect equaled the substitution effect.
B)  income effect outweighed the substitution effect.
C)  the substitution effect outweighed the income effect.
D)  None of the above.E) B) and D)
F) All of the above

Question 16

Proponents of tax-law changes to encourage saving would

Accepted Answer

A)  argue that corporate tax rates should be decreased.
B)  increase the number of government benefits which are means-tested.
C)  argue that state sales tax should be replaced with state income tax.
D)  favor none of the above programs.E) All of the above
F) C) and D)

Question 17

The Fed raised interest rates in 2004 and 2005. This implies, other things the same, that the Fed

Accepted Answer

A)  increased the money supply because it was concerned about unemployment.
B)  increased the money supply because it was concerned about inflation.
C)  decreased the money supply because it was concerned about unemployment.
D)  decreased the money supply because it was concerned about inflation.E) None of the above
F) A) and D)

Question 18

"Leaning against the wind" is exemplified by a(n)

Accepted Answer

A)  tax increase when there is a recession.
B)  decrease in the money supply when there is a recession.
C)  increase in government expenditures when there is a recession.
D)  All of the above are correct.E) A) and B)
F) C) and D)

Question 19

Suppose that changes in aggregate demand tended to be infrequent and that it takes a long time for the economy to return to long-run output. How would this affect the arguments of those who oppose using policy to stabilize output?

Accepted Answer

Those who oppose stabilization policy mo...

Question 20

Tax cuts affect only aggregate demand not aggregate supply.

Accepted Answer

A) True 
 B)False

Exam 36: Six Debates Over Macroeconomic Policy

The political business cycle refers to

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Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. In practice, however, there are obstacles to the use of such policies. What are the primary difficulties with using monetary and fiscal policy to stabilize the economy?

Correct AnswerverifiedBoth monetary and fiscal policy work wit...View AnswerShow Answer

What is meant by the political business cycle?

Correct AnswerverifiedCentral banks sympathetic to i...View AnswerShow Answer

The Fed raised interest rates in 2004 and 2005. This implies, other things the same, that the Fed

Correct AnswerverifiedShow Answer

"Leaning against the wind" is exemplified by a(n)

Correct AnswerverifiedShow Answer

Suppose that changes in aggregate demand tended to be infrequent and that it takes a long time for the economy to return to long-run output. How would this affect the arguments of those who oppose using policy to stabilize output?

Correct AnswerverifiedThose who oppose stabilization policy mo...View AnswerShow Answer

The laws that created the Fed give it some specific recommendations about what goals it should pursue so it has little discretion in making policy.

Correct AnswerverifiedShow Answer

Double taxation means that both

Correct AnswerverifiedShow Answer

Which of the following is correct? Investment tax credits

Correct AnswerverifiedShow Answer

Economists

Correct AnswerverifiedShow Answer

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Correct AnswerverifiedShow Answer

Those who desire that policymakers stabilize the economy would advocate which of the following when aggregate demand is insufficient to ensure full employment?

Correct AnswerverifiedShow Answer

Proponents of tax-law changes to encourage saving would

Correct AnswerverifiedShow Answer

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

Correct AnswerverifiedShow Answer

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

Correct AnswerverifiedShow Answer

Tax cuts affect only aggregate demand not aggregate supply.

Correct AnswerverifiedShow Answer

Suppose aggregate demand fell. In order to stabilize the economy, the government might

Correct AnswerverifiedShow Answer

Those who believe the central bank should aim for zero inflation argue that reducing inflation is a policy with temporary costs and permanent benefits. What are the primary costs and benefits they are referring to?

Correct AnswerverifiedReducing inflation is likely to result i...View AnswerShow Answer

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged, then

Correct AnswerverifiedShow Answer

If a reduction in taxes on savings reduced the amount of private saving, then the

Correct AnswerverifiedShow Answer

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Both monetary and fiscal policy work wit...
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Central banks sympathetic to i...
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Correct Answer
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Those who oppose stabilization policy mo...
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Reducing inflation is likely to result i...
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Correct Answer
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