Question 1

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 2

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

Accepted Answer

A)  would have to increase the money supply. This would move unemployment closer to the natural rate.
B)  would have to increase the money supply. This would move unemployment further from the natural rate.
C)  would have to decrease the money supply. This would move unemployment closer to the natural rate.
D)  would have to decrease the money supply. This would move unemployment further from the natural rate.E) B) and C)
F) C) and D)

Question 3

Which of the following is not correct?

Accepted Answer

A)  Government debt can continue to rise forever.
B)  If the government uses funds to pay for investment programs, on net the debt need not burden future generations.
C)  Social Security does not transfer wealth from younger generations to older generations.
D)  The average U.S. citizens' share of the government debt represents about 1 percent of her lifetime income.E) A) and D)
F) C) and D)

Question 4

The laws that created the Fed give it only vague recommendations about what goals it should pursue, and they do not tell the Fed how to pursue whatever goals it might choose.

Accepted Answer

A) True 
 B)False

Question 5

Identify three government policies that discourage saving.

Accepted Answer

First, the returns to saving are heavily...

Question 6

Double taxation means that both

Accepted Answer

A)  wage income and interest income are taxed, which is currently the case in the United States.
B)  wage income and interest income are taxed, which is not currently the case in the United States.
C)  the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the United States.
D)  the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in the United States.E) B) and D)
F) B) and C)

Question 7

If people in a country that has had persistently high inflation expect it to remain high and are skeptical of promises the central bank makes, then the Phillips curve is

Accepted Answer

A)  farther to the left than otherwise. If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises.
B)  farther to the left than otherwise. If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises.
C)  farther to the right than otherwise. If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises
D)  farther to the right than otherwise. If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises..E) B) and C)
F) A) and C)

Question 8

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 3 percent per year. Then the government can have a deficit of about

Accepted Answer

A)  6 percent of GDP without raising the debt-to-income ratio.
B)  5 percent of GDP without raising the debt-to-income ratio.
C)  1.5 percent of GDP without raising the debt-to-income ratio.
D)  1 percent of GDP without raising the debt-to-income ratio.E) B) and D)
F) A) and B)

Question 9

An economist would be more likely to argue for reducing inflation if she thought that

Accepted Answer

A)  the central bank lacked credibility and if bonds were usually not indexed for inflation.
B)  the central bank lacked credibility and if bonds were usually indexed for inflation.
C)  the central bank had credibility and if bonds were usually not indexed for inflation.
D)  the central bank had credibility and if bonds were usually indexed for inflation.E) B) and C)
F) A) and D)

Question 10

A law that requires the money supply to grow by a fixed percentage each year would eliminate

Accepted Answer

A)  the time inconsistency problem, but not political business cycles.
B)  the political business cycle, but not the time inconsistency problem.
C)  both the time inconsistency problem and political business cycles.
D)  neither the time inconsistency problem nor political business cycles.E) B) and C)
F) All of the above

Question 11

Assuming that the substitution effect is large relative to the income effect, tax reform designed to increase saving

Accepted Answer

A)  increases the interest rate and decreases spending on capital goods.
B)  increases the interest rate and increases spending on capital goods.
C)  decreases the interest rate and increases spending on capital goods.
D)  decreases the interest rate and decreases spending on capital goods.E) B) and C)
F) A) and D)

Question 12

The average person's share of the U.S. government debt as a percentage of lifetime income is

Accepted Answer

A)  less than 2 percent.
B)  about 5 percent.
C)  about 10 percent.
D)  over 12 percent.E) C) and D)
F) None of the above

Question 13

Once state and federal taxes are added together, a typical worker faces about a 40 percent marginal tax-rate on interest income.

Accepted Answer

A) True 
 B)False

Question 14

In theory the severity of recessions can be diminished with

Accepted Answer

A)  an increase in government spending, which the political process cannot delay.
B)  an increase in government spending, which the length of the political process can delay.
C)  a decrease in government expenditures, which the political process cannot delay.
D)  a decrease in government spending, which the length of the political process can delay.E) B) and C)
F) A) and D)

Question 15

A policymaker against stabilizing the economy would be likely to believe

Accepted Answer

A)  policymakers should "do no harm".
B)  there are no obstacles to the practical application of policy in real life.
C)  policy lags are short enough that implementing policy changes in response to recession is not too risky.
D)  policy mitigates the magnitude of economic fluctuations.E) B) and D)
F) B) and C)

Question 16

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

Accepted Answer

A)  lower the discount rate and sell bonds.
B)  lower the discount rate and buy bonds.
C)  raise the discount rate and sell bonds.
D)  raise the discount rate and buy bonds.E) All of the above
F) A) and B)

Question 17

If a central bank had to give up its discretion and follow a rule that required it to keep inflation low,

Accepted Answer

A)  the short-run Phillips curve would shift up.
B)  the short-run Phillips curve would shift down.
C)  the long-run Phillips curve would shift right.
D)  the long-run Phillips curve would shift left.E) None of the above
F) B) and D)

Question 18

The time inconsistency of monetary policy means that

Accepted Answer

A)  once people have formed expectations of low inflation based on a promise by the central bank, the central bank is tempted to raise inflation to lower unemployment.
B)  at some times central banks think it is more important to keep unemployment low; at other times, they think it is more important to keep inflation low.
C)  monetary policy is not consistent across time because it is influenced by politics.
D)  monetary policy is not consistent across time because policymakers are incompetent.E) A) and D)
F) A) and C)

Question 19

Explain how it is possible for the government debt to grow forever.

Accepted Answer

The debt can grow because the economy gr...

Question 20

An individual would suffer lower losses from an unexpectedly higher inflation rate if

Accepted Answer

A)  she held much currency and owned few bonds.
B)  she held much currency and owned many bonds.
C)  she held little currency and owned few bonds.
D)  she held little currency and owned many bonds.E) A) and D)
F) A) and B)

Exam 23: Six Debates Over Macroeconomic Policy

Double taxation means that both

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In theory the severity of recessions can be diminished with

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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

Assuming that the substitution effect is large relative to the income effect, tax reform designed to increase saving

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Once state and federal taxes are added together, a typical worker faces about a 40 percent marginal tax-rate on interest income.

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A law that requires the money supply to grow by a fixed percentage each year would eliminate

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Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 3 percent per year. Then the government can have a deficit of about

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If people in a country that has had persistently high inflation expect it to remain high and are skeptical of promises the central bank makes, then the Phillips curve is

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The laws that created the Fed give it only vague recommendations about what goals it should pursue, and they do not tell the Fed how to pursue whatever goals it might choose.

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The average person's share of the U.S. government debt as a percentage of lifetime income is

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An individual would suffer lower losses from an unexpectedly higher inflation rate if

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A policymaker against stabilizing the economy would be likely to believe

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Explain how it is possible for the government debt to grow forever.

Correct AnswerverifiedThe debt can grow because the economy gr...View AnswerShow Answer

The time inconsistency of monetary policy means that

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Identify three government policies that discourage saving.

Correct AnswerverifiedFirst, the returns to saving are heavily...View AnswerShow Answer

An economist would be more likely to argue for reducing inflation if she thought that

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According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

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Which of the following is not correct?

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If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

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If a central bank had to give up its discretion and follow a rule that required it to keep inflation low,

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Those who oppose stabilization policy mo...
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The debt can grow because the economy gr...
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First, the returns to saving are heavily...
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