Question 1

A reduction in the tax rate on interest income

Accepted Answer

A)   would necessarily raise national saving.
B)   would primarily benefit the wealthy.
C)   both a and b are correct.
D)   None of the above are correct.E) All of the above
F) None of the above

Question 2

Part of the lag in monetary policy effects is due to

Accepted Answer

A)   the long political process of monetary policy decisions.
B)   precise economic forecasts.
C)   the time required for firms and households to alter their spending plans.
D)   changes in the unemployment rate.E) A) and B)
F) All of the above

Question 3

An individual would suffer lower losses or maybe even gain from an unexpectedly higher inflation rate if

Accepted Answer

A)   she held much currency and on net was a lender.
B)   she held much currency and on net was a borrower.
C)   she held little currency and on net was a lender.
D)   she held little currency and on net was a borrower.E) All of the above
F) A) and B)

Question 4

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 5

Tax cuts

Accepted Answer

A)   can easily target investment spending, but investment spending falls by only a small percentage during recessions.
B)   can easily target investment spending, which falls by a large percentage during recessions.
C)   cannot easily target investment spending, but investment spending falls by only a small percentage during recessions.
D)   cannot easily target investment spending, which falls by a large percentage during recessions.E) All of the above
F) A) and C)

Question 6

Explain why policy lags could make stabilization policies counterproductive.

Accepted Answer

As the textbook explains, it takes time ...

Question 7

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) C) and D)

Question 8

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 9

If a central bank were required to target inflation at zero, then when there was a positive aggregate supply shock the central bank

Accepted Answer

A)   would have to increase the interest rate. This would move unemployment closer to the natural rate.
B)   would have to increase the interest rate. This would move unemployment further from the natural rate.
C)   would have to decrease the interest rate. This would move unemployment closer to the natural rate.
D)   would have to decrease the interest rate. This would move unemployment further from the natural rate.E) None of the above
F) A) and B)

Question 10

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) None of the above
F) B) and C)

Question 11

From fiscal year 2012 to fiscal year 2013 China's budget deficit rose 50%. Other things the same, we would expect this to have

Accepted Answer

A)   decreased interest rates and investment.
B)   decreased interest rates and increased investment.
C)   increased interest rates and investment.
D)   increased interest rates and decreased investment.E) None of the above
F) All of the above

Question 12

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

Accepted Answer

A) True 
 B)False

Question 13

If businesses become more pessimistic about the future, what fiscal policies could the government take to stabilize the economy?

Accepted Answer

Increase g...

Question 14

A 1977 amendment to the Federal Reserve Act of 1913

Accepted Answer

A)   requires the Federal Reserve to place more weight on promoting price stability than on promoting maximum employment.
B)   requires the Federal Reserve to place more weight on promoting maximum employment than on promoting price stability.
C)   requires the Federal Reserve to place equal weight on promoting price stability and maximum employment.
D)   says the Federal Reserve should promote price stability and maximum employment, but does not specify how the Federal Reserve should weight these goals.E) A) and B)
F) A) and C)

Question 15

According to political business cycle theory, if the Fed wanted to increase the chances of a President's re­election, what specific actions might it take?

Accepted Answer

If the Fed wanted to see the President r...

Question 16

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) All of the above
F) A) and B)

Question 17

A recession has no benefit to society-it represents a sheer waste of resources.

Accepted Answer

A) True 
 B)False

Question 18

What component of GDP is particularly volatile over the business cycle and can be targeted by tax cuts?

Accepted Answer

Investment...

Question 19

Which of the following is not an argument made by those who oppose reforming the tax laws to encourage saving?

Accepted Answer

A)   A public budget surplus can raise national saving.
B)   The substitution effect of a higher return to saving may be about equal to the income effect of a higher return to saving.
C)   Low-income households save a larger fraction of their income than high-income households.
D)   Tax cuts might cause a budget deficit.E) C) and D)
F) B) and C)

Question 20

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. In response to this change, someone who advocated "lean against the wind" policies might advocate

Accepted Answer

A)   decreasing the money supply.
B)   increasing taxes.
C)   increasing government expenditures.
D)   All of the aboveE) A) and B)
F) A) and C)

Exam 18: Six Debates Over Macroeconomic Policy

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

Correct AnswerverifiedShow Answer

From fiscal year 2012 to fiscal year 2013 China's budget deficit rose 50%. Other things the same, we would expect this to have

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow 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

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

Correct AnswerverifiedShow Answer

Which of the following is not an argument made by those who oppose reforming the tax laws to encourage saving?

Correct AnswerverifiedShow Answer

If a central bank were required to target inflation at zero, then when there was a positive aggregate supply shock the central bank

Correct AnswerverifiedShow Answer

If businesses become more pessimistic about the future, what fiscal policies could the government take to stabilize the economy?

Correct AnswerverifiedIncrease g...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

What component of GDP is particularly volatile over the business cycle and can be targeted by tax cuts?

Correct AnswerverifiedInvestment...View AnswerShow Answer

Part of the lag in monetary policy effects is due to

Correct AnswerverifiedShow Answer

According to political business cycle theory, if the Fed wanted to increase the chances of a President's re­election, what specific actions might it take?

Correct AnswerverifiedIf the Fed wanted to see the President r...View AnswerShow Answer

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. In response to this change, someone who advocated "lean against the wind" policies might advocate

Correct AnswerverifiedShow Answer

A 1977 amendment to the Federal Reserve Act of 1913

Correct AnswerverifiedShow Answer

Tax cuts

Correct AnswerverifiedShow Answer

A recession has no benefit to society-it represents a sheer waste of resources.

Correct AnswerverifiedShow Answer

Explain why policy lags could make stabilization policies counterproductive.

Correct AnswerverifiedAs the textbook explains, it takes time ...View AnswerShow Answer

A reduction in the tax rate on interest income

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

An individual would suffer lower losses or maybe even gain from an unexpectedly higher inflation rate if

Correct AnswerverifiedShow Answer

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Increase g...
View Answer

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Investment...
View Answer

Correct Answer
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According to political business cycle theory, if the Fed wanted to increase the chances of a President's reelection, what specific actions might it take?

Correct Answer
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If the Fed wanted to see the President r...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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As the textbook explains, it takes time ...
View Answer

Correct Answer
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Those who oppose stabilization policy mo...
View Answer

Correct Answer
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