Question 1

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

Question 2

An added benefit of inflation is that it allows for the possibility of

Accepted Answer

A)  menu costs.
B)  aggregate supply shocks.
C)  negative real interest rates.
D)  recessions.E) A) and B)
F) A) and C)

Question 3

Describe three costs of inflation.

Accepted Answer

There are several costs of inflation. Sh...

Question 4

Inflation reduction has the highest cost when the efforts are

Accepted Answer

A)  credible so that the sacrifice ratio is low.
B)  credible so that the sacrifice ratio is high.
C)  unexpected so that the sacrifice ratio is high.
D)  unexpected so that the sacrifice ratio is low.E) None of the above
F) A) and B)

Question 5

The cost of inflation reduction is a large, permanent increase in unemployment.

Accepted Answer

A) True 
 B)False

Question 6

While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy, what are some of the reasons why tax cuts might be preferred to increased government spending?

Accepted Answer

First, tax cuts can influence both aggre...

Question 7

For the Fed to fully eliminate the costs of inflation, how low does the inflation rate need to be?

Accepted Answer

A)  0 percent
B)  3 percent
C)  5 percent
D)  6 percentE) A) and B)
F) A) and C)

Question 8

Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could

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

Question 9

Some studies have found that saving is not very sensitive to the rate of return on saving.

Accepted Answer

A) True 
 B)False

Question 10

Some people believe that monetary policy should be made by rule rather than by discretion. One of their beliefs is that

Accepted Answer

A)  setting a policy rule will limit the abuse of power of policymakers.
B)  policymakers can better influence the political business cycle in their favor when following a policy rule.
C)  a policy rule provides policymakers with the greatest flexibility to manage inflation.
D)  if the Fed was required to follow a low-inflation policy, the economy would face a less favorable short-run trade-off between inflation and unemployment.E) B) and C)
F) A) and B)

Question 11

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Accepted Answer

A) True 
 B)False

Question 12

Provide two specific ways in which reducing inflation might leave "permanent scars" on the economy.

Accepted Answer

Reducing inflation leads to a temporary ...

Question 13

If the Fed followed a rule for monetary policy, the time inconsistency problem would be eliminated.

Accepted Answer

A) True 
 B)False

Question 14

According to the political business cycle, after an election, unless the central bank acts inflation is likely to

Accepted Answer

A)  have risen. To counter this the central bank would raise interest rates.
B)  have risen. To counter this the central bank would lower interest rates.
C)  have fallen. To counter this the central bank would raise interest rates.
D)  have fallen. To counter this the central bank would lower interest rates.E) All of the above
F) C) and D)

Question 15

Which of the following does not reduce the potential burden of an increase in debt on future generations?

Accepted Answer

A)  the growth rate of output is high
B)  in response to increased debt, parents save more to leave their children larger bequests
C)  budget deficits raise interest rates
D)  All of the above are correct.E) A) and B)
F) A) and C)

Question 16

When wages are fixed by contract, inflation reduces

Accepted Answer

A)  nominal wages; this likely makes labor markets more flexible.
B)  nominal wages; this likely makes labor markets less flexible.
C)  real wages; this likely makes labor markets more flexible.
D)  real wages; this likely makes labor markets less flexible.E) B) and C)
F) C) and D)

Question 17

In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998, the government ran a surplus of about $69.3 billion. Other things the same, we would expect this change

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

Question 18

Which of the following is not an argument by those who oppose tax-law changes to encourage saving?

Accepted Answer

A)  Saving is not very responsive to changes in the tax rate.
B)  Saving is not an important determinant of a nation's ability to produce output.
C)  Reducing the budget deficit instead of changing the tax laws could raise saving.
D)  Changes in the tax laws to induce saving would distribute the tax burden less fairly.E) All of the above
F) A) and B)

Question 19

A reduction in the tax rate on income from saving would

Accepted Answer

A)  most directly benefit the poor in the short run.
B)  increase real wages over time.
C)  decrease the capital stock over time.
D)  decrease productivity over time.E) A) and C)
F) B) and C)

Question 20

Suppose that the government goes into deficit in order to help local school districts build better schools. Does this burden future generations?

Accepted Answer

The benefits of the project ac...

Exam 36: Six Debates Over Macroeconomic Policy

Which of the following is not an argument by those who oppose tax-law changes to encourage saving?

Correct AnswerverifiedShow Answer

Provide two specific ways in which reducing inflation might leave "permanent scars" on the economy.

Correct AnswerverifiedReducing inflation leads to a temporary ...View AnswerShow Answer

A reduction in the tax rate on income from saving would

Correct AnswerverifiedShow Answer

According to the political business cycle, after an election, unless the central bank acts inflation is likely to

Correct AnswerverifiedShow Answer

Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could

Correct AnswerverifiedShow Answer

While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy, what are some of the reasons why tax cuts might be preferred to increased government spending?

Correct AnswerverifiedFirst, tax cuts can influence both aggre...View AnswerShow Answer

An added benefit of inflation is that it allows for the possibility of

Correct AnswerverifiedShow Answer

Inflation reduction has the highest cost when the efforts are

Correct AnswerverifiedShow Answer

Describe three costs of inflation.

Correct AnswerverifiedThere are several costs of inflation. Sh...View AnswerShow Answer

If the Fed followed a rule for monetary policy, the time inconsistency problem would be eliminated.

Correct AnswerverifiedShow Answer

In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998, the government ran a surplus of about $69.3 billion. Other things the same, we would expect this change

Correct AnswerverifiedShow Answer

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Correct AnswerverifiedShow Answer

When wages are fixed by contract, inflation reduces

Correct AnswerverifiedShow Answer

Which of the following does not reduce the potential burden of an increase in debt on future generations?

Correct AnswerverifiedShow Answer

Suppose that the government goes into deficit in order to help local school districts build better schools. Does this burden future generations?

Correct AnswerverifiedThe benefits of the project ac...View AnswerShow Answer

Some studies have found that saving is not very sensitive to the rate of return on saving.

Correct AnswerverifiedShow Answer

A policymaker against stabilizing the economy would be likely to believe

Correct AnswerverifiedShow Answer

The cost of inflation reduction is a large, permanent increase in unemployment.

Correct AnswerverifiedShow Answer

For the Fed to fully eliminate the costs of inflation, how low does the inflation rate need to be?

Correct AnswerverifiedShow Answer

Some people believe that monetary policy should be made by rule rather than by discretion. One of their beliefs is that

Correct AnswerverifiedShow Answer

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Reducing inflation leads to a temporary ...
View Answer

Correct Answer
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Correct Answer
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First, tax cuts can influence both aggre...
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Correct Answer
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Correct Answer
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Correct Answer
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There are several costs of inflation. Sh...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The benefits of the project ac...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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