Question 1

The Federal Reserve

Accepted Answer

A)   requires little time to change policy and aggregate demand responds quickly.
B)   requires little time to change policy but aggregate demand responds slowly.
C)   usually requires a substantial time to change policy but aggregate demand responds quickly.
D)   usually requires a substantial time to change policy and aggregate demand responds slowly.E) All of the above
F) C) and D)

Question 2

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

Question 3

Explain the main arguments in favor of economic stabilization.

Accepted Answer

Fluctuations in the economy-recessions a...

Question 4

Why might tax cuts be more appropriate than increasing government expenditures to counter recessions? Is there any evidence for this thinking?

Accepted Answer

Tax cuts affect aggregate demand quickly...

Question 5

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 6

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

Question 7

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 8

Which of the following is not an argument in favor of requiring the government to balance its budget?

Accepted Answer

A)   Government debt imposes higher taxes or more borrowing on future generations.
B)   A balanced budget will smooth the business cycle.
C)   Deficits lower national saving.
D)   Recent history shows that Congress will run deficits even when deficits are not justified by war or recession.E) A) and B)
F) A) and C)

Question 9

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Accepted Answer

A)   Avoid unexpected changes in the inflation rate.
B)   Rewrite the tax laws so that nominal gains were taxed instead of real gains.
C)   Make policy that would discourage firms from issuing indexed bonds.
D)   All of the above are correct.E) A) and D)
F) C) and D)

Question 10

An increase in the tax rate on interest income

Accepted Answer

A)   raises the amount earned on savings. Saving will rise if the income effect of the increase in the tax rate is larger than the substitution effect.
B)   raises the amount earned on savings. Saving will rise if the income effect of the increase in the tax rate is smaller than the substitution effect.
C)   reduces the amount earned on savings. Saving will fall if the income effect of the increase in the tax rate is larger than the substitution effect.
D)   reduces the amount earned on savings. Saving will fall if the income effect of the increase in the tax rate is smaller than the substitution effect.E) C) and D)
F) A) and C)

Question 11

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

Accepted Answer

A)   sustainable, but the future burden on your children cannot be offset.
B)   sustainable, and the future burden on your children can be offset if you save for them.
C)   not sustainable, and the future burden on your children cannot be offset.
D)   not sustainable, but the future burden on your children can be offset if you save for them.E) All of the above
F) B) and D)

Question 12

nominal federal funds rate, y is real GDP, y* is an estimate of the natural rate of output, π is the inflation rate, and π* is the inflation target. Other things the same, if the economy starts at y* and π* and then y rises and exceeds y* by 1% and π rises 2% points above π*, the rule would require the Fed to raise the federal funds rate by

Accepted Answer

A)   1.5 percentage points
B)   2.5 percentage points
C)   3.5 percentage points
D)   5.5 percentage pointsE) B) and C)
F) None of the above

Question 13

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 less than 2 percent of her lifetime income.E) B) and D)
F) None of the above

Question 14

Suppose the nation's price level rises as a result of an increase in aggregate demand and a decrease in aggregate supply which leaves output unchanged. If the Fed is required to follow a rule that stabilizes the price level, what will the Fed do to the money supply and what impact will this have on total output in the economy?

Accepted Answer

To keep the price level stable...

Question 15

Suppose a tax cut affects aggregate demand and aggregate supply. Which of the shifts raise real GDP?

Accepted Answer

A)   both the shift of aggregate demand and the shift of aggregate supply
B)   the shift of aggregate demand, but not the shift of aggregate supply
C)   the shift of aggregate supply, but not the shift of aggregate demand
D)   neither the shift of aggregate demand nor the shift of aggregate supplyE) None of the above
F) B) and D)

Question 16

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, the central bank must

Accepted Answer

A)   decrease the money supply, which will move output back towards its long-run level.
B)   decrease the money supply, which will move output farther from its long-run level.
C)   increase the money supply, which will move output back towards its long-run level.
D)   increase the money supply, which will move output farther from its long-run level.E) C) and D)
F) B) and D)

Question 17

A reduction in the marginal tax-rate includes a substitution effect that tends to increase saving.

Accepted Answer

A) True 
 B)False

Question 18

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) C) and D)
F) B) and D)

Question 19

Which of the following is an important advantage of discretionary monetary policy?

Accepted Answer

A)   Influencing the political business cycle
B)   Flexibility to deal with changing economic conditions
C)   Limiting the opportunities for abuse of power by policymakers
D)   Avoiding the time inconsistency of policy problemE) A) and C)
F) B) and C)

Question 20

If the natural rate of unemployment is 6%, but the Fed thinks it is 5% and attempts to use monetary policy to move unemployment from 6% to 5%, then in the short run which of the following variables will the Fed's policy raise?

Accepted Answer

A)   the price level and real GDP
B)   the price level but not real GDP
C)   real GDP but not the price level
D)   neither real GDP nor the price levelE) C) and D)
F) B) and C)

Exam 36: Six Debates Over Macroeconomic Policy

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, the central bank must

Correct Answer
verified

A reduction in the marginal tax-rate includes a substitution effect that tends to increase saving.

Correct Answer
verified

Suppose a tax cut affects aggregate demand and aggregate supply. Which of the shifts raise real GDP?

Correct Answer
verified

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Correct Answer
verified

Which of the following is not correct?

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

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Explain the main arguments in favor of economic stabilization.

Correct Answer
verified
Fluctuations in the economy-recessions a...
View Answer

Correct Answer
verified
To keep the price level stable...
View Answer

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

Correct Answer
verified

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

Correct Answer
verified

Which of the following is an important advantage of discretionary monetary policy?

Correct Answer
verified

An increase in the tax rate on interest income

Correct Answer
verified

Which of the following is not an argument in favor of requiring the government to balance its budget?

Correct Answer
verified

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

Correct Answer
verified

The Federal Reserve

Correct Answer
verified

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

Correct Answer
verified

If the natural rate of unemployment is 6%, but the Fed thinks it is 5% and attempts to use monetary policy to move unemployment from 6% to 5%, then in the short run which of the following variables will the Fed's policy raise?

Correct Answer
verified

Why might tax cuts be more appropriate than increasing government expenditures to counter recessions? Is there any evidence for this thinking?

Correct Answer
verified
Tax cuts affect aggregate demand quickly...
View Answer

Exam 36: Six Debates Over Macroeconomic Policy

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, the central bank must

Correct AnswerverifiedShow Answer

A reduction in the marginal tax-rate includes a substitution effect that tends to increase saving.

Correct AnswerverifiedShow Answer

Suppose a tax cut affects aggregate demand and aggregate supply. Which of the shifts raise real GDP?

Correct AnswerverifiedShow Answer

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Correct AnswerverifiedShow Answer

Which of the following is not correct?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Explain the main arguments in favor of economic stabilization.

Correct AnswerverifiedFluctuations in the economy-recessions a...View AnswerShow Answer

Correct AnswerverifiedTo keep the price level stable...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

Correct AnswerverifiedShow Answer

Which of the following is an important advantage of discretionary monetary policy?

Correct AnswerverifiedShow Answer

An increase in the tax rate on interest income

Correct AnswerverifiedShow Answer

Which of the following is not an argument in favor of requiring the government to balance its budget?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The Federal Reserve

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

If the natural rate of unemployment is 6%, but the Fed thinks it is 5% and attempts to use monetary policy to move unemployment from 6% to 5%, then in the short run which of the following variables will the Fed's policy raise?

Correct AnswerverifiedShow Answer

Why might tax cuts be more appropriate than increasing government expenditures to counter recessions? Is there any evidence for this thinking?

Correct AnswerverifiedTax cuts affect aggregate demand quickly...View AnswerShow 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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Correct Answer
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Correct Answer
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Fluctuations in the economy-recessions a...
View Answer

Correct Answer
verified
To keep the price level stable...
View Answer

Correct Answer
verified

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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Correct Answer
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Correct Answer
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Correct Answer
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Tax cuts affect aggregate demand quickly...
View Answer