Question 1

An economist advising a central bank intending to reduce the inflation rate would likely point out that

Accepted Answer

A)  the costs of reducing inflation persist and the costs of reducing it do not depend on the public's inflation expectations.
B)  the costs of reducing inflation persist, but they are smaller if the public reduces its inflation expectations.
C)  the costs of reducing inflation are temporary and the costs of reducing it do not depend on the public's inflation expectations.
D)  the costs of reducing inflation are temporary and the costs are smaller if the public reduces its inflation expectations.E) All of the above
F) B) and C)

Question 2

Economists

Accepted Answer

A)  agree that the costs of moderate inflation are small. The increase in unemployment from reducing inflation will be smaller if inflation expectations remain high.
B)  agree that the costs of moderate inflation are small. The increase in unemployment from reducing inflation will be larger if inflation expectations remain high.
C)  disagree about the costs of moderate inflation. The increase in unemployment from reducing inflation will be smaller if inflation expectations remain high.
D)  disagree about the costs of moderate inflation. The increase in unemployment from reducing inflation will be larger if inflation expectations remain high.E) B) and C)
F) None of the above

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

If the unemployment rate rises, which policies would both be appropriate to reduce it?

Accepted Answer

A)  increase taxes, increase government spending
B)  increase taxes, decrease government spending
C)  decrease taxes, increase government spending
D)  decrease taxes, decrease government spendingE) B) and C)
F) A) and D)

Question 5

Which of the following is not correct?

Accepted Answer

A)  A potential cost of deficits is that they reduce national saving, thereby reducing growth of the capital stock and output growth.
B)  Deficits give people the opportunity to consume at the expense of their children, but they do not require them to do so.
C)  The U.S. debt per-person is large compared with average lifetime income.
D)  Current spending may benefit future generations.E) All of the above
F) C) and D)

Question 6

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)  decreasing government expenditures.E) A) and C)
F) A) and B)

Question 7

Which of the following is correct?

Accepted Answer

A)  Well designed tax cuts can increase investment which fluctuates more than consumption over the business cycle.
B)  Well designed tax cuts can increase investment but it fluctuates less than consumption over the business cycle.
C)  Tax cuts have little effect on investment which fluctuate more than consumption over the business cycle.
D)  Tax cuts have little effect on investment but it fluctuates less than consumption over the business cycleE) A) and C)
F) A) and B)

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

Question 9

In practice, the problems created by time inconsistency and the political business cycle appear to be quite serious.

Accepted Answer

A) True 
 B)False

Question 10

The Obama administration believed that transfer payments to the unemployed would have a larger impact on aggregate demand than tax cuts.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 supply shifts left, 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) A) and C)
F) C) and D)

Question 13

Reforming tax laws to encourage saving is motivated by which of the Ten Principles of Economics from Chapter 1?

Accepted Answer

A)  The cost of something is what you give up to get it (Principle 2) .
B)  Trade can make everyone better off (Principle 5) .
C)  Markets are usually a good way to organize economic activity (Principle 6) .
D)  A country's standard of living depends on its ability to produce goods and services (Principle 8) .E) B) and C)
F) C) and D)

Question 14

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) A) and D)
F) A) and C)

Question 15

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) A) and B)
F) A) and C)

Question 16

Which of the following is correct?

Accepted Answer

A)  Economic forecasts are precise and aggregate spending responds almost immediately to interest rate changes.
B)  Economic forecast are precise and aggregate spending responds to interest rate changes with a lag.
C)  Economic forecasts are imprecise and aggregate spending responds almost immediately to interest rate changes.
D)  Economic forecast are imprecise and aggregate spending responds to interest rate changes with a lag.E) A) and C)
F) All of the above

Question 17

In which cases were tax cuts followed by robust growth?

Accepted Answer

A)  the ones of the Kennedy administration in 1964 and the ones of the Reagan administration in 1981
B)  the ones of the Kennedy administration in 1964 but not the ones of the Reagan administration in 1981
C)  the ones of the Reagan administration in 1981 but not the ones of the Kennedy administration in 1964
D)  neither the ones of the Kennedy administration in 1964 nor the ones of the Reagan administration in 1981E) None of the above
F) A) and B)

Question 18

If the public correctly perceives that the central bank will reduce inflation, then

Accepted Answer

A)  the short-run Phillips curve shifts right, and the sacrifice ratio will be higher.
B)  the short-run Phillips curve shifts right, and the sacrifice ratio will be lower.
C)  the short-run Phillips curve shifts left, and the sacrifice ratio will be higher.
D)  the short-run Phillips curve shifts left, and the sacrifice ratio will be lower.E) A) and C)
F) B) and C)

Question 19

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

Accepted Answer

A)  inflation targeting.
B)  the monetary policy reaction lag.
C)  the time inconsistency of policy.
D)  the sacrifice ratio dilemma.E) C) and D)
F) None of the above

Question 20

Of means tested programs and IRA's, which lower the rate of return on saving?

Accepted Answer

A)  Both means-tested programs and IRA's.
B)  Means-tested programs, but not IRA's.
C)  IRA's but not means-tested programs.
D)  Neither means-tested program, or IRA's.E) A) and B)
F) A) and C)

Exam 23: Six Debates Over Macroeconomic Policy

Of means tested programs and IRA's, which lower the rate of return on saving?

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If the unemployment rate rises, which policies would both be appropriate to reduce it?

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Which of the following is correct?

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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 supply shifts left, the central bank must

Correct AnswerverifiedShow 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

Which of the following is correct?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In practice, the problems created by time inconsistency and the political business cycle appear to be quite serious.

Correct AnswerverifiedShow Answer

In which cases were tax cuts followed by robust growth?

Correct AnswerverifiedShow Answer

Economists

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The Obama administration believed that transfer payments to the unemployed would have a larger impact on aggregate demand than tax cuts.

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Which of the following is not correct?

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The political business cycle refers to

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Economists

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Reforming tax laws to encourage saving is motivated by which of the Ten Principles of Economics from Chapter 1?

Correct AnswerverifiedShow Answer

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

Correct AnswerverifiedShow 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

If the public correctly perceives that the central bank will reduce inflation, then

Correct AnswerverifiedShow Answer

An economist advising a central bank intending to reduce the inflation rate would likely point out that

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

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