Question 1

The Federal Open Market Committee

Accepted Answer

A) by law must focus on maintaining low inflation rather than stabilizing output. 
B) by law must focus on stabilizing output rather than maintaining low inflation. 
C) by law must follow a mechanical rule that takes into account deviations of unemployment from its natural rate and deviations of inflation from a target. 
D) operates with almost complete discretion over monetary policy. 
A) by law must focus on maintaining low inflation rather than stabilizing output. 
B) by law must focus on stabilizing output rather than maintaining low inflation. 
C) by law must follow a mechanical rule that takes into account deviations of unemployment from its natural rate and deviations of inflation from a target. 
D) operates with almost complete discretion over monetary policy.

Question 2

Which of the following are both correct?

Accepted Answer

A) Data show no correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the income effect. 
B) Data show no correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the substitution effect. 
C) Data show a positive correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the income effect. 
D) Data show a positive correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the substitution effect. 
A) Data show no correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the income effect. 
B) Data show no correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the substitution effect. 
C) Data show a positive correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the income effect. 
D) Data show a positive correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the substitution effect.

Question 3

IRAs, and 401(k) and 403(b) plans

Accepted Answer

A) impose added taxes on those who save. 
B) place no limits on the amount people can deposit into these programs. 
C) impose penalties for withdrawals except under certain circumstances. 
D) None of the above is correct. 
A) impose added taxes on those who save. 
B) place no limits on the amount people can deposit into these programs. 
C) impose penalties for withdrawals except under certain circumstances. 
D) None of the above is correct.

Question 4

In the summer of 2008, consumers indicated that they were less optimistic about the future of the economy. Such a change in sentiment is likely to

Accepted Answer

A) shift aggregate demand to the left. 
B) increase output. 
C) decrease unemployment. 
D) increase prices. 
A) shift aggregate demand to the left. 
B) increase output. 
C) decrease unemployment. 
D) increase prices.

Question 5

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 6

The Fed lowered interest rates in 2001 and 2002. 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. 
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.

Question 7

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Accepted Answer

A) True 
 B)False

Question 8

In addition to the tax code, other policies reduce the incentives for people to save Provide an example.

Accepted Answer

Some government benefits are m

Question 9

Means-tested government programs tend to reduce saving. What are means-tested programs and how do they reduce saving?

Accepted Answer

Means-tested benefits give assistance, o

Question 10

Last year a country's real GDP grew by 2%, it's inflation rate was 3%, and it's government budget deficit was about $200 billion. It's debt-to-GDP ratio was unchanged. About what was it's debt at the start of last year?

Accepted Answer

A) 10.0 trillion 
B) 6.7 trillion 
C) 4 trillion 
D) None of the above are correct. 
A) 10.0 trillion 
B) 6.7 trillion 
C) 4 trillion 
D) None of the above are correct.

Question 11

Which costs of inflation could the government reduce without reducing inflation?

Accepted Answer

A) arbitrary redistributions of wealth 
B) shoeleather costs 
C) menu costs 
D) none of the above is correct. 
A) arbitrary redistributions of wealth 
B) shoeleather costs 
C) menu costs 
D) none of the above is correct.

Question 12

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

Accepted Answer

Tax policies designed to encourage savin

Question 13

Explain the time inconsistency of monetary policy.

Accepted Answer

Time inconsistency refers to the idea th

Question 14

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections the Fed would

Accepted Answer

A) raise interest rates to shift aggregate demand left. 
B) raise interest rates to shift aggregate demand right. 
C) reduce interest rates to shift aggregate demand left. 
D) reduce interest rates to shift aggregate demand right. 
A) raise interest rates to shift aggregate demand left. 
B) raise interest rates to shift aggregate demand right. 
C) reduce interest rates to shift aggregate demand left. 
D) reduce interest rates to shift aggregate demand right.

Question 15

Suppose that a country has an inflation rate of about 3 percent per year and a real GDP growth rate of about 3 percent per year. How large of a deficit can the government run (as a percentage of GDP) without raising the debt-to-income ratio?

Accepted Answer

The government could run a def

Question 16

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. 
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.

Question 17

If aggregate demand shifts because of a wave of pessimism about stock prices, those who favor a policy that "leans against the wind" would advocate the

Accepted Answer

A) Federal Reserve increase the money supply or the government increase taxes. 
B) Federal Reserve increase the money supply or the government decrease taxes. 
C) Federal Reserve decrease the money supply or the government increase taxes. 
D) Federal Reserve decrease the money supply or the government decrease taxes. 
A) Federal Reserve increase the money supply or the government increase taxes. 
B) Federal Reserve increase the money supply or the government decrease taxes. 
C) Federal Reserve decrease the money supply or the government increase taxes. 
D) Federal Reserve decrease the money supply or the government decrease taxes.

Question 18

Which of the following is an argument in favor of a balanced budget rule?

Accepted Answer

A) Some economists believe that rules are better than discretion. 
B) Per-capita debt is small relative to lifetime income. 
C) The effect of deficit spending on future generations depends in part on what the government buys. 
D) Other government policies also redistribute income across generations. 
A) Some economists believe that rules are better than discretion. 
B) Per-capita debt is small relative to lifetime income. 
C) The effect of deficit spending on future generations depends in part on what the government buys. 
D) Other government policies also redistribute income across generations.

Question 19

Explain what is meant by the time inconsistency of monetary policy.

Accepted Answer

The time inconsistency of monetary polic

Question 20

Which of the following are justifications for running a budget deficit?

Accepted Answer

A) avoiding raising tax rates 
B) stabilizing an economy during a recession 
C) both a and b 
D) neither a nor b 
A) avoiding raising tax rates 
B) stabilizing an economy during a recession 
C) both a and b 
D) neither a nor b

Exam 36: Six Debates Over Macroeconomic Policy

The Federal Open Market Committee

Which of the following are both correct?

IRAs, and 401(k) and 403(b) plans

In the summer of 2008, consumers indicated that they were less optimistic about the future of the economy. Such a change in sentiment is likely to

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

The Fed lowered interest rates in 2001 and 2002. This implies, other things the same, that the Fed

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

In addition to the tax code, other policies reduce the incentives for people to save Provide an example.

Means-tested government programs tend to reduce saving. What are means-tested programs and how do they reduce saving?

Last year a country's real GDP grew by 2%, it's inflation rate was 3%, and it's government budget deficit was about $200 billion. It's debt-to-GDP ratio was unchanged. About what was it's debt at the start of last year?

Which costs of inflation could the government reduce without reducing inflation?

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

Explain the time inconsistency of monetary policy.

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections the Fed would

Suppose that a country has an inflation rate of about 3 percent per year and a real GDP growth rate of about 3 percent per year. How large of a deficit can the government run (as a percentage of GDP) without raising the debt-to-income ratio?

Economists

If aggregate demand shifts because of a wave of pessimism about stock prices, those who favor a policy that "leans against the wind" would advocate the

Which of the following is an argument in favor of a balanced budget rule?

Explain what is meant by the time inconsistency of monetary policy.

Which of the following are justifications for running a budget deficit?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nation S Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Tools of Finance

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

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