Question 1

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

Accepted Answer

Investment

Question 2

During recessions, even with no changes in policy, the deficit tends to ______ because _____________.

Accepted Answer

rise, income falls so tax reve

Question 3

According to traditional Keynesian analysis, if the economy is in a recession, the government can move it back towards full employment by

Accepted Answer

A) cutting taxes and increasing expenditures. The effect of the tax cut is larger. 
B) cutting taxes and increasing expenditures. The effect of the tax cut is smaller. 
C) raising taxes and decreasing expenditures. The effect of the tax increase is larger. 
D) raising taxes and decreasing expenditures. The effect of the tax increase is smaller. 
A) cutting taxes and increasing expenditures. The effect of the tax cut is larger. 
B) cutting taxes and increasing expenditures. The effect of the tax cut is smaller. 
C) raising taxes and decreasing expenditures. The effect of the tax increase is larger. 
D) raising taxes and decreasing expenditures. The effect of the tax increase is smaller.

Question 4

A permanent reduction in inflation would

Accepted Answer

A) permanently reduce the frequency of price changes and permanently lower unemployment. 
B) permanently reduce the frequency of price changes and temporarily raise unemployment. 
C) temporarily reduce the frequency of price changes and temporarily lower unemployment. 
D) temporarily reduce the frequency of price changes and temporarily raise unemployment. 
A) permanently reduce the frequency of price changes and permanently lower unemployment. 
B) permanently reduce the frequency of price changes and temporarily raise unemployment. 
C) temporarily reduce the frequency of price changes and temporarily lower unemployment. 
D) temporarily reduce the frequency of price changes and temporarily raise unemployment.

Question 5

A year ago a country reduced the tax rate on all interest income from 40% to 10%. During the year private saving was $600 billion as compared to $500 billion the year before the tax reform. Taxes collected on interest income fell by $150 billion. Assuming no other changes in government revenues or spending which of the following is correct?

Accepted Answer

A) the substitution effect was larger than the income effect; national saving rose 
B) the substitution effect was larger than the income effect; national saving fell 
C) the income effect was larger than the substitution effect; national saving rose 
D) the income effect was larger than the substitution effect; national saving fell 
A) the substitution effect was larger than the income effect; national saving rose 
B) the substitution effect was larger than the income effect; national saving fell 
C) the income effect was larger than the substitution effect; national saving rose 
D) the income effect was larger than the substitution effect; national saving fell

Question 6

A permanent reduction in inflation would

Accepted Answer

A) permanently reduce shoeleather costs and permanently lower unemployment 
B) permanently reduce shoeleather costs and temporarily raise unemployment 
C) temporarily reduce shoeleather costs and temporarily lower unemployment 
D) temporarily reduce shoeleather costs and temporarily raise unemployment 
A) permanently reduce shoeleather costs and permanently lower unemployment 
B) permanently reduce shoeleather costs and temporarily raise unemployment 
C) temporarily reduce shoeleather costs and temporarily lower unemployment 
D) temporarily reduce shoeleather costs and temporarily raise unemployment

Question 7

Which of the following is not a valid point in debating the merits of increasing government expenditures or cutting taxes during a recession?

Accepted Answer

A) A cut in the marginal tax rate increases the incentives to find a job and work longer hours. 
B) Consumers will save a portion of a tax cut. 
C) The government may use the increase in expenditures on projects with little value, particularly if it wishes to respond quickly. 
D) There is no evidence that tax cuts have been followed by increases in economic growth. 
A) A cut in the marginal tax rate increases the incentives to find a job and work longer hours. 
B) Consumers will save a portion of a tax cut. 
C) The government may use the increase in expenditures on projects with little value, particularly if it wishes to respond quickly. 
D) There is no evidence that tax cuts have been followed by increases in economic growth.

Question 8

To counter the recession of 2008-2009 President Obama and congress created a large increase in government expenditures.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) shoeleather and menu costs 
B) menu costs and relative price variability 
C) unintended changes in tax liabilities and arbitrary redistributions of wealth 
D) none of the above is correct. 
A) shoeleather and menu costs 
B) menu costs and relative price variability 
C) unintended changes in tax liabilities and arbitrary redistributions of wealth 
D) none of the above is correct.

Question 10

Using typical estimates of the sacrifice ratio, how much output would likely be sacrificed to reduce inflation from 4 percent to 2 percent?

Accepted Answer

The typical estimate of the sacrifice ra

Question 11

Suppose that the country of Aquilonia has an inflation rate of about 6 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 500 billion units of currency and current nominal national debt of 100 billion units of domestic currency. Which of the following government spending and taxation figures will keep the debt to income ratio constant?

Accepted Answer

A) government spending equal to 50 billion units and tax collections equal to 48 billion units 
B) government spending equal to 50 billion units and tax collections equal to 41 billion units 
C) government spending equal to 50 billion units and tax collections equal to 40 billion units 
D) government spending equal to 50 billion units and tax collections equal to 32 billion units 
A) government spending equal to 50 billion units and tax collections equal to 48 billion units 
B) government spending equal to 50 billion units and tax collections equal to 41 billion units 
C) government spending equal to 50 billion units and tax collections equal to 40 billion units 
D) government spending equal to 50 billion units and tax collections equal to 32 billion units

Question 12

Why is there a lag between the Fed's actions and the economy's response?

Accepted Answer

Monetary policy is supposed to

Question 13

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

Accepted Answer

A) lower the discount rate and sell bonds. 
B) lower the discount rate and buy bonds. 
C) raise the discount rate and sell bonds. 
D) raise the discount rate and buy bonds. 
A) lower the discount rate and sell bonds. 
B) lower the discount rate and buy bonds. 
C) raise the discount rate and sell bonds. 
D) raise the discount rate and buy bonds.

Question 14

According to traditional Keynesian analysis, which has a greater impact on aggregate demand, changing taxes or changing government expenditures? Why?

Accepted Answer

An increase in government expe

Question 15

A policymaker in favor of stabilizing the economy would be likely to believe

Accepted Answer

A) recessions are a waste of resources. 
B) economies must suffer through the booms and busts of the business cycle. 
C) the long policy lags make implementing policy changes in response to recession too risky. 
D) policy increases the magnitude of economic fluctuations. 
A) recessions are a waste of resources. 
B) economies must suffer through the booms and busts of the business cycle. 
C) the long policy lags make implementing policy changes in response to recession too risky. 
D) policy increases the magnitude of economic fluctuations.

Question 16

Proponents of requiring the government to balance its budget argue that debt burdens future generations. Explain one claim they make to support this argument.

Accepted Answer

High debt means that future taxpayers wi

Question 17

Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing inflation from 3% to 1%?

Accepted Answer

A) 5% 
B) 10% 
C) 15% 
D) 20% 
A) 5% 
B) 10% 
C) 15% 
D) 20%

Question 18

If a government managed to reduce the time inconsistency problem by mandating that the central bank target inflation at a low rate, then

Accepted Answer

A) the long-run Phillips curve would shift right. 
B) the long-run Phillips curve would shift left. 
C) the short-run Phillips curve would shift up. 
D) the short-run Phillips curve would shift down. 
A) the long-run Phillips curve would shift right. 
B) the long-run Phillips curve would shift left. 
C) the short-run Phillips curve would shift up. 
D) the short-run Phillips curve would shift down.

Question 19

The Federal Reserve will tend to tighten monetary policy when

Accepted Answer

A) interest rates are rising too rapidly. 
B) it thinks the unemployment rate is too high. 
C) the growth rate of real GDP is quite sluggish. 
D) it thinks inflation is too high today, or will become too high in the future. 
A) interest rates are rising too rapidly. 
B) it thinks the unemployment rate is too high. 
C) the growth rate of real GDP is quite sluggish. 
D) it thinks inflation is too high today, or will become too high in the future.

Question 20

If people in countries that have had persistently high inflation are skeptical about efforts to reduce inflation, the short-run Phillips curve will remain far to the

Accepted Answer

A) left, and the sacrifice ratio will be low. 
B) left, and the sacrifice ratio will be high. 
C) right, and the sacrifice ratio will be low. 
D) right, and the sacrifice ratio will be high. 
A) left, and the sacrifice ratio will be low. 
B) left, and the sacrifice ratio will be high. 
C) right, and the sacrifice ratio will be low. 
D) right, and the sacrifice ratio will be high.

Exam 36: Six Debates Over Macroeconomic Policy

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

During recessions, even with no changes in policy, the deficit tends to ______ because _____________.

According to traditional Keynesian analysis, if the economy is in a recession, the government can move it back towards full employment by

A permanent reduction in inflation would

A permanent reduction in inflation would

Which of the following is not a valid point in debating the merits of increasing government expenditures or cutting taxes during a recession?

To counter the recession of 2008-2009 President Obama and congress created a large increase in government expenditures.

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

Using typical estimates of the sacrifice ratio, how much output would likely be sacrificed to reduce inflation from 4 percent to 2 percent?

Why is there a lag between the Fed's actions and the economy's response?

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

According to traditional Keynesian analysis, which has a greater impact on aggregate demand, changing taxes or changing government expenditures? Why?

A policymaker in favor of stabilizing the economy would be likely to believe

Proponents of requiring the government to balance its budget argue that debt burdens future generations. Explain one claim they make to support this argument.

Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing inflation from 3% to 1%?

If a government managed to reduce the time inconsistency problem by mandating that the central bank target inflation at a low rate, then

The Federal Reserve will tend to tighten monetary policy when

If people in countries that have had persistently high inflation are skeptical about efforts to reduce inflation, the short-run Phillips curve will remain far to the

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

Filters

During recessions, even with no changes in policy, the deficit tends to because _______.