Exam 36: Six Debates Over Macroeconomic Policy

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged, then

Economists

"Leaning against the wind" is exemplified by a(n)

What is meant by the political business cycle?

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

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

Those who desire that policymakers stabilize the economy would advocate which of the following when aggregate demand is insufficient to ensure full employment?

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. In practice, however, there are obstacles to the use of such policies. What are the primary difficulties with using monetary and fiscal policy to stabilize the economy?

Tax cuts affect only aggregate demand not aggregate supply.

Proponents of tax-law changes to encourage saving would

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Those who believe the central bank should aim for zero inflation argue that reducing inflation is a policy with temporary costs and permanent benefits. What are the primary costs and benefits they are referring to?

Suppose aggregate demand fell. In order to stabilize the economy, the government might

The political business cycle refers to

Suppose that changes in aggregate demand tended to be infrequent and that it takes a long time for the economy to return to long-run output. How would this affect the arguments of those who oppose using policy to stabilize output?

If a reduction in taxes on savings reduced the amount of private saving, then the

Double taxation means that both

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

Which of the following is correct? Investment tax credits

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.