Question 1

Which of the following does not reduce the potential burden of an increase in debt on future generations?

Accepted Answer

A) the growth rate of output is high 
B) in response to increased debt, parents save more to leave their children larger bequests 
C) budget deficits raise interest rates 
D) All of the above are correct. 
A) the growth rate of output is high 
B) in response to increased debt, parents save more to leave their children larger bequests 
C) budget deficits raise interest rates 
D) All of the above are correct.

Question 2

Some studies have found that saving is not very sensitive to the rate of return on saving.

Accepted Answer

A) True 
 B)False

Question 3

In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998, the government ran a surplus of about $69.3 billion. Other things the same, we would expect this change

Accepted Answer

A) decreased interest rates and investment. 
B) decreased interest rates and increased investment. 
C) increased interest rates and investment. 
D) increased interest rates and decreased investment. 
A) decreased interest rates and investment. 
B) decreased interest rates and increased investment. 
C) increased interest rates and investment. 
D) increased interest rates and decreased investment.

Question 4

When wages are fixed by contract, inflation reduces

Accepted Answer

A) nominal wages; this likely makes labor markets more flexible. 
B) nominal wages; this likely makes labor markets less flexible. 
C) real wages; this likely makes labor markets more flexible. 
D) real wages; this likely makes labor markets less flexible. 
A) nominal wages; this likely makes labor markets more flexible. 
B) nominal wages; this likely makes labor markets less flexible. 
C) real wages; this likely makes labor markets more flexible. 
D) real wages; this likely makes labor markets less flexible.

Question 5

Inflation reduction has the highest cost when the efforts are

Accepted Answer

A) credible so that the sacrifice ratio is low. 
B) credible so that the sacrifice ratio is high. 
C) unexpected so that the sacrifice ratio is high. 
D) unexpected so that the sacrifice ratio is low. 
A) credible so that the sacrifice ratio is low. 
B) credible so that the sacrifice ratio is high. 
C) unexpected so that the sacrifice ratio is high. 
D) unexpected so that the sacrifice ratio is low.

Question 6

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. 
A) menu costs. 
B) aggregate supply shocks. 
C) negative real interest rates. 
D) recessions.

Question 7

A reduction in the tax rate on income from saving would

Accepted Answer

A) most directly benefit the poor in the short run. 
B) increase real wages over time. 
C) decrease the capital stock over time. 
D) decrease productivity over time. 
A) most directly benefit the poor in the short run. 
B) increase real wages over time. 
C) decrease the capital stock over time. 
D) decrease productivity over time.

Question 8

If the Fed followed a rule for monetary policy, the time inconsistency problem would be eliminated.

Accepted Answer

A) True 
 B)False

Question 9

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. 
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.

Question 10

The cost of inflation reduction is a large, permanent increase in unemployment.

Accepted Answer

A) True 
 B)False

Question 11

A policymaker against stabilizing the economy would be likely to believe

Accepted Answer

A) policymakers should "do no harm". 
B) there are no obstacles to the practical application of policy in real life. 
C) policy lags are short enough that implementing policy changes in response to recession is not too risky. 
D) policy mitigates the magnitude of economic fluctuations. 
A) policymakers should "do no harm". 
B) there are no obstacles to the practical application of policy in real life. 
C) policy lags are short enough that implementing policy changes in response to recession is not too risky. 
D) policy mitigates the magnitude of economic fluctuations.

Question 12

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 13

Provide two specific ways in which reducing inflation might leave "permanent scars" on the economy.

Accepted Answer

Reducing inflation leads to a temporary

Question 14

Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could

Accepted Answer

A) buy bonds. These purchases also move the price level closer to its original level. 
B) buy bonds. However these purchases move the price level farther from its original level. 
C) sell bonds. These sales also move the price level closer to its original level. 
D) sell bonds. However these sales move the price level farther from its original level. 
A) buy bonds. These purchases also move the price level closer to its original level. 
B) buy bonds. However these purchases move the price level farther from its original level. 
C) sell bonds. These sales also move the price level closer to its original level. 
D) sell bonds. However these sales move the price level farther from its original level.

Question 15

While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy, what are some of the reasons why tax cuts might be preferred to increased government spending?

Accepted Answer

First, tax cuts can influence both aggre

Question 16

For the Fed to fully eliminate the costs of inflation, how low does the inflation rate need to be?

Accepted Answer

A) 0 percent 
B) 3 percent 
C) 5 percent 
D) 6 percent 
A) 0 percent 
B) 3 percent 
C) 5 percent 
D) 6 percent

Question 17

Some people believe that monetary policy should be made by rule rather than by discretion. One of their beliefs is that

Accepted Answer

A) setting a policy rule will limit the abuse of power of policymakers. 
B) policymakers can better influence the political business cycle in their favor when following a policy rule. 
C) a policy rule provides policymakers with the greatest flexibility to manage inflation. 
D) if the Fed was required to follow a low-inflation policy, the economy would face a less favorable short-run trade-off between inflation and unemployment. 
A) setting a policy rule will limit the abuse of power of policymakers. 
B) policymakers can better influence the political business cycle in their favor when following a policy rule. 
C) a policy rule provides policymakers with the greatest flexibility to manage inflation. 
D) if the Fed was required to follow a low-inflation policy, the economy would face a less favorable short-run trade-off between inflation and unemployment.

Question 18

Suppose that the government goes into deficit in order to help local school districts build better schools. Does this burden future generations?

Accepted Answer

The benefits of the project ac

Question 19

According to the political business cycle, after an election, unless the central bank acts inflation is likely to

Accepted Answer

A) have risen. To counter this the central bank would raise interest rates. 
B) have risen. To counter this the central bank would lower interest rates. 
C) have fallen. To counter this the central bank would raise interest rates. 
D) have fallen. To counter this the central bank would lower interest rates. 
A) have risen. To counter this the central bank would raise interest rates. 
B) have risen. To counter this the central bank would lower interest rates. 
C) have fallen. To counter this the central bank would raise interest rates. 
D) have fallen. To counter this the central bank would lower interest rates.

Question 20

Describe three costs of inflation.

Accepted Answer

There are several costs of inflation. Sh

Exam 36: Six Debates Over Macroeconomic Policy

Which of the following does not reduce the potential burden of an increase in debt on future generations?

Some studies have found that saving is not very sensitive to the rate of return on saving.

In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998, the government ran a surplus of about $69.3 billion. Other things the same, we would expect this change

When wages are fixed by contract, inflation reduces

Inflation reduction has the highest cost when the efforts are

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

A reduction in the tax rate on income from saving would

If the Fed followed a rule for monetary policy, the time inconsistency problem would be eliminated.

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

The cost of inflation reduction is a large, permanent increase in unemployment.

A policymaker against stabilizing the economy would be likely to believe

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

Provide two specific ways in which reducing inflation might leave "permanent scars" on the economy.

Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could

While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy, what are some of the reasons why tax cuts might be preferred to increased government spending?

For the Fed to fully eliminate the costs of inflation, how low does the inflation rate need to be?

Some people believe that monetary policy should be made by rule rather than by discretion. One of their beliefs is that

Suppose that the government goes into deficit in order to help local school districts build better schools. Does this burden future generations?

According to the political business cycle, after an election, unless the central bank acts inflation is likely to

Describe three costs of inflation.

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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