Exam 36: Six Debates Over Macroeconomic Policy

Advocates of cutting taxes rather than increasing government expenditures in response to a recession argue that the increase in spending by consumers and business may be more effective than that of the government. Explain this argument.

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?

According to a 1977 amendment to the Federal Reserve Act of 1913, what weights should the Fed put on the goals of maximum employment, stable prices, and moderate long-term interest rates?

What is the benefit of a high saving rate?

Explain how tax cuts can increase aggregate supply.

When measured over a long span of time, a tax on interest income

List two of the three types of fiscal programs that the President and Congress emphasized in response to the 2008-2009 recession.

List two costs of inflation.

If businesses become more pessimistic about the future, what fiscal policies could the government take to stabilize the economy?

The Federal Open Market Committee

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

The time inconsistency of policy implies that

When wages are fixed by contract, inflation reduces

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

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

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?

A policymaker opposed to using government policy to stabilize the economy would be likely to believe

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.

Which of the following is an argument against using policy to stabilize the economy?

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