Exam 36: Six Debates Over Macroeconomic Policy

President Barack Obama and Congress cut taxes and raised government expenditures during the 2008 financial crisis. According to the aggregate supply and aggregate demand model, which of these policies would tend to reduce unemployment?

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

Describe three costs of inflation.

Some economists believe that there are positives from a little inflation and that it may "grease the wheels" in the

A recession has no benefit to society-it represents a sheer waste of resources.

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

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

If net exports fall, what actions could a central bank take to stabilize the economy?

Why might tax cuts be more appropriate than increasing government expenditures to counter recessions? Is there any evidence for this thinking?

The Federal Reserve will tend to tighten monetary policy with the goal is to stabilize the economy when

One concern of those who oppose the central bank targeting inflation at zero is that reducing inflation is costly. What is the cost of reducing the inflation rate?

Identify three government policies that discourage saving.

Tax cuts affect only aggregate demand not aggregate supply.

Which of the following likely occurs when households and firms become more pessimistic?

A reduction in the marginal tax-rate includes an income effect that tends to increase savings.

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

Once state and federal taxes are added together, a typical worker faces about a 40 percent marginal tax-rate on interest income.

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?

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. What are some things policymakers can do to boost the economy when aggregate demand is inadequate to ensure full employment?

Explain how tax provisions to encourage private saving may reduce national saving.