Question 1

Explain the time inconsistency of monetary policy.

Accepted Answer

Time inconsistency refers to the idea th

Question 2

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

Accepted Answer

A) Increased spending. 
B) Increased aggregate demand. 
C) Real GDP rises. 
D) The unemployment rate increases. 
A) Increased spending. 
B) Increased aggregate demand. 
C) Real GDP rises. 
D) The unemployment rate increases.

Question 3

As it is usually practiced, inflation targeting sets

Accepted Answer

A) a specific inflation rate for the central bank to target and prohibits it from deviating from the target even when some shock pushes inflation away from that number. 
B) a specific inflation rate for the central bank to target but allows it to deviate from the target when some shock pushes inflation away from that number. 
C) sets some range of inflation rates for the central bank to target but prohibits it from deviating from that range even when some shock pushes inflation outside the range. 
D) sets some range of inflation rates for the central bank to target but allows it to deviate from that range even when some shock pushes inflation outside the range. 
A) a specific inflation rate for the central bank to target and prohibits it from deviating from the target even when some shock pushes inflation away from that number. 
B) a specific inflation rate for the central bank to target but allows it to deviate from the target when some shock pushes inflation away from that number. 
C) sets some range of inflation rates for the central bank to target but prohibits it from deviating from that range even when some shock pushes inflation outside the range. 
D) sets some range of inflation rates for the central bank to target but allows it to deviate from that range even when some shock pushes inflation outside the range.

Question 4

Proponents of zero inflation argue that reducing inflation has

Accepted Answer

A) permanent costs and temporary benefits. 
B) temporary costs and permanent benefits. 
C) permanent costs and benefits. 
D) temporary costs and benefits. 
A) permanent costs and temporary benefits. 
B) temporary costs and permanent benefits. 
C) permanent costs and benefits. 
D) temporary costs and benefits.

Question 5

The six debates over macroeconomic policy exist mostly because

Accepted Answer

A) economists disagree over basic issues such as the importance of saving for economic growth. 
B) there are tradeoffs and people disagree about the best way to deal with them. 
C) politicians offer misleading information. 
D) people fail to clearly see the benefits or the costs of most changes. 
A) economists disagree over basic issues such as the importance of saving for economic growth. 
B) there are tradeoffs and people disagree about the best way to deal with them. 
C) politicians offer misleading information. 
D) people fail to clearly see the benefits or the costs of most changes.

Question 6

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 7

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 8

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

Accepted Answer

A) the central bank would have to decrease the money supply which would decrease output. 
B) the central bank would have to decrease the money supply which would increase output. 
C) the central bank would have to increase the money supply which would decrease output. 
D) the central bank would have to increase the money supply which would increase output. 
A) the central bank would have to decrease the money supply which would decrease output. 
B) the central bank would have to decrease the money supply which would increase output. 
C) the central bank would have to increase the money supply which would decrease output. 
D) the central bank would have to increase the money supply which would increase output.

Question 9

Which of the following is not an argument in favor of reforming the tax laws to encourage saving?

Accepted Answer

A) Saving is a key determinant of long-run prosperity. 
B) Current tax laws discourage saving for the purpose of leaving a large bequest. 
C) The substitution effect of a higher return to saving may be about equal to the income effect of a higher return to saving. 
D) The tax code currently taxes some forms of capital income twice. 
A) Saving is a key determinant of long-run prosperity. 
B) Current tax laws discourage saving for the purpose of leaving a large bequest. 
C) The substitution effect of a higher return to saving may be about equal to the income effect of a higher return to saving. 
D) The tax code currently taxes some forms of capital income twice.

Question 10

All of the following are arguments against stabilization policy except

Accepted Answer

A) Economic forecasting is highly imprecise. 
B) Long lags may cause stabilization policies to in fact destabilize the economy. 
C) Monetary policy affects aggregate demand by changing interest rates. 
D) Fiscal policy must go through a long political process. 
A) Economic forecasting is highly imprecise. 
B) Long lags may cause stabilization policies to in fact destabilize the economy. 
C) Monetary policy affects aggregate demand by changing interest rates. 
D) Fiscal policy must go through a long political process.

Question 11

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

Accepted Answer

A) its income effect on saving and its effect on the government budget 
B) its income effect on saving but not its effect on the government budget 
C) its effect on the government budget but not its income effect on saving 
D) neither its income effect on saving nor its effect on the government budget 
A) its income effect on saving and its effect on the government budget 
B) its income effect on saving but not its effect on the government budget 
C) its effect on the government budget but not its income effect on saving 
D) neither its income effect on saving nor its effect on the government budget

Question 12

Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

Accepted Answer

Both are prone to lags, but the lags are

Question 13

Paul Volcker, former chair of the Fed, implemented

Accepted Answer

A) contractionary policy which increased the popularity of the U.S. president who had appointed him. 
B) contractionary policy which decreased the popularity of the U.S. president who had appointed him. 
C) expansionary policy which increased the popularity of the U.S. president who had appointed him. 
D) expansionary policy which decreased the popularity of the U.S. president who had appointed him. 
A) contractionary policy which increased the popularity of the U.S. president who had appointed him. 
B) contractionary policy which decreased the popularity of the U.S. president who had appointed him. 
C) expansionary policy which increased the popularity of the U.S. president who had appointed him. 
D) expansionary policy which decreased the popularity of the U.S. president who had appointed him.

Question 14

The time inconsistency of policy implies that

Accepted Answer

A) what policymakers say they will do is generally what they will do, but people don't believe them because of current policy. 
B) when people expect that inflation will be low, it is harder for the Fed to increase output by increasing the money supply. 
C) people will believe Fed policy will be more inflationary than the Fed claims. 
D) what policymakers say they will do is usually not what they do, but people believe them anyway. 
A) what policymakers say they will do is generally what they will do, but people don't believe them because of current policy. 
B) when people expect that inflation will be low, it is harder for the Fed to increase output by increasing the money supply. 
C) people will believe Fed policy will be more inflationary than the Fed claims. 
D) what policymakers say they will do is usually not what they do, but people believe them anyway.

Question 15

Which of the following are currently provisions of the U.S. tax system and discourage saving?

Accepted Answer

A) some forms of capital income are taxed twice 
B) if they are large enough, bequests are taxed 
C) both a and b 
D) neither a nor b 
A) some forms of capital income are taxed twice 
B) if they are large enough, bequests are taxed 
C) both a and b 
D) neither a nor b

Question 16

The principal lag for monetary policy

Accepted Answer

A) and fiscal policy is the time it takes to implement policy. 
B) and fiscal policy is the time it takes for policy to change spending. 
C) is the time it takes to implement policy. The principal lag for fiscal policy is the time it takes for policy to change spending. 
D) is the time it takes for policy to change spending. The principal lag for fiscal policy is the time it takes to implement it. 
A) and fiscal policy is the time it takes to implement policy. 
B) and fiscal policy is the time it takes for policy to change spending. 
C) is the time it takes to implement policy. The principal lag for fiscal policy is the time it takes for policy to change spending. 
D) is the time it takes for policy to change spending. The principal lag for fiscal policy is the time it takes to implement it.

Question 17

Suppose that the country of Aquilonia has an inflation rate of about 2 percent per year and a real growth rate of about 1 percent per year. Suppose also that it has nominal GDP of about 200 billion units of currency and current nominal national debt of 150 billion units of domestic currency. Which of the following government spending and taxation figures will not raise the debt-to-income ratio?

Accepted Answer

A) government spending equal to 20 billion units and tax collections equal to 16 billion units 
B) government spending equal to 20 billion units and tax collections equal to 14 billion units 
C) government spending equal to 20 billion units and tax collections equal to 10 billion units 
D) government spending equal to 20 billion units and tax collections equal to 8 billion units 
A) government spending equal to 20 billion units and tax collections equal to 16 billion units 
B) government spending equal to 20 billion units and tax collections equal to 14 billion units 
C) government spending equal to 20 billion units and tax collections equal to 10 billion units 
D) government spending equal to 20 billion units and tax collections equal to 8 billion units

Question 18

In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a deficit of $159 billion. This change would be expected to have

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 19

If the unemployment rate rises, which policies would be appropriate to reduce it?

Accepted Answer

A) increase the money supply, increase taxes 
B) increase the money supply, cut taxes 
C) decrease the money supply, increase taxes 
D) decrease the money supply, cut taxes 
A) increase the money supply, increase taxes 
B) increase the money supply, cut taxes 
C) decrease the money supply, increase taxes 
D) decrease the money supply, cut taxes

Question 20

If a country had a rule that required the ratio of debt to GDP to be constant, it would necessarily have to run a surplus if

Accepted Answer

A) real GDP rose and the inflation rate were positive. 
B) real GDP rose and the inflation rate were negative. 
C) real GDP fell and the inflation rate were positive. 
D) real GDP fell and the inflation rate were negative. 
A) real GDP rose and the inflation rate were positive. 
B) real GDP rose and the inflation rate were negative. 
C) real GDP fell and the inflation rate were positive. 
D) real GDP fell and the inflation rate were negative.

Exam 23: Six Debates Over Macroeconomic Policy

Explain the time inconsistency of monetary policy.

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

As it is usually practiced, inflation targeting sets

Proponents of zero inflation argue that reducing inflation has

The six debates over macroeconomic policy exist mostly because

A reduction in the tax rate on income from saving would

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

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

Which of the following is not an argument in favor of reforming the tax laws to encourage saving?

All of the following are arguments against stabilization policy except

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

Paul Volcker, former chair of the Fed, implemented

The time inconsistency of policy implies that

Which of the following are currently provisions of the U.S. tax system and discourage saving?

The principal lag for monetary policy

In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a deficit of $159 billion. This change would be expected to have

If the unemployment rate rises, which policies would be appropriate to reduce it?

If a country had a rule that required the ratio of debt to GDP to be constant, it would necessarily have to run a surplus if

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

Application: The Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomic Models

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 Trade-Off Between Inflation and Unemployment

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