Question 1

Assuming that the substitution effect is large relative to the income effect, tax reform designed to increase saving

Accepted Answer

A) increases the interest rate and decreases spending on capital goods. 
B) increases the interest rate and increases spending on capital goods. 
C) decreases the interest rate and increases spending on capital goods. 
D) decreases the interest rate and decreases spending on capital goods. 
A) increases the interest rate and decreases spending on capital goods. 
B) increases the interest rate and increases spending on capital goods. 
C) decreases the interest rate and increases spending on capital goods. 
D) decreases the interest rate and decreases spending on capital goods.

Question 2

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 3

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 3 percent per year. Then the government can have a deficit of about

Accepted Answer

A) 6 percent of GDP without raising the debt-to-income ratio. 
B) 5 percent of GDP without raising the debt-to-income ratio. 
C) 1.5 percent of GDP without raising the debt-to-income ratio. 
D) 1 percent of GDP without raising the debt-to-income ratio. 
A) 6 percent of GDP without raising the debt-to-income ratio. 
B) 5 percent of GDP without raising the debt-to-income ratio. 
C) 1.5 percent of GDP without raising the debt-to-income ratio. 
D) 1 percent of GDP without raising the debt-to-income ratio.

Question 4

The laws that created the Fed give it only vague recommendations about what goals it should pursue, and they do not tell the Fed how to pursue whatever goals it might choose.

Accepted Answer

A) True 
 B)False

Question 5

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?

Accepted Answer

Those who oppose stabilization policy mo

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

If a central bank had to give up its discretion and follow a rule that required it to keep inflation low,

Accepted Answer

A) the short-run Phillips curve would shift up. 
B) the short-run Phillips curve would shift down. 
C) the long-run Phillips curve would shift right. 
D) the long-run Phillips curve would shift left. 
A) the short-run Phillips curve would shift up. 
B) the short-run Phillips curve would shift down. 
C) the long-run Phillips curve would shift right. 
D) the long-run Phillips curve would shift left.

Question 8

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

Accepted Answer

A) lower the discount rate and sell bonds. 
B) lower the discount rate and buy bonds. 
C) raise the discount rate and sell bonds. 
D) raise the discount rate and buy bonds. 
A) lower the discount rate and sell bonds. 
B) lower the discount rate and buy bonds. 
C) raise the discount rate and sell bonds. 
D) raise the discount rate and buy bonds.

Question 9

A law that requires the money supply to grow by a fixed percentage each year would eliminate

Accepted Answer

A) the time inconsistency problem, but not political business cycles. 
B) the political business cycle, but not the time inconsistency problem. 
C) both the time inconsistency problem and political business cycles. 
D) neither the time inconsistency problem nor political business cycles. 
A) the time inconsistency problem, but not political business cycles. 
B) the political business cycle, but not the time inconsistency problem. 
C) both the time inconsistency problem and political business cycles. 
D) neither the time inconsistency problem nor political business cycles.

Question 10

If people in a country that has had persistently high inflation expect it to remain high and are skeptical of promises the central bank makes, then the Phillips curve is

Accepted Answer

A) farther to the left than otherwise. If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises. 
B) farther to the left than otherwise. If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises. 
C) farther to the right than otherwise. If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises 
D) farther to the right than otherwise. If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises.. 
A) farther to the left than otherwise. If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises. 
B) farther to the left than otherwise. If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises. 
C) farther to the right than otherwise. If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises 
D) farther to the right than otherwise. If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises..

Question 11

The average person's share of the U.S. government debt as a percentage of lifetime income is

Accepted Answer

A) less than 2 percent. 
B) about 5 percent. 
C) about 10 percent. 
D) over 12 percent. 
A) less than 2 percent. 
B) about 5 percent. 
C) about 10 percent. 
D) over 12 percent.

Question 12

The time inconsistency of monetary policy means that

Accepted Answer

A) once people have formed expectations of low inflation based on a promise by the central bank, the central bank is tempted to raise inflation to lower unemployment. 
B) at some times central banks think it is more important to keep unemployment low; at other times, they think it is more important to keep inflation low. 
C) monetary policy is not consistent across time because it is influenced by politics. 
D) monetary policy is not consistent across time because policymakers are incompetent. 
A) once people have formed expectations of low inflation based on a promise by the central bank, the central bank is tempted to raise inflation to lower unemployment. 
B) at some times central banks think it is more important to keep unemployment low; at other times, they think it is more important to keep inflation low. 
C) monetary policy is not consistent across time because it is influenced by politics. 
D) monetary policy is not consistent across time because policymakers are incompetent.

Question 13

Identify three government policies that discourage saving.

Accepted Answer

First, the returns to saving are heavily

Question 14

Which of the following is not correct?

Accepted Answer

A) Government debt can continue to rise forever. 
B) If the government uses funds to pay for investment programs, on net the debt need not burden future generations. 
C) Social Security does not transfer wealth from younger generations to older generations. 
D) The average U.S. citizens' share of the government debt represents about 1 percent of her lifetime income. 
A) Government debt can continue to rise forever. 
B) If the government uses funds to pay for investment programs, on net the debt need not burden future generations. 
C) Social Security does not transfer wealth from younger generations to older generations. 
D) The average U.S. citizens' share of the government debt represents about 1 percent of her lifetime income.

Question 15

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

Accepted Answer

A) would have to increase the money supply. This would move unemployment closer to the natural rate. 
B) would have to increase the money supply. This would move unemployment further from the natural rate. 
C) would have to decrease the money supply. This would move unemployment closer to the natural rate. 
D) would have to decrease the money supply. This would move unemployment further from the natural rate. 
A) would have to increase the money supply. This would move unemployment closer to the natural rate. 
B) would have to increase the money supply. This would move unemployment further from the natural rate. 
C) would have to decrease the money supply. This would move unemployment closer to the natural rate. 
D) would have to decrease the money supply. This would move unemployment further from the natural rate.

Question 16

An individual would suffer lower losses from an unexpectedly higher inflation rate if

Accepted Answer

A) she held much currency and owned few bonds. 
B) she held much currency and owned many bonds. 
C) she held little currency and owned few bonds. 
D) she held little currency and owned many bonds. 
A) she held much currency and owned few bonds. 
B) she held much currency and owned many bonds. 
C) she held little currency and owned few bonds. 
D) she held little currency and owned many bonds.

Question 17

In theory the severity of recessions can be diminished with

Accepted Answer

A) an increase in government spending, which the political process cannot delay. 
B) an increase in government spending, which the length of the political process can delay. 
C) a decrease in government expenditures, which the political process cannot delay. 
D) a decrease in government spending, which the length of the political process can delay. 
A) an increase in government spending, which the political process cannot delay. 
B) an increase in government spending, which the length of the political process can delay. 
C) a decrease in government expenditures, which the political process cannot delay. 
D) a decrease in government spending, which the length of the political process can delay.

Question 18

Explain how it is possible for the government debt to grow forever.

Accepted Answer

The debt can grow because the economy gr

Question 19

Double taxation means that both

Accepted Answer

A) wage income and interest income are taxed, which is currently the case in the United States. 
B) wage income and interest income are taxed, which is not currently the case in the United States. 
C) the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the United States. 
D) the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in the United States. 
A) wage income and interest income are taxed, which is currently the case in the United States. 
B) wage income and interest income are taxed, which is not currently the case in the United States. 
C) the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the United States. 
D) the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in the United States.

Question 20

An economist would be more likely to argue for reducing inflation if she thought that

Accepted Answer

A) the central bank lacked credibility and if bonds were usually not indexed for inflation. 
B) the central bank lacked credibility and if bonds were usually indexed for inflation. 
C) the central bank had credibility and if bonds were usually not indexed for inflation. 
D) the central bank had credibility and if bonds were usually indexed for inflation. 
A) the central bank lacked credibility and if bonds were usually not indexed for inflation. 
B) the central bank lacked credibility and if bonds were usually indexed for inflation. 
C) the central bank had credibility and if bonds were usually not indexed for inflation. 
D) the central bank had credibility and if bonds were usually indexed for inflation.

Exam 23: Six Debates Over Macroeconomic Policy

Assuming that the substitution effect is large relative to the income effect, tax reform designed to increase saving

A policymaker against stabilizing the economy would be likely to believe

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 3 percent per year. Then the government can have a deficit of about

The laws that created the Fed give it only vague recommendations about what goals it should pursue, and they do not tell the Fed how to pursue whatever goals it might choose.

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?

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

If a central bank had to give up its discretion and follow a rule that required it to keep inflation low,

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

A law that requires the money supply to grow by a fixed percentage each year would eliminate

If people in a country that has had persistently high inflation expect it to remain high and are skeptical of promises the central bank makes, then the Phillips curve is

The average person's share of the U.S. government debt as a percentage of lifetime income is

The time inconsistency of monetary policy means that

Identify three government policies that discourage saving.

Which of the following is not correct?

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

An individual would suffer lower losses from an unexpectedly higher inflation rate if

In theory the severity of recessions can be diminished with

Explain how it is possible for the government debt to grow forever.

Double taxation means that both

An economist would be more likely to argue for reducing inflation if she thought that

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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