Exam 23: Six Debates Over Macroeconomic Policy: Part B

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

To counter the recession of 2008-2009 President Obama and congress created a large increase in government expenditures.

Tax cuts affect only aggregate demand not aggregate supply.

A reduction in the marginal tax-rate includes a substitution effect that tends to increase saving.

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

Social Security transfers wealth from younger generations to older generations.

In effect,a consumption tax would put all saving automatically into a tax-advantaged savings account similar to an Individual Retirement Account (IRA).

Advocates of stabilization policy argue that when there is a recession,the government should increase the money supply and increase government expenditures.

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.

In practice,the problems created by time inconsistency and the political business cycle appear to be quite serious.

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

The Obama administration believed that transfer payments to the unemployed would have a larger impact on aggregate demand than tax cuts.

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

The cost of inflation reduction is less if people believe that the central bank will really reduce inflation.

Economists agree that if a monetary policy rule is to be used,the best one makes the growth rate of the money supply constant.

When the government has a deficit,a burden is necessarily imposed on future generations of taxpayers.

In essence,a consumption tax puts all saving into tax-advantaged savings accounts.

There are ways that policymakers could reduce the costs of inflation without reducing inflation.

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