Exam 18: Six Debates Over Macroeconomic Policy

Consider the following rule for monetary policy: r = 2 percent + π + 1/2y - y*)/y* + 1/2π - π*), where r is the nominal federal funds rate, y is real GDP, y* is an estimate of the natural rate of output, π is the inflation rate, and π* is the inflation target. Other things the same, if the inflation rate rises by 1 percentage point this rule says the Fed should increase the nominal federal funds rate by

The principal reason that monetary policy has lags is that it takes a long time for

Which of the following would those in favor of increasing government spending rather than decreasing taxes to prop up aggregate demand probably not agree with?

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?

Which of the following things can a government do to lower the costs of inflation?

The time inconsistency of monetary policy means that

A program to reduce inflation is likely to have higher costs if the sacrifice ratio is

When aggregate demand is high, risking higher inflation, those in favor of using monetary and fiscal policy to stabilize the economy might recommend

Inflation

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.

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 when higher inflation becomes a concern?

U.S. public policy discourages saving because

According to traditional Keynesian analysis, which has a greater impact on aggregate demand, changing taxes or changing government expenditures? Why?

Suppose tax laws were reformed to encourage saving by increasing the rate of return on savings. Which of the following would be true?

Eliminating double-taxation would likely

A policymaker against stabilizing the economy would be likely to believe

If inflation were high in some country and lawmakers in that country passed a law requiring the central bank to maintain a low level of inflation, it is likely that

Economists believe that a little bit of inflation may be a good thing. What are the potential benefits of inflation?

The average U.S. citizens' share of the government debt represents less than 2 percent of a person's lifetime income.

Inflation