Exam 18: Six Debates Over Macroeconomic Policy

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 2.5 percent per year. Then the government can have a deficit of about

Which of the following is true of stimulus policy enacted in 2009?

The Federal Open Market Committee

Which of the following are both correct?

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, the central bank must

Those who believe the central bank should aim for zero inflation argue that reducing inflation is a policy with temporary costs and permanent benefits. What are the primary costs and benefits they are referring to?

Suppose a tax cut affects aggregate demand and aggregate supply. Which of the shifts raise the price level?

Proponents of zero-inflation policies acknowledge that the public is unconcerned about the inflation rate.

A higher rate of return on saving has

Means-tested government benefits base benefits on

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

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

If real output grows at 3 percent per year and the inflation rate is 3 percent per year then government debt can grow by 6 percent per year and not increase the ratio of debt to income.

Explain why fiscal policy actions typically work with a lag.

A higher return on saving the amount a household needs to save to achieve any target level of future consumption. This effect on saving is called the effect. If the income effect is large enough, then a reduction in taxes on saving might tax revenues.

Means-tested programs tend to favor

As compared to government spending, a tax cut is likely to affect aggregate demand

Higher inflation results in

Which of the following is not an argument in favor of requiring the government to balance its budget?

A policymaker in favor of stabilizing the economy would be likely to believe