Exam 18: Six Debates Over Macroeconomic Policy

A year ago a country reduced the tax rate on all interest income from 40% to 10%. During the year private saving was $600 billion as compared to $500 billion the year before the tax reform. Taxes collected on interest income fell by $150 billion. Assuming no other changes in government revenues or spending which of the following is correct?

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

Which of the following two effects of a decrease in the tax rate on saving would raise savings?

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections the Fed would

In fiscal year 2011, the U.S. government ran a deficit of about $1,300 billion. In fiscal year 2012, the government ran a deficit of about $1,087 billion. Other things the same, this change would be expected to have

Why might policymakers attempts to stabilize the economy do more harm than good?

If the government cut expenditures during an expansion

The Federal Reserve will tend to tighten monetary policy when

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

Government deficits mean that

Explain what is meant by the time inconsistency of monetary policy.

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

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

Proponents of a balanced government budget acknowledge that running a budget deficit is justifiable in time of war.

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

A 1977 amendment to the Federal Reserve Act of 1913

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

A balanced budget would require that when real GDP was growing rapidly,

One prominent debate over macroeconomic policy centers on the question of whether monetary and fiscal policy should be used to try to stabilize the economy.

Some economists believe that there are positives from a little inflation and that it may "grease the wheels"