Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

Are there any situations in which running a budget deficit is justified? Explain.

Accepted Answer

The two primary justifications for running a deficit are wars and recessions. When a military conflict raises government spending it is reasonable to finance the extra spending by borrowing. During a recession, raising taxes or cutting spending to avoid a deficit would reduce aggregate demand at a time when it needs to be stimulated.

Question 3

In general, the longest lag for

Accepted Answer

A)  both fiscal and monetary policy is the time it takes to change policy. 
B)  both fiscal and monetary policy is the time it takes for policy to affect aggregate demand. 
C)  monetary policy is the time it takes to change policy, while for fiscal policy the longest lag is the time it takes for policy to affect aggregate demand. 
D)  fiscal policy is the time it takes to change policy, while for monetary policy the longest lag is the time it takes for policy to affect aggregate demand. 
A)  both fiscal and monetary policy is the time it takes to change policy. 
B)  both fiscal and monetary policy is the time it takes for policy to affect aggregate demand. 
C)  monetary policy is the time it takes to change policy, while for fiscal policy the longest lag is the time it takes for policy to affect aggregate demand. 
D)  fiscal policy is the time it takes to change policy, while for monetary policy the longest lag is the time it takes for policy to affect aggregate demand. D

Question 4

Which of the following is correct?

Accepted Answer

A)  Well designed tax cuts can increase investment which fluctuates more than consumption over the business cycle. 
B)  Well designed tax cuts can increase investment but it fluctuates less than consumption over the business cycle. 
C)  Tax cuts have little effect on investment which fluctuate more than consumption over the business cycle. 
D)  Tax cuts have little effect on investment but it fluctuates less than consumption over the business cycle 
A)  Well designed tax cuts can increase investment which fluctuates more than consumption over the business cycle. 
B)  Well designed tax cuts can increase investment but it fluctuates less than consumption over the business cycle. 
C)  Tax cuts have little effect on investment which fluctuate more than consumption over the business cycle. 
D)  Tax cuts have little effect on investment but it fluctuates less than consumption over the business cycle

Question 5

At the end of 2011 the U.S. government had a debt of about $10.12 trillion. During 2012 inflation was about 2.5% and real GDP grew about 1.6%. What is the largest deficit the government could have had in 2012 without raising the ratio of debt to GDP?

Accepted Answer

A)  about 414.9 billion 
B)  about 404.8 billion 
C)  about 253.0 billion 
D)  about 161.9 billion 
A)  about 414.9 billion 
B)  about 404.8 billion 
C)  about 253.0 billion 
D)  about 161.9 billion

Question 6

Tax cuts proposed by the Kennedy and Reagan administrations were followed by robust economic growth.

Accepted Answer

A) True 
 B)False

Question 7

The Federal Reserve will tend to tighten monetary policy when

Accepted Answer

A)  interest rates are rising too rapidly. 
B)  it thinks the unemployment rate is too high. 
C)  the growth rate of real GDP is quite sluggish. 
D)  it thinks inflation is too high today, or will become too high in the future. 
A)  interest rates are rising too rapidly. 
B)  it thinks the unemployment rate is too high. 
C)  the growth rate of real GDP is quite sluggish. 
D)  it thinks inflation is too high today, or will become too high in the future.

Question 8

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 9

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which of the following, at least in theory, could explain why some countries would continue to have high inflation?

Accepted Answer

A)  High inflation countries have relatively small sacrifice ratios and so see no need to reduce inflation. 
B)  Inflation reduction works best when it is unexpected, and people in high inflation countries would quickly anticipate any change in monetary policy. 
C)  In a country where inflation has been high for a long time, people are likely to have found ways to limit the costs. 
D)  In a country where inflation has been high for a long time, there are no costs to the inflation. 
A)  High inflation countries have relatively small sacrifice ratios and so see no need to reduce inflation. 
B)  Inflation reduction works best when it is unexpected, and people in high inflation countries would quickly anticipate any change in monetary policy. 
C)  In a country where inflation has been high for a long time, people are likely to have found ways to limit the costs. 
D)  In a country where inflation has been high for a long time, there are no costs to the inflation.

Question 10

From fiscal year 2012 to fiscal year 2013 China's budget deficit rose 50%. Other things the same, we would expect this to have

Accepted Answer

A)  decreased interest rates and investment. 
B)  decreased interest rates and increased investment. 
C)  increased interest rates and investment. 
D)  increased interest rates and decreased investment. 
A)  decreased interest rates and investment. 
B)  decreased interest rates and increased investment. 
C)  increased interest rates and investment. 
D)  increased interest rates and decreased investment.

Question 11

Inflation reduction has the lowest cost when the efforts are

Accepted Answer

A)  credible so that the sacrifice ratio is low. 
B)  credible so that the sacrifice ratio is high. 
C)  unexpected so that the sacrifice ratio is high. 
D)  unexpected so that the sacrifice ratio is low. 
A)  credible so that the sacrifice ratio is low. 
B)  credible so that the sacrifice ratio is high. 
C)  unexpected so that the sacrifice ratio is high. 
D)  unexpected so that the sacrifice ratio is low.

Question 12

Time inconsistency will cause the

Accepted Answer

A)  short-run Phillips curve to be higher than otherwise. 
B)  short-run Phillips curve to be lower the otherwise. 
C)  long-run Phillips curve to be farther to the right than otherwise. 
D)  long-run Phillips curve to be farther left than otherwise. 
A)  short-run Phillips curve to be higher than otherwise. 
B)  short-run Phillips curve to be lower the otherwise. 
C)  long-run Phillips curve to be farther to the right than otherwise. 
D)  long-run Phillips curve to be farther left than otherwise.

Question 13

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 14

Policymakers following a "lean against the wind" policy would

Accepted Answer

A)  increase government expenditures when output is low and decrease them when output is high. 
B)  increase government expenditures when output is low and do nothing when output is high. 
C)  decrease government expenditures when output is low and increase them when output is high. 
D)  decrease government expenditures when output is high and do nothing when output is low. 
A)  increase government expenditures when output is low and decrease them when output is high. 
B)  increase government expenditures when output is low and do nothing when output is high. 
C)  decrease government expenditures when output is low and increase them when output is high. 
D)  decrease government expenditures when output is high and do nothing when output is low.

Question 15

At the end of 2012, the government had a debt of about $11.3 trillion. If during 2013 real GDP rose 2% and inflation was 2.2%, what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)  about $226.0 billion 
B)  about $248.6 billion 
C)  about $474.6 billion 
D)  about $561.8 billion 
A)  about $226.0 billion 
B)  about $248.6 billion 
C)  about $474.6 billion 
D)  about $561.8 billion

Question 16

"Leaning against the wind" is exemplified by a

Accepted Answer

A)  tax cut when there is a recession. 
B)  decrease in the money supply when there is a recession. 
C)  decrease in government expenditures when there is a recession. 
D)  All of the above are correct. 
A)  tax cut when there is a recession. 
B)  decrease in the money supply when there is a recession. 
C)  decrease in government expenditures when there is a recession. 
D)  All of the above are correct.

Question 17

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 18

Which costs of inflation could the government take action to reduce without reducing inflation?

Accepted Answer

A)  shoeleather costs 
B)  unintended changes in tax liabilities 
C)  menu costs 
D)  none of the above is correct. 
A)  shoeleather costs 
B)  unintended changes in tax liabilities 
C)  menu costs 
D)  none of the above is correct.

Question 19

A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is

Accepted Answer

A)  small and an increase in private saving tends to have a small impact on the capital stock. 
B)  small and an increase in private saving tends to have a large impact on the capital stock. 
C)  large and an increase in private saving tends to have a small impact on the capital stock. 
D)  large and an increase in private saving tends to have a large impact on the capital stock. 
A)  small and an increase in private saving tends to have a small impact on the capital stock. 
B)  small and an increase in private saving tends to have a large impact on the capital stock. 
C)  large and an increase in private saving tends to have a small impact on the capital stock. 
D)  large and an increase in private saving tends to have a large impact on the capital stock.

Question 20

Demand for workers in some industry declines. These workers are reluctant to have a cut in their nominal wage. However,

Accepted Answer

A)  inflation will raise their real wage and so increase the number of available workers. 
B)  inflation will raise their real wage and so decrease the number of available workers 
C)  inflation will reduce their real wage and so increase the number of available workers. 
D)  inflation will reduce their real wage and so decrease the number of available workers. 
A)  inflation will raise their real wage and so increase the number of available workers. 
B)  inflation will raise their real wage and so decrease the number of available workers 
C)  inflation will reduce their real wage and so increase the number of available workers. 
D)  inflation will reduce their real wage and so decrease the number of available workers.

Exam 23: Six Debates Over Macroeconomic Policy

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

Are there any situations in which running a budget deficit is justified? Explain.

In general, the longest lag for

Which of the following is correct?

At the end of 2011 the U.S. government had a debt of about $10.12 trillion. During 2012 inflation was about 2.5% and real GDP grew about 1.6%. What is the largest deficit the government could have had in 2012 without raising the ratio of debt to GDP?

Tax cuts proposed by the Kennedy and Reagan administrations were followed by robust economic growth.

The Federal Reserve will tend to tighten monetary policy when

Double taxation means that both

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which of the following, at least in theory, could explain why some countries would continue to have high inflation?

From fiscal year 2012 to fiscal year 2013 China's budget deficit rose 50%. Other things the same, we would expect this to have

Inflation reduction has the lowest cost when the efforts are

Time inconsistency will cause the

In theory the severity of recessions can be diminished with

Policymakers following a "lean against the wind" policy would

At the end of 2012, the government had a debt of about $11.3 trillion. If during 2013 real GDP rose 2% and inflation was 2.2%, what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

"Leaning against the wind" is exemplified by a

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

Which costs of inflation could the government take action to reduce without reducing inflation?

A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is

Demand for workers in some industry declines. These workers are reluctant to have a cut in their nominal wage. However,

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 Macroeconomics: Basic Concepts

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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