Question 1

Why might the response of far-sighted consumers reduce the multiplier effect of an increase in government expenditures?

Accepted Answer

Consumers may recognize that b

Question 2

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

Accepted Answer

A)  would have to increase the money supply. This would move unemployment closer to the natural rate. 
B)  would have to increase the money supply. This would move unemployment further from the natural rate. 
C)  would have to decrease the money supply. This would move unemployment closer to the natural rate. 
D)  would have to decrease the money supply. This would move unemployment further from the natural rate. 
A)  would have to increase the money supply. This would move unemployment closer to the natural rate. 
B)  would have to increase the money supply. This would move unemployment further from the natural rate. 
C)  would have to decrease the money supply. This would move unemployment closer to the natural rate. 
D)  would have to decrease the money supply. This would move unemployment further from the natural rate.

Question 3

The Federal Reserve

Accepted Answer

A)  requires little time to change policy and aggregate demand responds quickly. 
B)  requires little time to change policy but aggregate demand responds slowly. 
C)  usually requires a substantial time to change policy but aggregate demand responds quickly. 
D)  usually requires a substantial time to change policy and aggregate demand responds slowly. 
A)  requires little time to change policy and aggregate demand responds quickly. 
B)  requires little time to change policy but aggregate demand responds slowly. 
C)  usually requires a substantial time to change policy but aggregate demand responds quickly. 
D)  usually requires a substantial time to change policy and aggregate demand responds slowly.

Question 4

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?

Accepted Answer

A temporar

Question 5

Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

Accepted Answer

Both are prone to lags, but the lags are

Question 6

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

Accepted Answer

The time inconsistency of monetary polic

Question 7

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 supply shifts left, the central bank must

Accepted Answer

A)  decrease the money supply, which will move output back towards its long-run level. 
B)  decrease the money supply, which will move output farther from its long-run level. 
C)  increase the money supply, which will move output back towards its long-run level. 
D)  increase the money supply, which will move output farther from its long-run level. 
A)  decrease the money supply, which will move output back towards its long-run level. 
B)  decrease the money supply, which will move output farther from its long-run level. 
C)  increase the money supply, which will move output back towards its long-run level. 
D)  increase the money supply, which will move output farther from its long-run level.

Question 8

According to traditional Keynesian analysis, if the economy is in a recession, the government can move it back towards full employment by

Accepted Answer

A)  cutting taxes and increasing expenditures. The effect of the tax cut is larger. 
B)  cutting taxes and increasing expenditures. The effect of the tax cut is smaller. 
C)  raising taxes and decreasing expenditures. The effect of the tax increase is larger. 
D)  raising taxes and decreasing expenditures. The effect of the tax increase is smaller. 
A)  cutting taxes and increasing expenditures. The effect of the tax cut is larger. 
B)  cutting taxes and increasing expenditures. The effect of the tax cut is smaller. 
C)  raising taxes and decreasing expenditures. The effect of the tax increase is larger. 
D)  raising taxes and decreasing expenditures. The effect of the tax increase is smaller.

Question 9

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

Accepted Answer

A)  increased spending 
B)  increased aggregate demand 
C)  increased real GDP 
D)  an increase in the unemployment rate 
A)  increased spending 
B)  increased aggregate demand 
C)  increased real GDP 
D)  an increase in the unemployment rate

Question 10

Proponents of requiring the government to balance its budget argue that debt burdens future generations. Explain one claim they make to support this argument.

Accepted Answer

High debt means that future taxpayers wi

Question 11

Explain what is meant by saying that capital income is taxed twice.

Accepted Answer

Shareholders are part owners o

Question 12

What is the benefit of a high saving rate?

Accepted Answer

A high saving rate provides mo

Question 13

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

Accepted Answer

An increase in government expe

Question 14

Which of the following is not an argument made by those who oppose reforming the tax laws to encourage saving?

Accepted Answer

A)  A public budget surplus can raise national saving. 
B)  The substitution effect of a higher return to saving may be about equal to the income effect of a higher return to saving. 
C)  Low-income households save a larger fraction of their income than high-income households. 
D)  Tax cuts might cause a budget deficit. 
A)  A public budget surplus can raise national saving. 
B)  The substitution effect of a higher return to saving may be about equal to the income effect of a higher return to saving. 
C)  Low-income households save a larger fraction of their income than high-income households. 
D)  Tax cuts might cause a budget deficit.

Question 15

Why is there a lag between the Fed's actions and the economy's response?

Accepted Answer

Monetary policy is supposed to

Question 16

Explain how a higher rate of return on saving could, at least in theory, lead to lower saving.

Accepted Answer

A higher rate of return on saving means

Question 17

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

Accepted Answer

A)  raise interest rates to shift aggregate demand left. 
B)  raise interest rates to shift aggregate demand right. 
C)  reduce interest rates to shift aggregate demand left. 
D)  reduce interest rates to shift aggregate demand right. 
A)  raise interest rates to shift aggregate demand left. 
B)  raise interest rates to shift aggregate demand right. 
C)  reduce interest rates to shift aggregate demand left. 
D)  reduce interest rates to shift aggregate demand right.

Question 18

An economist would be more likely to argue against reducing inflation if she thought that

Accepted Answer

A)  the central bank lacked credibility and if bonds were usually not indexed for inflation. 
B)  the central bank lacked credibility and if bonds were usually indexed for inflation. 
C)  the central bank had credibility and if bonds were usually not indexed for inflation. 
D)  the central bank had credibility and if bonds were usually indexed for inflation. 
A)  the central bank lacked credibility and if bonds were usually not indexed for inflation. 
B)  the central bank lacked credibility and if bonds were usually indexed for inflation. 
C)  the central bank had credibility and if bonds were usually not indexed for inflation. 
D)  the central bank had credibility and if bonds were usually indexed for inflation.

Question 19

Why is it desirable, if possible, to use policy to offset the effects of a decrease in aggregate demand?

Accepted Answer

Because a decrease i

Question 20

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

Accepted Answer

A)  more quickly but is more likely to be spent on projects with little benefit. 
B)  more quickly and is less likely to be spent on projects with little benefit. 
C)  less quickly but is less likely to be spent on projects with little benefit. 
D)  less quickly and is more likely to be spent on projects with little benefit. 
A)  more quickly but is more likely to be spent on projects with little benefit. 
B)  more quickly and is less likely to be spent on projects with little benefit. 
C)  less quickly but is less likely to be spent on projects with little benefit. 
D)  less quickly and is more likely to be spent on projects with little benefit.

Exam 23: Six Debates Over Macroeconomic Policy

Why might the response of far-sighted consumers reduce the multiplier effect of an increase in government expenditures?

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

The Federal Reserve

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 kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

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

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 supply shifts left, the central bank must

According to traditional Keynesian analysis, if the economy is in a recession, the government can move it back towards full employment by

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

Proponents of requiring the government to balance its budget argue that debt burdens future generations. Explain one claim they make to support this argument.

Explain what is meant by saying that capital income is taxed twice.

What is the benefit of a high saving rate?

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

Which of the following is not an argument made by those who oppose reforming the tax laws to encourage saving?

Why is there a lag between the Fed's actions and the economy's response?

Explain how a higher rate of return on saving could, at least in theory, lead to lower saving.

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

An economist would be more likely to argue against reducing inflation if she thought that

Why is it desirable, if possible, to use policy to offset the effects of a decrease in aggregate demand?

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

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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