Question 1

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

Accepted Answer

A)  recessions are a waste of resources. 
B)  economies must suffer through the booms and busts of the business cycle. 
C)  the long policy lags make implementing policy changes in response to recession too risky. 
D)  policy increases the magnitude of economic fluctuations. 
A)  recessions are a waste of resources. 
B)  economies must suffer through the booms and busts of the business cycle. 
C)  the long policy lags make implementing policy changes in response to recession too risky. 
D)  policy increases the magnitude of economic fluctuations.

Question 2

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

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

Accepted Answer

A)  both the shift of aggregate demand and the shift of aggregate supply 
B)  the shift of aggregate demand, but not the shift of aggregate supply 
C)  the shift of aggregate supply, but not the shift of aggregate demand 
D)  neither the shift of aggregate demand nor the shift of aggregate supply 
A)  both the shift of aggregate demand and the shift of aggregate supply 
B)  the shift of aggregate demand, but not the shift of aggregate supply 
C)  the shift of aggregate supply, but not the shift of aggregate demand 
D)  neither the shift of aggregate demand nor the shift of aggregate supply

Question 4

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

Accepted Answer

A)  inflation targeting. 
B)  the monetary policy reaction lag. 
C)  the time inconsistency of policy. 
D)  the sacrifice ratio dilemma. 
A)  inflation targeting. 
B)  the monetary policy reaction lag. 
C)  the time inconsistency of policy. 
D)  the sacrifice ratio dilemma.

Question 5

The national debt

Accepted Answer

A)  exists because of past government budget deficits. 
B)  is the difference between the government's spending and revenue in a given year. 
C)  is the amount households owe on credit cards, mortgages and other loans. 
D)  is the amount household and firms have borrowed minus the amount they have saved. 
A)  exists because of past government budget deficits. 
B)  is the difference between the government's spending and revenue in a given year. 
C)  is the amount households owe on credit cards, mortgages and other loans. 
D)  is the amount household and firms have borrowed minus the amount they have saved.

Question 6

If there is an increase in the money supply, in the short run

Accepted Answer

A)  the interest rises. It takes several weeks for spending to fully respond to this change. 
B)  the interest rises. It takes several months for spending to fully respond to this change. 
C)  the interest falls. It takes several weeks for spending to fully respond to this change. 
D)  the interest falls. It takes several months for spending to fully respond to this change. 
A)  the interest rises. It takes several weeks for spending to fully respond to this change. 
B)  the interest rises. It takes several months for spending to fully respond to this change. 
C)  the interest falls. It takes several weeks for spending to fully respond to this change. 
D)  the interest falls. It takes several months for spending to fully respond to this change.

Question 7

When wages are set by contract, inflation

Accepted Answer

A)  reduces real wages; this likely makes labor markets more flexible. 
B)  reduces real wages; this likely makes labor markets less flexible. 
C)  raises real wages; this likely makes labor markets more flexible. 
D)  raises real wages; this likely makes labor markets less flexible. 
A)  reduces real wages; this likely makes labor markets more flexible. 
B)  reduces real wages; this likely makes labor markets less flexible. 
C)  raises real wages; this likely makes labor markets more flexible. 
D)  raises real wages; this likely makes labor markets less flexible.

Question 8

Last year a country's real GDP grew by 4%, it's inflation rate was 2.5%, and it's government budget deficit was about $250 billion. It's debt to GDP ratio was unchanged. About what was it's debt at the start of last year?

Accepted Answer

A)  16.7 trillion 
B)  10.0 trillion 
C)  6.25 trillion 
D)  3.85 trillion 
A)  16.7 trillion 
B)  10.0 trillion 
C)  6.25 trillion 
D)  3.85 trillion

Question 9

Proponents of zero inflation argue that reducing inflation has

Accepted Answer

A)  permanent costs and temporary benefits. 
B)  temporary costs and permanent benefits. 
C)  permanent costs and benefits. 
D)  temporary costs and benefits. 
A)  permanent costs and temporary benefits. 
B)  temporary costs and permanent benefits. 
C)  permanent costs and benefits. 
D)  temporary costs and benefits.

Question 10

What component of GDP is particularly volatile over the business cycle and can be targeted by tax cuts?

Accepted Answer

Investment

Question 11

Why do many economists advocate a consumption tax rather than an income tax?

Accepted Answer

The current income tax means that income

Question 12

If businesses become more pessimistic about the future, what fiscal policies could the government take to stabilize the economy?

Accepted Answer

Increase g

Question 13

According to the political business cycle, after an election, unless the central bank acts inflation is likely to

Accepted Answer

A)  have risen. To counter this the central bank would raise interest rates. 
B)  have risen. To counter this the central bank would lower interest rates. 
C)  have fallen. To counter this the central bank would raise interest rates. 
D)  have fallen. To counter this the central bank would lower interest rates. 
A)  have risen. To counter this the central bank would raise interest rates. 
B)  have risen. To counter this the central bank would lower interest rates. 
C)  have fallen. To counter this the central bank would raise interest rates. 
D)  have fallen. To counter this the central bank would lower interest rates.

Question 14

Opponents of using policy to stabilize the economy generally believe that

Accepted Answer

A)  neither fiscal nor monetary policy have much impact on aggregate demand. 
B)  attempts to stabilize the economy decrease the magnitude of economic fluctuations. 
C)  unemployment and inflation are not cause for much concern. 
D)  economic conditions can easily change between the start of policy action and when it takes effect. 
A)  neither fiscal nor monetary policy have much impact on aggregate demand. 
B)  attempts to stabilize the economy decrease the magnitude of economic fluctuations. 
C)  unemployment and inflation are not cause for much concern. 
D)  economic conditions can easily change between the start of policy action and when it takes effect.

Question 15

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

Accepted Answer

Tax policies designed to encourage savin

Question 16

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

Accepted Answer

A)  We can be sure that it reduced the severity of the recession because the recession was less severe than the Great Depression. 
B)  We can be sure that it reduced the severity of the recession even though the recession was more severe than the Great Depression. 
C)  We can not be sure that it reduced the severity of the recession, but the recession was less severe than the Great Depression. 
D)  We can not be sure that it reduced the severity of the recession because the recession was more severe than the Great Depression. 
A)  We can be sure that it reduced the severity of the recession because the recession was less severe than the Great Depression. 
B)  We can be sure that it reduced the severity of the recession even though the recession was more severe than the Great Depression. 
C)  We can not be sure that it reduced the severity of the recession, but the recession was less severe than the Great Depression. 
D)  We can not be sure that it reduced the severity of the recession because the recession was more severe than the Great Depression.

Question 17

Which of the following is not a cost of inflation identified by economists?

Accepted Answer

A)  menu costs associated with more frequent adjustment of prices 
B)  confusion and inconvenience resulting from a changing value of the unit of account 
C)  reduced price flexibility 
D)  arbitrary redistributions of wealth associated with dollar-denominated debts 
A)  menu costs associated with more frequent adjustment of prices 
B)  confusion and inconvenience resulting from a changing value of the unit of account 
C)  reduced price flexibility 
D)  arbitrary redistributions of wealth associated with dollar-denominated debts

Question 18

When the government has a deficit, a burden is necessarily imposed on future generations of taxpayers.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

Accepted Answer

A)  buy bonds. These purchases also move the price level closer to its original level. 
B)  buy bonds. However these purchases move the price level farther from its original level. 
C)  sell bonds. These purchases also move the price level closer to its original level. 
D)  sell bonds. However these purchase move the price level farther from its original level. 
A)  buy bonds. These purchases also move the price level closer to its original level. 
B)  buy bonds. However these purchases move the price level farther from its original level. 
C)  sell bonds. These purchases also move the price level closer to its original level. 
D)  sell bonds. However these purchase move the price level farther from its original level.

Exam 23: Six Debates Over Macroeconomic Policy

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

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

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

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

The national debt

If there is an increase in the money supply, in the short run

When wages are set by contract, inflation

Last year a country's real GDP grew by 4%, it's inflation rate was 2.5%, and it's government budget deficit was about $250 billion. It's debt to GDP ratio was unchanged. About what was it's debt at the start of last year?

Proponents of zero inflation argue that reducing inflation has

What component of GDP is particularly volatile over the business cycle and can be targeted by tax cuts?

Why do many economists advocate a consumption tax rather than an income tax?

If businesses become more pessimistic about the future, what fiscal policies could the government take to stabilize the economy?

According to the political business cycle, after an election, unless the central bank acts inflation is likely to

Opponents of using policy to stabilize the economy generally believe that

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

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

Which of the following is not a cost of inflation identified by economists?

When the government has a deficit, a burden is necessarily imposed on future generations of taxpayers.

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

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

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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