Question 1

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

Accepted Answer

A)  the short-run Phillips curve would shift up. 
B)  the short-run Phillips curve would shift down. 
C)  the long-run Phillips curve would shift right. 
D)  the long-run Phillips curve would shift left. 
A)  the short-run Phillips curve would shift up. 
B)  the short-run Phillips curve would shift down. 
C)  the long-run Phillips curve would shift right. 
D)  the long-run Phillips curve would shift left.

Question 2

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. What are some things policymakers can do to boost the economy when aggregate demand is inadequate to ensure full employment?

Accepted Answer

Policymakers can increase gove

Question 3

If financial turmoil overseas reduces U.S. net exports, then those in favor of "lean against the wind policies" would advocate

Accepted Answer

A)  decreasing the money supply and cutting taxes. 
B)  decreasing the money supply and raising taxes. 
C)  increasing the money supply and cutting taxes. 
D)  increasing the money supply and raising taxes. 
A)  decreasing the money supply and cutting taxes. 
B)  decreasing the money supply and raising taxes. 
C)  increasing the money supply and cutting taxes. 
D)  increasing the money supply and raising taxes.

Question 4

Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could

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 sales also move the price level closer to its original level. 
D)  sell bonds. However these sales 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 sales also move the price level closer to its original level. 
D)  sell bonds. However these sales move the price level farther from its original level.

Question 5

Explain why policy lags could make stabilization policies counterproductive.

Accepted Answer

As the textbook explains, it takes time

Question 6

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

Accepted Answer

A) True 
 B)False

Question 7

For the Fed to fully eliminate the costs of inflation, how low does the inflation rate need to be?

Accepted Answer

A)  0 percent 
B)  3 percent 
C)  5 percent 
D)  6 percent 
A)  0 percent 
B)  3 percent 
C)  5 percent 
D)  6 percent

Question 8

According to traditional Keynesian analysis, a tax cut has a larger effect on aggregate demand than an increase in government expenditures of the same size.

Accepted Answer

A) True 
 B)False

Question 9

The Federal Reserve

Accepted Answer

A)  does not have an inflation target; if it did it would likely be 1% or less. 
B)  does not have an inflation target; if it did it would likely be in the range of 2%. 
C)  does have an inflation target; it is 1%. 
D)  does have an inflation target; it is a range from 1-3%. 
A)  does not have an inflation target; if it did it would likely be 1% or less. 
B)  does not have an inflation target; if it did it would likely be in the range of 2%. 
C)  does have an inflation target; it is 1%. 
D)  does have an inflation target; it is a range from 1-3%.

Question 10

Changes in tax laws that reduce taxes more for those who save a lot will

Accepted Answer

A)  favor low-income households. 
B)  favor people with high income. 
C)  create a more egalitarian society. 
D)  unambiguously increase national saving. 
A)  favor low-income households. 
B)  favor people with high income. 
C)  create a more egalitarian society. 
D)  unambiguously increase national saving.

Question 11

At the end of 2007, the government had a debt of about $5,000 billion. During 2007, real GDP grew by about 0.8 percent and inflation was about 2.7 percent. About what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)  135 billion 
B)  143 billion 
C)  169 billion 
D)  175 billion 
A)  135 billion 
B)  143 billion 
C)  169 billion 
D)  175 billion

Question 12

According to a 1977 amendment to the Federal Reserve Act of 1913, what weights should the Fed put on the goals of maximum employment, stable prices, and moderate long-term interest rates?

Accepted Answer

While the amendment indicates

Question 13

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged, then

Accepted Answer

A)  the central bank would have to raise interest rates which would decrease output. 
B)  the central bank would have to raise interest rates which would increase output. 
C)  the central bank would have to reduce interest rates which would decrease output. 
D)  the central bank would have to reduce interest rates which would increase output. 
A)  the central bank would have to raise interest rates which would decrease output. 
B)  the central bank would have to raise interest rates which would increase output. 
C)  the central bank would have to reduce interest rates which would decrease output. 
D)  the central bank would have to reduce interest rates which would increase output.

Question 14

Suppose that changes in aggregate demand tended to be infrequent and that it takes a long time for the economy to return to long-run output. How would this affect the arguments of those who oppose using policy to stabilize output?

Accepted Answer

Those who oppose stabilization policy mo

Question 15

Tax cuts

Accepted Answer

A)  can easily target investment spending, but investment spending falls by only a small percentage during recessions. 
B)  can easily target investment spending, which falls by a large percentage during recessions. 
C)  cannot easily target investment spending, but investment spending falls by only a small percentage during recessions. 
D)  cannot easily target investment spending, which falls by a large percentage during recessions. 
A)  can easily target investment spending, but investment spending falls by only a small percentage during recessions. 
B)  can easily target investment spending, which falls by a large percentage during recessions. 
C)  cannot easily target investment spending, but investment spending falls by only a small percentage during recessions. 
D)  cannot easily target investment spending, which falls by a large percentage during recessions.

Question 16

Which of the following support the idea that monetary policy should be made by a rule?

Accepted Answer

A)  the political business cycle and the time-inconsistency problem 
B)  the political business cycle but not the time-inconsistency problem 
C)  the time-inconsistency problem, but not the political business cycle 
D)  neither the political business cycle nor the time-inconsistency problem 
A)  the political business cycle and the time-inconsistency problem 
B)  the political business cycle but not the time-inconsistency problem 
C)  the time-inconsistency problem, but not the political business cycle 
D)  neither the political business cycle nor the time-inconsistency problem

Question 17

Suppose a 25-year-old worker purchases a $5,000 bond that pays 6% interest per year which she plans to withdraw when she retires in 40 years. How much will the $5,000 accumulate to in 40 years? If the worker faces a marginal tax rate of 30% on interest income, how much will the $5,000 accumulate to in 40 years?

Accepted Answer

In the absence of taxes, the b

Question 18

All of the following are arguments against stabilization policy except

Accepted Answer

A)  Economic forecasting is highly imprecise. 
B)  Long lags may cause stabilization policies to in fact destabilize the economy. 
C)  Monetary policy affects aggregate demand by changing interest rates. 
D)  Fiscal policy must go through a long political process. 
A)  Economic forecasting is highly imprecise. 
B)  Long lags may cause stabilization policies to in fact destabilize the economy. 
C)  Monetary policy affects aggregate demand by changing interest rates. 
D)  Fiscal policy must go through a long political process.

Question 19

Economists agree that if a monetary policy rule is to be used, the best one makes the growth rate of the money supply constant.

Accepted Answer

A) True 
 B)False

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 23: Six Debates Over Macroeconomic Policy

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

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. What are some things policymakers can do to boost the economy when aggregate demand is inadequate to ensure full employment?

If financial turmoil overseas reduces U.S. net exports, then those in favor of "lean against the wind policies" would advocate

Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could

Explain why policy lags could make stabilization policies counterproductive.

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

For the Fed to fully eliminate the costs of inflation, how low does the inflation rate need to be?

According to traditional Keynesian analysis, a tax cut has a larger effect on aggregate demand than an increase in government expenditures of the same size.

The Federal Reserve

Changes in tax laws that reduce taxes more for those who save a lot will

At the end of 2007, the government had a debt of about $5,000 billion. During 2007, real GDP grew by about 0.8 percent and inflation was about 2.7 percent. About what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

According to a 1977 amendment to the Federal Reserve Act of 1913, what weights should the Fed put on the goals of maximum employment, stable prices, and moderate long-term interest rates?

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged, then

Suppose that changes in aggregate demand tended to be infrequent and that it takes a long time for the economy to return to long-run output. How would this affect the arguments of those who oppose using policy to stabilize output?

Tax cuts

Which of the following support the idea that monetary policy should be made by a rule?

All of the following are arguments against stabilization policy except

Economists agree that if a monetary policy rule is to be used, the best one makes the growth rate of the money supply constant.

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.

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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