Question 1

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 2

An increase in the money supply

Accepted Answer

A)  reduces interest rates and shifts aggregate demand to the right. 
B)  reduces interest rates and shifts aggregate supply to the right 
C)  raises interest rates and shifts aggregate demand to the right. 
D)  raises interest rates and shifts aggregate supply to the right. 
A)  reduces interest rates and shifts aggregate demand to the right. 
B)  reduces interest rates and shifts aggregate supply to the right 
C)  raises interest rates and shifts aggregate demand to the right. 
D)  raises interest rates and shifts aggregate supply to the right.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

A higher rate of return on saving has

Accepted Answer

A)  an income effect that discourages saving and a substitution effect that encourages saving. 
B)  an income effect that encourages saving and a substitution effect that discourages saving. 
C)  income and substitution effects that both decrease saving. 
D)  income and substitution effects that both increase saving. 
A)  an income effect that discourages saving and a substitution effect that encourages saving. 
B)  an income effect that encourages saving and a substitution effect that discourages saving. 
C)  income and substitution effects that both decrease saving. 
D)  income and substitution effects that both increase saving.

Question 5

An increase in government expenditures may lead people to expect that in the future taxes will rise and create greater distortions. By themselves these changes in expectations lead people to

Accepted Answer

A)  raise both consumption and investment. 
B)  raise consumption but reduce investment. 
C)  raise investment but reduce consumption. 
D)  reduce both consumption and investment. 
A)  raise both consumption and investment. 
B)  raise consumption but reduce investment. 
C)  raise investment but reduce consumption. 
D)  reduce both consumption and investment.

Question 6

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

Accepted Answer

A)  its substitution effect on saving and its effect on the government budget 
B)  its substitution effect on saving but not its effect on the government budget 
C)  its effect on the government budget but not its substitution effect on saving 
D)  neither its substitution effect on saving nor its effect on the government budget 
A)  its substitution effect on saving and its effect on the government budget 
B)  its substitution effect on saving but not its effect on the government budget 
C)  its effect on the government budget but not its substitution effect on saving 
D)  neither its substitution effect on saving nor its effect on the government budget

Question 7

The effect of budget deficits on interest rates

Accepted Answer

A)  increases private investment, so eventually the capital stock rises. 
B)  increases private investment, so eventually the capital stock falls. 
C)  decreases private investment, so eventually the capital stock rises. 
D)  decreases private investment, so eventually the capital stock falls. 
A)  increases private investment, so eventually the capital stock rises. 
B)  increases private investment, so eventually the capital stock falls. 
C)  decreases private investment, so eventually the capital stock rises. 
D)  decreases private investment, so eventually the capital stock falls.

Question 8

Explain how it is possible for the government debt to grow forever.

Accepted Answer

The debt can grow because the economy gr

Question 9

The effects of a decline in the value of financial assets, such as stocks, on consumption and the economy might be offset by

Accepted Answer

A)  increasing government spending. 
B)  decreasing the money supply. 
C)  increasing taxes. 
D)  undertaking no policy action. 
A)  increasing government spending. 
B)  decreasing the money supply. 
C)  increasing taxes. 
D)  undertaking no policy action.

Question 10

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

Which costs of inflation could the government reduce without reducing inflation?

Accepted Answer

A)  shoeleather and menu costs 
B)  menu costs and relative price variability 
C)  unintended changes in tax liabilities and arbitrary redistributions of wealth 
D)  none of the above is correct. 
A)  shoeleather and menu costs 
B)  menu costs and relative price variability 
C)  unintended changes in tax liabilities and arbitrary redistributions of wealth 
D)  none of the above is correct.

Question 13

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 14

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

Accepted Answer

A)  its income effect on saving and its effect on the government budget 
B)  its income effect on saving but not its effect on the government budget 
C)  its effect on the government budget but not its income effect on saving 
D)  neither its income effect on saving nor its effect on the government budget 
A)  its income effect on saving and its effect on the government budget 
B)  its income effect on saving but not its effect on the government budget 
C)  its effect on the government budget but not its income effect on saving 
D)  neither its income effect on saving nor its effect on the government budget

Question 15

The time inconsistency of policy implies that

Accepted Answer

A)  what policymakers say they will do is generally what they will do, but people don't believe them because of current policy. 
B)  when people expect that inflation will be low, it is easier for the Fed to increase output by increasing the money supply. 
C)  people will believe Fed policy will be less inflationary than the Fed claims. 
D)  what policymakers say they will do is usually not what they do, but people believe them anyway. 
A)  what policymakers say they will do is generally what they will do, but people don't believe them because of current policy. 
B)  when people expect that inflation will be low, it is easier for the Fed to increase output by increasing the money supply. 
C)  people will believe Fed policy will be less inflationary than the Fed claims. 
D)  what policymakers say they will do is usually not what they do, but people believe them anyway.

Question 16

Tax laws do not give preferential treatment to some kinds of retirement saving.

Accepted Answer

A) True 
 B)False

Question 17

A country has a growth rate of 3%. Government spending is 60 billion units of currency and its tax revenues are 32 billion units of currency. The current national debt is 400 billion units of currency. At which inflation rate is its debt- to-income ratio unchanged?

Accepted Answer

A)  2% 
B)  3% 
C)  4% 
D)  5% 
A)  2% 
B)  3% 
C)  4% 
D)  5%

Question 18

Economists believe that a little bit of inflation may be a good thing. What are the potential benefits of inflation?

Accepted Answer

First, economists believe that inflation

Question 19

Means-tested programs tend to favor

Accepted Answer

A)  those with high income as would a consumption tax. 
B)  those with high income while a consumption tax would favor those with low income. 
C)  those with low income as would a consumption tax. 
D)  those with low income while a consumption tax would favor those with high income. 
A)  those with high income as would a consumption tax. 
B)  those with high income while a consumption tax would favor those with low income. 
C)  those with low income as would a consumption tax. 
D)  those with low income while a consumption tax would favor those with high income.

Question 20

Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing inflation from 3% to 1%?

Accepted Answer

A)  5% 
B)  10% 
C)  15% 
D)  20% 
A)  5% 
B)  10% 
C)  15% 
D)  20%

Exam 36: Six Debates Over Macroeconomic Policy

The national debt

An increase in the money supply

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

A higher rate of return on saving has

An increase in government expenditures may lead people to expect that in the future taxes will rise and create greater distortions. By themselves these changes in expectations lead people to

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

The effect of budget deficits on interest rates

Explain how it is possible for the government debt to grow forever.

The effects of a decline in the value of financial assets, such as stocks, on consumption and the economy might be offset by

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

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

Which costs of inflation could the government reduce without reducing inflation?

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?

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

The time inconsistency of policy implies that

Tax laws do not give preferential treatment to some kinds of retirement saving.

A country has a growth rate of 3%. Government spending is 60 billion units of currency and its tax revenues are 32 billion units of currency. The current national debt is 400 billion units of currency. At which inflation rate is its debt- to-income ratio unchanged?

Economists believe that a little bit of inflation may be a good thing. What are the potential benefits of inflation?

Means-tested programs tend to favor

Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing inflation from 3% to 1%?

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

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

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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