Exam 36: Six Debates Over Macroeconomic Policy

Suppose the nation's price level rises as a result of an increase in aggregate demand and a decrease in aggregate supply which leaves output unchanged. If the Fed is required to follow a rule that stabilizes the price level, what will the Fed do to the money supply and what impact will this have on total output in the economy?

The Fed raised interest rates in 2004 and 2005. This implies, other things the same, that the Fed

An added benefit of inflation is that it allows for the possibility of

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

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

If the natural rate of unemployment is 6%, but the Fed thinks it is 5% and attempts to use monetary policy to move unemployment from 6% to 5%, then in the short run which of the following variables will the Fed's policy raise?

Which of the following is an important advantage of discretionary monetary policy?

A reduction in the marginal tax-rate includes a substitution effect that tends to increase saving.

Which of the following is not an argument in favor of requiring the government to balance its budget?

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

Which of the following is not correct?

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Why might tax cuts be more appropriate than increasing government expenditures to counter recessions? Is there any evidence for this thinking?

Which of the following is not an argument by those who oppose tax-law changes to encourage saving?

An increase in the tax rate on interest income

nominal federal funds rate, y is real GDP, y* is an estimate of the natural rate of output, π is the inflation rate, and π* is the inflation target. Other things the same, if the economy starts at y* and π* and then y rises and exceeds y* by 1% and π rises 2% points above π*, the rule would require the Fed to raise the federal funds rate by

The Federal Reserve

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

Explain the main arguments in favor of economic stabilization.

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 demand shifts right, the central bank must