Question 1

Over time, continued budget deficits lead to

Accepted Answer

A)  a higher capital stock and higher productivity. 
B)  a higher capital stock and lower productivity. 
C)  a lower capital stock and higher productivity. 
D)  a lower capital stock and lower productivity. 
A)  a higher capital stock and higher productivity. 
B)  a higher capital stock and lower productivity. 
C)  a lower capital stock and higher productivity. 
D)  a lower capital stock and lower productivity.

Question 2

While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy, what are some of the reasons why tax cuts might be preferred to increased government spending?

Accepted Answer

First, tax cuts can influence both aggre

Question 3

In response to recession, who primarily raised expenditures rather than cut taxes?

Accepted Answer

A)  President George W. Bush and President Barack Obama 
B)  President George W. Bush but not President Barack Obama 
C)  President Barack Obama but not President George W. Bush 
D)  Neither President George W. Bush nor President Barack Obama 
A)  President George W. Bush and President Barack Obama 
B)  President George W. Bush but not President Barack Obama 
C)  President Barack Obama but not President George W. Bush 
D)  Neither President George W. Bush nor President Barack Obama

Question 4

Proponents of zero inflation argue that a successful program to reduce inflation

Accepted Answer

A)  eventually reduces inflation expectations. 
B)  eventually raises real interest rates. 
C)  permanently decreases output. 
D)  permanently raises unemployment. 
A)  eventually reduces inflation expectations. 
B)  eventually raises real interest rates. 
C)  permanently decreases output. 
D)  permanently raises unemployment.

Question 5

A consumption tax that replaces an income tax

Accepted Answer

A)  only taxes a household on the money it spends. 
B)  discourages saving. 
C)  would likely result in a lower level of saving than an income tax. 
D)  ultimately taxes income twice - once when the household pays income tax and once when the household makes a purchase. 
A)  only taxes a household on the money it spends. 
B)  discourages saving. 
C)  would likely result in a lower level of saving than an income tax. 
D)  ultimately taxes income twice - once when the household pays income tax and once when the household makes a purchase.

Question 6

Explain how tax provisions to encourage private saving may reduce national saving.

Accepted Answer

Without careful planning it is possible

Question 7

Inflation

Accepted Answer

A)  causes people to spend more time reducing money balances. When inflation is unexpectedly high it redistributes wealth from lenders to borrowers. 
B)  causes people to spend more time reducing money balances. When inflation is unexpectedly high it redistributes wealth from borrowers to lenders. 
C)  causes people to spend less time reducing money balances. When inflation is unexpectedly high it redistributes wealth from lenders to borrowers. 
D)  causes people to spend less time reducing money balances. When inflation is unexpectedly high it redistributes wealth from borrowers to lenders. 
A)  causes people to spend more time reducing money balances. When inflation is unexpectedly high it redistributes wealth from lenders to borrowers. 
B)  causes people to spend more time reducing money balances. When inflation is unexpectedly high it redistributes wealth from borrowers to lenders. 
C)  causes people to spend less time reducing money balances. When inflation is unexpectedly high it redistributes wealth from lenders to borrowers. 
D)  causes people to spend less time reducing money balances. When inflation is unexpectedly high it redistributes wealth from borrowers to lenders.

Question 8

When the Federal Open Market Committee meets it

Accepted Answer

A)  looks only at the state of economy to determine how to conduct monetary operations in order to follow the monetary policy rule set by law. 
B)  looks at the state of the economy and economic forecasts to determine how to conduct monetary operations in order to follow the monetary policy rule set by law. 
C)  looks only at the state of the economy to determine the target it will set for the federal funds rate. 
D)  looks at the state of the economy and economic forecasts to determine the target it will set for the federal funds rate. 
A)  looks only at the state of economy to determine how to conduct monetary operations in order to follow the monetary policy rule set by law. 
B)  looks at the state of the economy and economic forecasts to determine how to conduct monetary operations in order to follow the monetary policy rule set by law. 
C)  looks only at the state of the economy to determine the target it will set for the federal funds rate. 
D)  looks at the state of the economy and economic forecasts to determine the target it will set for the federal funds rate.

Question 9

If tax rates are raised to avoid a deficit during a recession, then

Accepted Answer

A)  real GDP and deadweight loss from taxes will rise. 
B)  real GDP will rise and deadweight loss from taxes will fall. 
C)  real GDP will fall and deadweight loss from taxes will rise. 
D)  real GDP and deadweight loss from taxes will fall. 
A)  real GDP and deadweight loss from taxes will rise. 
B)  real GDP will rise and deadweight loss from taxes will fall. 
C)  real GDP will fall and deadweight loss from taxes will rise. 
D)  real GDP and deadweight loss from taxes will fall.

Question 10

If the public correctly perceives that the central bank will reduce inflation, then

Accepted Answer

A)  the short-run Phillips curve shifts right, and unemployment will rise by more than otherwise. 
B)  the short-run Phillips curve shifts right, and unemployment will rise by less than otherwise. 
C)  the short-run Phillips curve shifts left, and unemployment will rise by more than otherwise. 
D)  the short-run Phillips curve shifts left, and unemployment will rise by less than otherwise. 
A)  the short-run Phillips curve shifts right, and unemployment will rise by more than otherwise. 
B)  the short-run Phillips curve shifts right, and unemployment will rise by less than otherwise. 
C)  the short-run Phillips curve shifts left, and unemployment will rise by more than otherwise. 
D)  the short-run Phillips curve shifts left, and unemployment will rise by less than otherwise.

Question 11

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 12

A reduction in the tax rate on interest income

Accepted Answer

A)  would necessarily raise national saving. 
B)  would primarily benefit the wealthy. 
C)  both a and b are correct. 
D)  None of the above are correct. 
A)  would necessarily raise national saving. 
B)  would primarily benefit the wealthy. 
C)  both a and b are correct. 
D)  None of the above are correct.

Question 13

Which of the following are justifications for running a budget deficit?

Accepted Answer

A)  stabilizing the economy during a recession 
B)  future generations will benefit from some current expenditures 
C)  both a and b 
D)  neither a nor b 
A)  stabilizing the economy during a recession 
B)  future generations will benefit from some current expenditures 
C)  both a and b 
D)  neither a nor b

Question 14

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 15

Advocates of stabilization policy argue that when there is a recession, the government should increase the money supply and increase government expenditures.

Accepted Answer

A) True 
 B)False

Question 16

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 17

Inflation

Accepted Answer

A)  leads people to use more resources to reduce money holdings. There is no way it can make labor markets work more efficiently. 
B)  leads people to use more resources to reduce money holdings. However, it can make labor markets work more efficiently. 
C)  leads people to use fewer resources to reduce money holdings. There is no way it can make labor markets work more efficiently 
D)  leads people to use fewer resources to reduce money holdings. However, it can make labor markets work more efficiently. 
A)  leads people to use more resources to reduce money holdings. There is no way it can make labor markets work more efficiently. 
B)  leads people to use more resources to reduce money holdings. However, it can make labor markets work more efficiently. 
C)  leads people to use fewer resources to reduce money holdings. There is no way it can make labor markets work more efficiently 
D)  leads people to use fewer resources to reduce money holdings. However, it can make labor markets work more efficiently.

Question 18

Consider the following rule for monetary policy: r = 2 percent +  + 1/2(y - y*)/y* + 1/2(- *), where r is the nominal interest 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. Which of the following statements is not correct?

Accepted Answer

A)  If aggregate demand shifts right from long-run equilibrium, this rule unambiguously implies that the Fed increases the nominal interest rate. 
B)  If aggregate supply shifts right from long-run equilibrium at the inflation target, we cannot tell without more information whether the Fed should increase or decrease the nominal interest rate. 
C)  If output is at its natural level, but inflation is above its target, the Fed must increase the nominal interest rate. 
D)  If inflation is at its targeted level, but output is above its natural rate, the Fed must decrease the federal funds rate. 
A)  If aggregate demand shifts right from long-run equilibrium, this rule unambiguously implies that the Fed increases the nominal interest rate. 
B)  If aggregate supply shifts right from long-run equilibrium at the inflation target, we cannot tell without more information whether the Fed should increase or decrease the nominal interest rate. 
C)  If output is at its natural level, but inflation is above its target, the Fed must increase the nominal interest rate. 
D)  If inflation is at its targeted level, but output is above its natural rate, the Fed must decrease the federal funds rate.

Question 19

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

Accepted Answer

A)  increased spending, increased aggregate demand, rising real GDP, and a rising unemployment rate 
B)  decreased spending, increased aggregate demand, rising real GDP, and a falling unemployment rate 
C)  decreased spending, decreased aggregate demand, falling real GDP, and a rising unemployment rate 
D)  decreased spending, decreased aggregate demand, falling real GDP, and a falling unemployment rate 
A)  increased spending, increased aggregate demand, rising real GDP, and a rising unemployment rate 
B)  decreased spending, increased aggregate demand, rising real GDP, and a falling unemployment rate 
C)  decreased spending, decreased aggregate demand, falling real GDP, and a rising unemployment rate 
D)  decreased spending, decreased aggregate demand, falling real GDP, and a falling unemployment rate

Question 20

Suppose a country has a real growth rate of 3%. Government spending is 75 billion units of currency and its tax revenues are 60 billion units of currency. The current national debt is 300 billion units of currency. At what inflation rate will its debt-to-income ratio remain unchanged?

Accepted Answer

Government spending exceeds tax revenues

Exam 36: Six Debates Over Macroeconomic Policy

Over time, continued budget deficits lead to

While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy, what are some of the reasons why tax cuts might be preferred to increased government spending?

In response to recession, who primarily raised expenditures rather than cut taxes?

Proponents of zero inflation argue that a successful program to reduce inflation

A consumption tax that replaces an income tax

Explain how tax provisions to encourage private saving may reduce national saving.

Inflation

When the Federal Open Market Committee meets it

If tax rates are raised to avoid a deficit during a recession, then

If the public correctly perceives that the central bank will reduce inflation, then

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

A reduction in the tax rate on interest income

Which of the following are justifications for running a budget deficit?

Advocates of stabilization policy argue that when there is a recession, the government should increase the money supply and increase government expenditures.

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

Inflation

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

Suppose a country has a real growth rate of 3%. Government spending is 75 billion units of currency and its tax revenues are 60 billion units of currency. The current national debt is 300 billion units of currency. At what inflation rate will its debt-to-income ratio remain unchanged?

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

Filters