Question 1

Economists

Accepted Answer

A) agree that the costs of moderate inflation are low and that the cost of reducing inflation is small. 
B) agree that the costs of moderate inflation are low, but disagree about the cost of reducing inflation. 
C) disagree about the costs of moderate inflation, but agree that the cost of reducing inflation is small. 
D) disagree about the costs of moderate inflation and disagree about the cost of reducing inflation.

Question 2

In fiscal year 2008, the U.S. government ran a deficit of about $459 billion. In fiscal year 2009, the government ran a deficit of about $1,413 billion. Other things the same, this change would be expected to have

Accepted Answer

A) decreased interest rates and investment. 
B) decreased interest rates and increased investment. 
C) increased interest rates and investment. 
D) increased interest rates and decreased investment.

Question 3

Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

Accepted Answer

The answer of Which kind of lag is important for...

Question 4

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. In response to this change, someone who advocated "lean against the wind" policies might advocate

Accepted Answer

A) decreasing the money supply. 
B) increasing taxes. 
C) increasing government expenditures. 
D) All of the above

Question 5

An economist would be more likely to argue against reducing inflation if she thought that

Accepted Answer

A) the central bank lacked credibility and if bonds were usually not indexed for inflation. 
B) the central bank lacked credibility and if bonds were usually indexed for inflation. 
C) the central bank had credibility and if bonds were usually not indexed for inflation. 
D) the central bank had credibility and if bonds were usually indexed for inflation.

Question 6

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

Accepted Answer

A) increased spending 
B) increased aggregate demand 
C) increased real GDP 
D) an increase in the unemployment rate

Question 7

The Federal Open Market Committee

Accepted Answer

A) must submit its policies to the President and Senate for approval. 
B) operates with almost complete discretion over monetary policy. 
C) is required to target short-term interest rates in a mechanical way based on an equation that takes into account both price stability and output fluctuations. 
D) is required to set and publicize targets for money supply growth.

Question 8

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.

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.

Question 10

An individual would suffer higher losses from an unexpectedly higher inflation rate if

Accepted Answer

A) she held much currency and owned few bonds. 
B) she held much currency and owned many bonds. 
C) she held little currency and owned few bonds. 
D) she held little currency and owned many bonds.

Question 11

An increase in the tax rate on interest income

Accepted Answer

A) raises the amount earned on savings. Saving will rise if the income effect of the increase in the tax rate is larger than the substitution effect. 
B) raises the amount earned on savings. Saving will rise if the income effect of the increase in the tax rate is smaller than the substitution effect. 
C) reduces the amount earned on savings. Saving will fall if the income effect of the increase in the tax rate is larger than the substitution effect. 
D) reduces the amount earned on savings. Saving will fall if the income effect of the increase in the tax rate is smaller than the substitution effect.

Question 12

An economist advising a central bank intending to reduce the inflation rate would likely point out that

Accepted Answer

A) the costs of reducing inflation persist and the costs of reducing it do not depend on the public's inflation expectations. 
B) the costs of reducing inflation persist, but they are smaller if the public reduces its inflation expectations. 
C) the costs of reducing inflation are temporary and the costs of reducing it do not depend on the public's inflation expectations. 
D) the costs of reducing inflation are temporary and the costs are smaller if the public reduces its inflation expectations.

Question 13

Which of the following is not correct?

Accepted Answer

A) Government debt can continue to rise forever. 
B) If the government uses funds to pay for investment programs, on net the debt need not burden future generations. 
C) Social Security does not transfer wealth from younger generations to older generations. 
D) The average U.S. citizens' share of the government debt represents less than 2 percent of her lifetime income.

Question 14

If aggregate demand shifts right and the President and Congress want to use fiscal policy to reverse the change in output, they could

Accepted Answer

A) increase government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will raise output above its long-run level. 
B) increase government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will reduce output to below its long-run level. 
C) decrease government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will raise output above its long-run level. 
D) decrease government expenditures. If by the time policy has been implemented the economy has moved back to long-run equilibrium, then this policy will reduce output to below its long-run level.

Question 15

Which of the following is not correct?

Accepted Answer

A) A potential cost of deficits is that they reduce national saving, thereby reducing growth of the capital stock and output growth. 
B) Deficits give people the opportunity to consume at the expense of their children, but they do not require them to do so. 
C) The U.S. debt per-person is large compared with average lifetime income. 
D) Current spending may benefit future generations.

Question 16

Means-tested college aid, base college aid primarily on

Accepted Answer

A) a student's abilities, and create an incentive to save. 
B) a student's abilities but create a disincentive to save. 
C) the current interest rate and are an incentive to save. 
D) the current interest rate and are a disincentive to save.

Question 17

What did the actions of the Federal Reserve during the 1990's demonstrate about monetary policy and rules?

Accepted Answer

The answer of What did the actions of the Federal...

Question 18

Which of the following would transfer wealth from old to young?

Accepted Answer

A) Increases in the budget deficit. 
B) Decreased building of highways and bridges. 
C) More generous education subsidies. 
D) Indexation of Social Security benefits to inflation.

Question 19

A 1977 amendment to the Federal Reserve Act of 1913

Accepted Answer

A) requires the Federal Reserve to place more weight on promoting price stability than on promoting maximum employment. 
B) requires the Federal Reserve to place more weight on promoting maximum employment than on promoting price stability. 
C) requires the Federal Reserve to place equal weight on promoting price stability and maximum employment. 
D) says the Federal Reserve should promote price stability and maximum employment, but does not specify how the Federal Reserve should weight these goals.

Question 20

The Federal Open Market Committee

Accepted Answer

A) operates with almost complete discretion over monetary policy. 
B) is required to increase the money supply by a given growth rate each year. 
C) is required to keep short-term interest rates within a range set by Congress. 
D) is required by its charter to change the money supply using a complex formula that concerns the tradeoff between inflation and unemployment.

Exam 36: Six Debates Over Macroeconomic Policy

Economists

In fiscal year 2008, the U.S. government ran a deficit of about $459 billion. In fiscal year 2009, the government ran a deficit of about $1,413 billion. Other things the same, this change would be expected to have

Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. In response to this change, someone who advocated "lean against the wind" policies might advocate

An economist would be more likely to argue against reducing inflation if she thought that

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

The Federal Open Market Committee

The effect of budget deficits on interest rates

Proponents of zero inflation argue that reducing inflation has

An individual would suffer higher losses from an unexpectedly higher inflation rate if

An increase in the tax rate on interest income

An economist advising a central bank intending to reduce the inflation rate would likely point out that

Which of the following is not correct?

If aggregate demand shifts right and the President and Congress want to use fiscal policy to reverse the change in output, they could

Which of the following is not correct?

Means-tested college aid, base college aid primarily on

What did the actions of the Federal Reserve during the 1990's demonstrate about monetary policy and rules?

Which of the following would transfer wealth from old to young?

A 1977 amendment to the Federal Reserve Act of 1913

The Federal Open Market Committee