Question 1

What is the political business cycle and how does it relate to whether the central bank should have discretion or use a rule?

Accepted Answer

The political business cycle describes the idea that politicians may manipulate the economy to serve their own political ends.For example,the political party in power might want to generate an economic boom prior to an election,even if this policy is ultimately not in the best interest of the country.If the central bank had to follow a policy rule it would be unable to manipulate monetary policy for political gain.

Question 2

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 the interest rate 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. A

Question 3

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 3 percent per year.Then the government can have a deficit of about

Accepted Answer

A)  6 percent of GDP without raising the debt-to-income ratio.
B)  5 percent of GDP without raising the debt-to-income ratio.
C)  1 percent of GDP without raising the debt-to-income ratio.
D)  None of the above is correct. B

Question 4

A decrease in the tax rate is more likely to increase national saving if

Accepted Answer

A)  the income effect of a change in the interest rate is small and an increase in private saving tends to have a small impact on the capital stock.
B)  the income effect of a change in the interest rate is small and an increase in private saving tends to have a large impact on the capital stock.
C)  the income effect of a change in the interest rate is large and an increase in private saving tends to have a small impact on the capital stock.
D)  the income effect of a change in the interest rate is large and an increase in private saving tends to have a large impact on the capital stock.

Question 5

If people in countries that have had persistently high inflation are skeptical about efforts to reduce inflation,the short-run Phillips curve will remain far to the

Accepted Answer

A)  left, and the sacrifice ratio will be low.
B)  left, and the sacrifice ratio will be high.
C)  right, and the sacrifice ratio will be low.
D)  right, and the sacrifice ratio will be high.

Question 6

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.

Question 7

If inflation falls it

Accepted Answer

A)  causes people to put in more effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from lenders to borrowers.
B)  causes people to put in more effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from borrowers to lenders.
C)  causes people to put in less effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from lenders to borrowers.
D)  causes people to put in less effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from borrowers to lenders.

Question 8

The cost of inflation reduction is a small but permanent increase in unemployment.

Accepted Answer

A) True 
 B)False

Question 9

Zero inflation

Accepted Answer

A)  might be dangerous because it could lead to times of deflation.
B)  would limit the flexibility of the labor market and so could at times raise unemployment.
C)  might make it impossible for the Central bank to lower the nominal interest rate at times.
D)  All of the above are correct.

Question 10

There are ways that policymakers could reduce the costs of inflation without reducing inflation.

Accepted Answer

A) True 
 B)False

Question 11

The Fed lowered interest rates in 2001 and 2002.This implies,other things the same,that the Fed

Accepted Answer

A)  increased the money supply because it was concerned about unemployment.
B)  increased the money supply because it was concerned about inflation.
C)  decreased the money supply because it was concerned about unemployment.
D)  decreased the money supply because it was concerned about inflation.

Question 12

If aggregate demand shifts because of a wave irrational exuberance,those who favor lean against the wind policy would advocate the

Accepted Answer

A)  federal reserve increase the money supply or the government increase taxes.
B)  federal reserve increase the money supply or the government decrease taxes.
C)  federal reserve decrease the money supply or the government increase taxes.
D)  federal reserve decrease the money supply or the government decrease taxes.

Question 13

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 same as the government's budget deficit.

Question 14

At the end of 2003,the government had a debt of about $3,924 billion.During 2004,real GDP grew by about 4.2 percent and inflation was about 2.6 percent.About what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)  about $63 billion
B)  about $267 billion
C)  about $429 billion
D)  None of the above is within a few billion dollars of the largest deficit the government could have run without raising the debt to GDP ratio.

Question 15

Identify three government policies that discourage saving.

Accepted Answer

The answer of Identify three government policies that discourage saving....

Question 16

What's the basis for arguing that deficits are likely to lead to lower living standards in the future?

Accepted Answer

The answer of What's the basis for arguing that deficits...

Question 17

Which inflation costs could the government take actions to reduce without reducing inflation?

Accepted Answer

A)  shoeleather and menu costs
B)  menu costs and relative price variability
C)  tax issues created by nonindexation, redistribution of wealth from unexpected inflation
D)  None of the above is correct.

Question 18

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)  In 2005, the U.S.government had a deficit.

Question 19

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices.If the economy starts at long-run equilibrium and then aggregate supply shifts right the central bank would have to

Accepted Answer

A)  increase the money supply, which causes output to move closer to its long-run equilibrium.
B)  increase the money supply, which causes output to move farther from long-run equilibrium.
C)  decrease the money supply, which causes output to move closer to its long-run equilibrium.
D)  decrease the money supply, which causes output to move farther from long-run equilibrium.

Question 20

If a government managed to reduce the time inconsistency problem by mandating that the central bank target inflation at a low rate,then

Accepted Answer

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

Exam 36: Five Debates Over Macroeconomic Policy