Question 1

A year ago a country reduced the tax rate on all interest income from 40% to 10%. During the year private saving was $600 billion as compared to $500 billion the year before the tax reform. Taxes collected on interest income fell by $150 billion. Assuming no other changes in government revenues or spending which of the following is correct?

Accepted Answer

A)  the substitution effect was larger than the income effect; national saving rose 
B)  the substitution effect was larger than the income effect; national saving fell 
C)  the income effect was larger than the substitution effect; national saving rose 
D)  the income effect was larger than the substitution effect; national saving fell

Question 2

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

Question 3

Which of the following two effects of a decrease in the tax rate on saving would raise savings?

Accepted Answer

A)  the income effect and the substitution effect 
B)  the income effect but not the substitution effect 
C)  the substitution effect but not the income effect 
D)  neither the substitution effect nor the income effect

Question 4

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections the Fed would

Accepted Answer

A)  raise interest rates to shift aggregate demand left. 
B)  raise interest rates to shift aggregate demand right. 
C)  reduce interest rates to shift aggregate demand left. 
D)  reduce interest rates to shift aggregate demand right.

Question 5

In fiscal year 2011, the U.S. government ran a deficit of about $1,300 billion. In fiscal year 2012, the government ran a deficit of about $1,087 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 6

Why might policymakers attempts to stabilize the economy do more harm than good?

Accepted Answer

The answer of Why might policymakers attempts to stabilize the...

Question 7

If the government cut expenditures during an expansion

Accepted Answer

A)  it would have to raise the tax rate 
B)  it would tend to stabilize the economy 
C)  both a and b 
D)  neither a nor b

Question 8

The Federal Reserve will tend to tighten monetary policy when

Accepted Answer

A)  interest rates are rising too rapidly. 
B)  it thinks the unemployment rate is too high. 
C)  the growth rate of real GDP is quite sluggish. 
D)  it thinks inflation is too high today, or will become too high in the future.

Question 9

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Accepted Answer

A) True 
 B)False

Question 10

Government deficits mean that

Accepted Answer

A)  national saving is negative so public saving is negative. 
B)  national saving is negative so public saving is lower than otherwise. 
C)  public saving is negative so national saving is negative. 
D)  public saving is negative so national saving is lower than otherwise.

Question 11

Explain what is meant by the time inconsistency of monetary policy.

Accepted Answer

The answer of Explain what is meant by the time...

Question 12

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

Accepted Answer

A)  sustainable, but the future burden on your children cannot be offset. 
B)  sustainable, and the future burden on your children can be offset if you save for them. 
C)  not sustainable, and the future burden on your children cannot be offset. 
D)  not sustainable, but the future burden on your children can be offset if you save for them.

Question 13

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

Accepted Answer

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

Question 14

Proponents of a balanced government budget acknowledge that running a budget deficit is justifiable in time of war.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

A 1977 amendment to the Federal Reserve Act of 1913

Accepted Answer

A)  says the Federal Reserve should only promote maximum employment 
B)  says the Federal Reserve should only promote price stability 
C)  says the Federal Reserve should promote price stability and maximum employment, but does not specify how the Federal Reserve should weight these goals. 
D)  says the Federal Reserve should promote price stability and maximum employment, but specifies that it place more weight on promoting price stability.

Question 17

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 18

A balanced budget would require that when real GDP was growing rapidly,

Accepted Answer

A)  the government raise taxes or cut expenditures. This would increase the magnitude of economic fluctuations. 
B)  the government raise taxes or cut expenditures. This would decrease the magnitude of economic fluctuations. 
C)  the government cut taxes or raise expenditures. This would increase the magnitude of economic fluctuations. 
D)  the government cut taxes or raise expenditures. This would decrease the magnitude of economic fluctuations.

Question 19

One prominent debate over macroeconomic policy centers on the question of whether monetary and fiscal policy should be used to try to stabilize the economy.

Accepted Answer

A) True 
 B)False

Question 20

Some economists believe that there are positives from a little inflation and that it may "grease the wheels"

Accepted Answer

A)  in the stock market. 
B)  in the foreign exchange market. 
C)  in the bond market. 
D)  in the labor market.

Exam 18: Six Debates Over Macroeconomic Policy

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

Which of the following two effects of a decrease in the tax rate on saving would raise savings?

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections the Fed would

In fiscal year 2011, the U.S. government ran a deficit of about $1,300 billion. In fiscal year 2012, the government ran a deficit of about $1,087 billion. Other things the same, this change would be expected to have

Why might policymakers attempts to stabilize the economy do more harm than good?

If the government cut expenditures during an expansion

The Federal Reserve will tend to tighten monetary policy when

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Government deficits mean that

Explain what is meant by the time inconsistency of monetary policy.

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

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

Proponents of a balanced government budget acknowledge that running a budget deficit is justifiable in time of war.

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

A 1977 amendment to the Federal Reserve Act of 1913

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

A balanced budget would require that when real GDP was growing rapidly,

One prominent debate over macroeconomic policy centers on the question of whether monetary and fiscal policy should be used to try to stabilize the economy.

Some economists believe that there are positives from a little inflation and that it may "grease the wheels"