Question 1

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

Question 2

A policymaker against stabilizing the economy would be likely to believe

Accepted Answer

A)  policymakers should "do no harm". 
B)  there are no obstacles to the practical application of policy in real life. 
C)  policy lags are short enough that implementing policy changes in response to recession is not too risky. 
D)  policy mitigates the magnitude of economic fluctuations.

Question 3

Forward-looking parents can reverse the adverse effects of government debt by saving more and leaving a larger bequest to their children.

Accepted Answer

A) True 
 B)False

Question 4

Suppose aggregate demand fell. In order to stabilize the economy, the government might

Accepted Answer

A)  decrease the money supply. 
B)  decrease government expenditures. 
C)  decrease taxes. 
D)  do nothing.

Question 5

Which of the following would likely increase private saving?

Accepted Answer

A)  both expansion of means testing and a consumption tax 
B)  expansion of means testing, but not a consumption tax 
C)  a consumption tax, but not expansion of means testing 
D)  neither expansion of means testing nor a consumption tax

Question 6

Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing inflation from 3% to 1%?

Accepted Answer

A)  5% 
B)  10% 
C)  15% 
D)  20%

Question 7

Supporters of using government expenditures to respond to recession

Accepted Answer

A)  argue that monetary policy should be used first. To respond to a recession the Fed would increase the money supply. 
B)  argue that monetary policy should be used first. To respond to a recession the Fed would decrease the money supply. 
C)  argue that monetary policy should be used only after fiscal policy has been used. To respond to a recession the Fed would increase the money supply. 
D)  argue that monetary policy should be used only after fiscal policy has been used. To respond to a recession the Fed would decrease the money supply.

Question 8

The time inconsistency of monetary policy means that

Accepted Answer

A)  once people have formed expectations of low inflation based on a promise by the central bank, the central bank is tempted to raise inflation to lower unemployment. 
B)  at some times central banks think it is more important to keep unemployment low; at other times, they think it is more important to keep inflation low. 
C)  monetary policy is not consistent across time because it is influenced by politics. 
D)  monetary policy is not consistent across time because policymakers are incompetent.

Question 9

Proponents of tax-law changes to encourage saving would

Accepted Answer

A)  argue that corporate tax rates should be decreased. 
B)  increase the number of government benefits which are means-tested. 
C)  argue that state sales tax should be replaced with state income tax. 
D)  favor none of the above programs.

Question 10

Proponents and opponents of balanced-budget policies agree that the government debt cannot continue to increase forever.

Accepted Answer

A) True 
 B)False

Question 11

If the budget deficit were reduced

Accepted Answer

A)  interest rates and investment would increase. 
B)  interest rates would increase and investment would decrease. 
C)  interest rates and investment would decrease. 
D)  interest rates would decrease and investment would increase.

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

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 14

Means-tested government programs tend to reduce saving. What are means-tested programs and how do they reduce saving?

Accepted Answer

The answer of Means-tested government programs tend to reduce saving....

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

The time inconsistency of policy implies that

Accepted Answer

A)  what policymakers say they will do is generally what they will do, but people don't believe them because of current policy. 
B)  when people expect that inflation will be low, it is easier for the Fed to increase output by increasing the money supply. 
C)  people will believe Fed policy will be less inflationary than the Fed claims. 
D)  what policymakers say they will do is usually not what they do, but people believe them anyway.

Question 17

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

Accepted Answer

A)  Influencing the political business cycle 
B)  Flexibility to deal with changing economic conditions 
C)  Limiting the opportunities for abuse of power by policymakers 
D)  Avoiding the time inconsistency of policy problem

Question 18

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?

Accepted Answer

The answer of Suppose the nation's price level rises as...

Question 19

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

Accepted Answer

A)  decrease the money supply, which shifts aggregate demand further right. 
B)  decrease the money supply, which shifts aggregate demand left. 
C)  increase the money supply, which shifts aggregate demand further right. 
D)  increase the money supply, which shifts aggregate demand left.

Question 20

Tax cuts affect only aggregate demand not aggregate supply.

Accepted Answer

A) True 
 B)False

Exam 23: Six Debates Over Macroeconomic Policy

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

A policymaker against stabilizing the economy would be likely to believe

Forward-looking parents can reverse the adverse effects of government debt by saving more and leaving a larger bequest to their children.

Suppose aggregate demand fell. In order to stabilize the economy, the government might

Which of the following would likely increase private saving?

Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing inflation from 3% to 1%?

Supporters of using government expenditures to respond to recession

The time inconsistency of monetary policy means that

Proponents of tax-law changes to encourage saving would

Proponents and opponents of balanced-budget policies agree that the government debt cannot continue to increase forever.

If the budget deficit were reduced

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

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

Means-tested government programs tend to reduce saving. What are means-tested programs and how do they reduce saving?

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

The time inconsistency of policy implies that

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

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

Tax cuts affect only aggregate demand not aggregate supply.