Question 1

Explain the time inconsistency of monetary policy.

Accepted Answer

Time inconsistency refers to the idea th...

Question 2

In which of the following situations is a program to reduce inflation likely to have the highest costs?

Accepted Answer

A)  if the sacrifice ratio is high and the reduction is unexpected
B)  if the sacrifice ratio is high and the reduction is expected
C)  if the sacrifice ratio is low and the reduction is unexpected
D)  if the sacrifice ratio is low and the reduction is expectedE) All of the above
F) C) and D)

Question 3

Suppose a country has had a high and relatively stable inflation rate for a long time.How might this affect the costs and benefits of inflation reduction?

Accepted Answer

If inflation is usually about what peopl...

Question 4

A recession has no benefit to society: it represents a sheer waste of resources.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is consistent with the political business cycle theory?

Accepted Answer

A)  The economy expands after the elections.
B)  The economy contracts after the elections.
C)  The economy expands before the elections.
D)  The economy contracts before the elections.E) None of the above
F) A) and C)

Question 6

In which of the following situations does inflation reduction have the lowest cost?

Accepted Answer

A)  when the efforts are credible, so that the sacrifice ratio is low
B)  when the efforts are credible, so that the sacrifice ratio is high
C)  when the efforts are unexpected, so that the sacrifice ratio is high
D)  when the efforts are unexpected, so that the sacrifice ratio is lowE) B) and C)
F) A) and C)

Question 7

What does the time inconsistency of monetary policy mean?

Accepted Answer

A)  It means that 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)  It means that 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)  It means that monetary policy is not consistent across time because it is influenced by politics.
D)  It means that monetary policy cannot be consistent across time because the rate of inflation is fluctuating.E) A) and B)
F) None of the above

Question 8

Why should the central bank aim for zero inflation?

Accepted Answer

A)  because reducing inflation imposes temporary costs but provides permanent benefits
B)  because reducing inflation from 2 percent to 0 percent is virtually costless
C)  because the government has indexed tax brackets to prevent the adverse effects of inflation
D)  because the costs of inflation are very highE) B) and D)
F) A) and B) A

Question 9

Proponents of zero inflation argue that reducing inflation implies which of the following?

Accepted Answer

A)  that reducing inflation eventually reduces inflation expectations
B)  that reducing inflation eventually raises real interest rates
C)  that reducing inflation permanently decreases output
D)  that reducing inflation permanently raises unemploymentE) None of the above
F) A) and B) A

Question 10

Why should the government balance its budget?

Accepted Answer

A)  because government debt imposes higher taxes or more borrowing on current generations
B)  because a balanced budget will smooth the business cycle
C)  because deficits increase national saving
D)  because recent history shows that the government will not run deficits unless they are justified by war or recessionE) A) and D)
F) All of the above

Question 11

Some studies have found that saving is not very sensitive to the rate of return on saving.

Accepted Answer

A) True 
 B)False

Question 12

In essence,a consumption tax puts all saving into tax-advantaged savings accounts.

Accepted Answer

A) True 
 B)False

Question 13

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Accepted Answer

A) True 
 B)False

Question 14

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt,real GDP,and the price level.Why would one say that inflation is similar to a tax when the government runs a positive public debt?

Accepted Answer

The higher the inflation rate,the lower ...

Question 15

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.If the interest rate is 10 percent and there is a tax of 40 percent on interest income,how much will her savings be worth at the age of 70?

Accepted Answer

With a tax rate of 40 percent,...

Question 16

The following excerpt from a Wall Street Journal article,"Japan's Revival Bid Has Global Consequences" (http://goo.gl/umZMId):
"Mr.Abe's government has fired the first of the "three arrows" of Abenomics: It installed a new central-bank governor who has flooded the economy with money.The second arrow,fiscal policy,has only been half-fired.It has embarked on a fiscal stimulus,but hasn't yet announced a medium-term plan to raise taxes and cut spending."
Discuss the possible effects of Prime Minister Shinzo Abe's macroeconomic policy approach given that Japan's government debt is excessive.

Accepted Answer

Mr.Abe's macroeconomic policies are esse...

Question 17

Identify three of the five costs of inflation.

Accepted Answer

There are several costs of inflation,including the following: shoeleather costs,because people spend resources to economize on their holdings of money;menu costs created by having to change prices;increased relative price variability,which distorts signals provided by relative price changes;distortions in the tax laws that discourage saving;arbitrary redistribution of wealth from unexpected inflation;and the general inconvenience created by the lack of a fixed unit of account.

Question 18

A reduction in the tax rate on income from saving would do which of the following?

Accepted Answer

A)  It would most directly benefit the poor in the short run.
B)  It would increase real wages over time.
C)  It would decrease the capital stock over time.
D)  It would decrease productivity over time.E) B) and D)
F) C) and D)

Question 19

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.The interest rate is 10 percent.To stimulate savings in retirement plans,suppose the interest income is not taxed until it is realized (the money is effectively withdrawn from the account.)To simplify,suppose that,when she is 70,our worker withdraws the entire amount in her account.How much will she receive if the tax on interest is 40 percent?

Accepted Answer

If interest is not taxed until realized,...

Question 20

Which of the following is one reason for the existence of policy lags?

Accepted Answer

A)  Government experts are slow in figuring out what is going on.
B)  Households and firms plan their spending in advance and therefore are slow in responding to changes in interest rates.
C)  It is impossible to build an accurate model of the economy.
D)  It is difficult for the Bank of Canada to change the bank rate.E) A) and B)
F) None of the above

Exam 17: Five Debates over Macroeconomic Policy

Explain the time inconsistency of monetary policy.

Correct Answer
verified
Time inconsistency refers to the idea th...
View Answer

In which of the following situations is a program to reduce inflation likely to have the highest costs?

Correct Answer
verified

Suppose a country has had a high and relatively stable inflation rate for a long time.How might this affect the costs and benefits of inflation reduction?

Correct Answer
verified
If inflation is usually about what peopl...
View Answer

A recession has no benefit to society: it represents a sheer waste of resources.

Correct Answer
verified

Which of the following statements is consistent with the political business cycle theory?

Correct Answer
verified

In which of the following situations does inflation reduction have the lowest cost?

Correct Answer
verified

What does the time inconsistency of monetary policy mean?

Correct Answer
verified

Why should the central bank aim for zero inflation?

Correct Answer
verified
A

Proponents of zero inflation argue that reducing inflation implies which of the following?

Correct Answer
verified
A

Why should the government balance its budget?

Correct Answer
verified

Some studies have found that saving is not very sensitive to the rate of return on saving.

Correct Answer
verified

In essence,a consumption tax puts all saving into tax-advantaged savings accounts.

Correct Answer
verified

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Correct Answer
verified

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt,real GDP,and the price level.Why would one say that inflation is similar to a tax when the government runs a positive public debt?

Correct Answer
verified
The higher the inflation rate,the lower ...
View Answer

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.If the interest rate is 10 percent and there is a tax of 40 percent on interest income,how much will her savings be worth at the age of 70?

Correct Answer
verified
With a tax rate of 40 percent,...
View Answer

Correct Answer
verified
Mr.Abe's macroeconomic policies are esse...
View Answer

Identify three of the five costs of inflation.

A reduction in the tax rate on income from saving would do which of the following?

Correct Answer
verified

Correct Answer
verified
If interest is not taxed until realized,...
View Answer

Which of the following is one reason for the existence of policy lags?

Correct Answer
verified

Exam 17: Five Debates over Macroeconomic Policy

Explain the time inconsistency of monetary policy.

Correct AnswerverifiedTime inconsistency refers to the idea th...View AnswerShow Answer

In which of the following situations is a program to reduce inflation likely to have the highest costs?

Correct AnswerverifiedShow Answer

Suppose a country has had a high and relatively stable inflation rate for a long time.How might this affect the costs and benefits of inflation reduction?

Correct AnswerverifiedIf inflation is usually about what peopl...View AnswerShow Answer

A recession has no benefit to society: it represents a sheer waste of resources.

Correct AnswerverifiedShow Answer

Which of the following statements is consistent with the political business cycle theory?

Correct AnswerverifiedShow Answer

In which of the following situations does inflation reduction have the lowest cost?

Correct AnswerverifiedShow Answer

What does the time inconsistency of monetary policy mean?

Correct AnswerverifiedShow Answer

Why should the central bank aim for zero inflation?

Correct AnswerverifiedA

Proponents of zero inflation argue that reducing inflation implies which of the following?

Correct AnswerverifiedA

Why should the government balance its budget?

Correct AnswerverifiedShow Answer

Some studies have found that saving is not very sensitive to the rate of return on saving.

Correct AnswerverifiedShow Answer

In essence,a consumption tax puts all saving into tax-advantaged savings accounts.

Correct AnswerverifiedShow Answer

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Correct AnswerverifiedShow Answer

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt,real GDP,and the price level.Why would one say that inflation is similar to a tax when the government runs a positive public debt?

Correct AnswerverifiedThe higher the inflation rate,the lower ...View AnswerShow Answer

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.If the interest rate is 10 percent and there is a tax of 40 percent on interest income,how much will her savings be worth at the age of 70?

Correct AnswerverifiedWith a tax rate of 40 percent,...View AnswerShow Answer

Correct AnswerverifiedMr.Abe's macroeconomic policies are esse...View AnswerShow Answer

Identify three of the five costs of inflation.

A reduction in the tax rate on income from saving would do which of the following?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedIf interest is not taxed until realized,...View AnswerShow Answer

Which of the following is one reason for the existence of policy lags?

Correct AnswerverifiedShow Answer

Correct Answer
verified
Time inconsistency refers to the idea th...
View Answer

Correct Answer
verified

Correct Answer
verified
If inflation is usually about what peopl...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A

Correct Answer
verified
A

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The higher the inflation rate,the lower ...
View Answer

Correct Answer
verified
With a tax rate of 40 percent,...
View Answer

Correct Answer
verified
Mr.Abe's macroeconomic policies are esse...
View Answer

Correct Answer
verified

Correct Answer
verified
If interest is not taxed until realized,...
View Answer

Correct Answer
verified