Question 1

Which of the following is a cost of inflation?

Accepted Answer

A)  shoeleather costs
B)  menu costs
C)  relative price variability
D)  All of the above are correct.E) None of the above
F) B) and C)

Question 2

The effects of a decline in the value of financial assets, such as stocks, on consumption and the economy might be offset by

Accepted Answer

A)  increasing government spending.
B)  decreasing the money supply.
C)  increasing taxes.
D)  undertaking no policy action.E) A) and D)
F) B) and C)

Question 3

The economy goes into recession. Which of the following lists contains things policymakers could do to try to end the recession?

Accepted Answer

A)  increase the money supply, increase taxes, increase government spending
B)  increase the money supply, increase taxes, decrease government spending
C)  increase the money supply, decrease taxes, increase government spending
D)  decrease the money supply, increase taxes, decrease government spendingE) A) and B)
F) A) and C) C

Question 4

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.E) B) and C)
F) A) and C)

Question 5

Suppose that changes in aggregate demand tended to be infrequent and that it takes a long time for the economy to return to long-run output. How would this affect the arguments of those who oppose using policy to stabilize output?

Accepted Answer

Those who oppose stabilization policy mo...

Question 6

A program to reduce inflation is likely to have lower costs if the sacrifice ratio is

Accepted Answer

A)  high and the reduction is unexpected.
B)  high and the reduction is expected.
C)  low and the reduction is unexpected.
D)  low and the reduction is expected.E) B) and C)
F) A) and C) D

Question 7

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 will move output back towards its long-run level.
B)  decrease the money supply, which will move output farther from its long-run level.
C)  increase the money supply, which will move output back towards its long-run level.
D)  increase the money supply, which will move output farther from its long-run level.E) A) and C)
F) A) and D)

Question 8

A reduction 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 reduction 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 reduction in the tax rate is smaller than the substitution effect.
C)  reduces the amount earned on savings. Saving will rise if the income effect of the reduction in the tax rate is larger than the substitution effect.
D)  reduces the amount earned on savings. Saving will rise if the income effect of the reduction in the tax rate is smaller than the substitution effect.E) B) and D)
F) B) and C)

Question 9

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 amount household and firms have borrowed minus the amount they have saved.E) C) and D)
F) All of the above

Question 10

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which of the following, at least in theory, could explain why some countries would continue to have high inflation?

Accepted Answer

A)  High inflation countries have relatively small sacrifice ratios and so see no need to reduce inflation.
B)  Inflation reduction works best when it is unexpected, and people in high inflation countries would quickly anticipate any change in monetary policy.
C)  In a country where inflation has been high for a long time, people are likely to have found ways to limit the costs.
D)  In a country where inflation has been high for a long time, there are no costs to the inflation.E) A) and C)
F) A) and B)

Question 11

An increase in the money supply

Accepted Answer

A)  reduces interest rates and shifts aggregate demand to the right.
B)  reduces interest rates and shifts aggregate supply to the right
C)  raises interest rates and shifts aggregate demand to the right.
D)  raises interest rates and shifts aggregate supply to the right.E) None of the above
F) B) and D)

Question 12

Tax laws do not give preferential treatment to some kinds of retirement saving.

Accepted Answer

A) True 
 B)False  False

Question 13

Describe three costs of inflation.

Accepted Answer

There are several costs of inflation. Sh...

Question 14

Which of the programs below would transfer wealth from the young to the old?

Accepted Answer

A)  Taxes are raised to provide better education.
B)  Taxes are raised to improve government infrastructure such as roads and bridges.
C)  Taxes are raised to provide more generous Social Security benefits.
D)  None of the above transfer wealth form the young to the old.E) All of the above
F) B) and D)

Question 15

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 $165 billion.
C)  About $267 billion.
D)  About $429 billion.E) B) and C)
F) All of the above

Question 16

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

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 and President Barack ObamaE) A) and B)
F) A) and C)

Question 17

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 and President Barack ObamaE) C) and D)
F) None of the above

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Economists agree that if a monetary policy rule is to be used, the best one makes the growth rate of the money supply constant.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is correct?

Accepted Answer

A)  Deficits always require people to consume at the expense of their children.
B)  If the government uses funds to pay for investment programs, on net the debt need not burden future generations.
C)  If the government is in debt it must be running a deficit currently.
D)  The current government debt is a large share of lifetime income.E) B) and D)
F) B) and C)

Exam 23: Six Debates Over Macroeconomic Policy

Which of the following is a cost of inflation?

Correct AnswerverifiedShow Answer

The effects of a decline in the value of financial assets, such as stocks, on consumption and the economy might be offset by

Correct AnswerverifiedShow Answer

The economy goes into recession. Which of the following lists contains things policymakers could do to try to end the recession?

Correct AnswerverifiedC

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

Correct AnswerverifiedShow Answer

Suppose that changes in aggregate demand tended to be infrequent and that it takes a long time for the economy to return to long-run output. How would this affect the arguments of those who oppose using policy to stabilize output?

Correct AnswerverifiedThose who oppose stabilization policy mo...View AnswerShow Answer

A program to reduce inflation is likely to have lower costs if the sacrifice ratio is

Correct AnswerverifiedD

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

Correct AnswerverifiedShow Answer

A reduction in the tax rate on interest income

Correct AnswerverifiedShow Answer

The national debt

Correct AnswerverifiedShow Answer

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which of the following, at least in theory, could explain why some countries would continue to have high inflation?

Correct AnswerverifiedShow Answer

An increase in the money supply

Correct AnswerverifiedShow Answer

Tax laws do not give preferential treatment to some kinds of retirement saving.

Correct AnswerverifiedFalse

Describe three costs of inflation.

Correct AnswerverifiedThere are several costs of inflation. Sh...View AnswerShow Answer

Which of the programs below would transfer wealth from the young to the old?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Economists agree that if a monetary policy rule is to be used, the best one makes the growth rate of the money supply constant.

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

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C

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Those who oppose stabilization policy mo...
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D

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False

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There are several costs of inflation. Sh...
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