Question 1

An opponent of monetary policy decisions by rule would point to which of the following as support of his case?

Accepted Answer

A)   time inconsistency of policy
B)   flexibility to confront unforseen circumstances
C)   political business cycle
D)   the ability to craft rules that account for all possible contingencies in advanceE) All of the above
F) A) and C)

Question 2

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

Question 3

Which of the following is an argument against trying to use policy to stabilize the economy?

Accepted Answer

A)   Recessions represent a waste of resources.
B)   Pessimism on the part of households and firms may become a self-fulfilling prophecy.
C)   "Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms.
D)   Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time.E) A) and D)
F) B) and C)

Question 4

People's skepticism about central bankers' announcements of their intentions stems from the fact that policymakers may act in a fashion that is time inconsistent.

Accepted Answer

A) True 
 B)False

Question 5

Which of the programs below would not transfer wealth between young and old generations?

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)   Taxes are raised to provide more generous Medicare benefits.E) A) and C)
F) B) and C)

Question 6

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004.One of their contributions was to argue that if a central bank could convince people to expect zero inflation,then the Fed would be tempted to raise output by increasing inflation.This possibility is known as

Accepted Answer

A)   inflation targeting.
B)   the monetary policy reaction lag.
C)   the time inconsistency of policy.
D)   the sacrifice ratio dilemma.E) B) and C)
F) A) and D)

Question 7

Proponents of zero inflation argue that reducing inflation has

Accepted Answer

A)   permanent costs and temporary benefits.
B)   temporary costs and permanent benefits.
C)   permanent costs and benefits.
D)   temporary costs and benefits.E) All of the above
F) B) and D)

Question 8

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

Accepted Answer

A) True 
 B)False

Question 9

According to the political business cycle theory,if the Fed wanted to see a President re-elected,prior to the election it might

Accepted Answer

A)   lower the discount rate and sell bonds.
B)   lower the discount rate and buy bonds.
C)   raise the discount rate and sell bonds.
D)   raise the discount rate and buy bonds.E) A) and B)
F) B) and D)

Question 10

Accumulated over a long span of time,the tax rate on interest income

Accepted Answer

A)   removes all benefits from saving.
B)   reduces the benefits from saving by a small amount.
C)   reduces the benefits from saving by a large amount.
D)   does nor reduce any of the benefits from saving.E) B) and C)
F) C) and D)

Question 11

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Accepted Answer

A)   Avoid unexpected changes in the inflation rate.
B)   Rewrite the tax laws so that nominal gains were taxed instead of real gains.
C)   Make policy that would discourage firms from issuing indexed bonds.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

The major driver of future federal spending is rising energy costs.

Accepted Answer

A) True 
 B)False

Question 14

IRA,401(k) ,403(b) ,and Keogh plans

Accepted Answer

A)   impose added taxes on those who save.
B)   place no limits on the amount people can deposit into these programs.
C)   impose penalties for withdrawals except under certain circumstances.
D)   None of the above is correct.E) A) and B)
F) A) and C)

Question 15

An added benefit of low levels of inflation is that it allows for the possibility of

Accepted Answer

A)   menu costs.
B)   aggregate supply shocks.
C)   negative real interest rates.
D)   recessions.E) None of the above
F) B) and D)

Question 16

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.E) All of the above
F) None of the above

Question 17

If a country had a rule that required the ratio of debt to GDP to be constant,it would necessarily have to run a surplus if

Accepted Answer

A)   real GDP rose and the inflation rate were positive.
B)   real GDP rose and the inflation rate were negative.
C)   real GDP fell and the inflation rate were positive.
D)   real GDP fell and the inflation rate were negative.E) All of the above
F) None of the above

Question 18

The principal reason that monetary policy has lags is that it takes a long time for

Accepted Answer

A)   changes in the interest rate to change aggregate demand.
B)   changes in the money supply to change interest rates.
C)   the Fed to make changes in policy.
D)   the federal government to change the tax code.E) A) and C)
F) B) and C)

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 supply shifts left,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 B)
F) A) and C)

Question 20

Stephen Cecchetti argues that the Fed should

Accepted Answer

A)   follow a precise mechanical rule.
B)   follow a rule that could vary some based on the economic forecasts of a forecasting model.
C)   be allowed discretion but announce a numerical target for inflation.
D)   have complete discretion without a rule and without needing to announce targets.E) A) and C)
F) None of the above

Exam 36: Five Debates Over Macroeconomic Policy

According to the political business cycle theory,if the Fed wanted to see a President re-elected,prior to the election it might

Correct AnswerverifiedShow Answer

If a country had a rule that required the ratio of debt to GDP to be constant,it would necessarily have to run a surplus if

Correct AnswerverifiedShow Answer

Which of the following is an argument against trying to use policy to stabilize the economy?

Correct AnswerverifiedShow Answer

The principal reason that monetary policy has lags is that it takes a long time for

Correct AnswerverifiedShow Answer

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 supply shifts left,the central bank must

Correct AnswerverifiedShow Answer

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

Correct AnswerverifiedShow Answer

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Correct AnswerverifiedShow Answer

An opponent of monetary policy decisions by rule would point to which of the following as support of his case?

Correct AnswerverifiedShow Answer

Proponents of zero inflation argue that reducing inflation has

Correct AnswerverifiedShow Answer

IRA,401(k) ,403(b) ,and Keogh plans

Correct AnswerverifiedShow Answer

Stephen Cecchetti argues that the Fed should

Correct AnswerverifiedShow Answer

The major driver of future federal spending is rising energy costs.

Correct AnswerverifiedShow Answer

Inflation

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

People's skepticism about central bankers' announcements of their intentions stems from the fact that policymakers may act in a fashion that is time inconsistent.

Correct AnswerverifiedShow Answer

Accumulated over a long span of time,the tax rate on interest income

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the programs below would not transfer wealth between young and old generations?

Correct AnswerverifiedShow Answer

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004.One of their contributions was to argue that if a central bank could convince people to expect zero inflation,then the Fed would be tempted to raise output by increasing inflation.This possibility is known as

Correct AnswerverifiedShow Answer

An added benefit of low levels of inflation is that it allows for the possibility of

Correct AnswerverifiedShow Answer

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