Question 1

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 2.5 percent per year. Then the government can have a deficit of about

Accepted Answer

A)   5 percent of GDP without raising the debt-to-income ratio.
B)   4.5 percent of GDP without raising the debt-to-income ratio.
C)   1.25 percent of GDP without raising the debt-to-income ratio.
D)   .5 percent of GDP without raising the debt-to-income ratio.E) B) and D)
F) C) and D)

Question 2

Which of the following are both correct?

Accepted Answer

A)   Data show no correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the income effect.
B)   Data show no correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the substitution effect.
C)   Data show a positive correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the income effect.
D)   Data show a positive correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the substitution effect.E) C) and D)
F) A) and B)

Question 3

Suppose a tax cut affects aggregate demand and aggregate supply. Which of the shifts raise the price level?

Accepted Answer

A)   both the shift of aggregate demand and the shift of aggregate supply
B)   the shift of aggregate demand, but not the shift of aggregate supply
C)   the shift of aggregate supply, but not the shift of aggregate demand
D)   neither the shift of aggregate demand nor the shift of aggregate supplyE) A) and C)
F) A) and D)

Question 4

Higher inflation results in

Accepted Answer

A)   more frequent price changes and increased variability of relative prices.
B)   more frequent price changes and decreased variability of relative prices.
C)   less frequent price changes and increased variability of relative prices.
D)   less frequent price changes and decreased variability of relative prices.E) A) and B)
F) B) and C)

Question 5

Explain why fiscal policy actions typically work with a lag.

Accepted Answer

Fiscal policy works with a lag primarily...

Question 6

A reduction in the marginal tax-rate includes a substitution effect that tends to increase saving.

Accepted Answer

A) True 
 B)False

Question 7

Proponents of zero-inflation policies acknowledge that the public is unconcerned about the inflation rate.

Accepted Answer

A) True 
 B)False

Question 8

A higher return on saving the amount a household needs to save to achieve any target level of future consumption. This effect on saving is called the effect. If the income effect is large enough, then a reduction in taxes on saving might tax revenues.

Accepted Answer

reduces, i...

Question 9

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)   increase the money supply so interest rates rise.
B)   increase the money supply so interest rates fall.
C)   decrease the money supply so interest rates rise.
D)   decrease the moneys supply so interest rates fallE) A) and D)
F) B) and C)

Question 10

A higher rate of return on saving has

Accepted Answer

A)   an income effect that discourages saving and a substitution effect that encourages saving.
B)   an income effect that encourages saving and a substitution effect that discourages saving.
C)   income and substitution effects that both decrease saving.
D)   income and substitution effects that both increase saving.E) None of the above
F) C) and D)

Question 11

Means-tested government benefits base benefits on

Accepted Answer

A)   a household's wealth and are an incentive to save.
B)   a household's wealth and are a disincentive to save.
C)   the current interest rate and are an incentive to save.
D)   the current interest rate and are a disincentive to save.E) A) and B)
F) A) and C)

Question 12

Which of the following is true of stimulus policy enacted in 2009?

Accepted Answer

A)   We can be sure that it reduced the severity of the recession because the recession was less severe than the Great Depression.
B)   We can be sure that it reduced the severity of the recession even though the recession was more severe than the Great Depression.
C)   We can not be sure that it reduced the severity of the recession, but the recession was less severe than the Great Depression.
D)   We can not be sure that it reduced the severity of the recession because the recession was more severe than the Great Depression.E) A) and B)
F) All of the above

Question 13

As compared to government spending, a tax cut is likely to affect aggregate demand

Accepted Answer

A)   more quickly but is more likely to be spent on projects with little benefit.
B)   more quickly and is less likely to be spent on projects with little benefit.
C)   less quickly but is less likely to be spent on projects with little benefit.
D)   less quickly and is more likely to be spent on projects with little benefit.E) All of the above
F) A) and D)

Question 14

If real output grows at 3 percent per year and the inflation rate is 3 percent per year then government debt can grow by 6 percent per year and not increase the ratio of debt to income.

Accepted Answer

A) True 
 B)False

Question 15

A policymaker in favor of stabilizing the economy would be likely to believe

Accepted Answer

A)   recessions are a waste of resources.
B)   economies must suffer through the booms and busts of the business cycle.
C)   the long policy lags make implementing policy changes in response to recession too risky.
D)   policy increases the magnitude of economic fluctuations.E) A) and B)
F) A) and C)

Question 16

Those who believe the central bank should aim for zero inflation argue that reducing inflation is a policy with temporary costs and permanent benefits. What are the primary costs and benefits they are referring to?

Accepted Answer

Reducing inflation is likely to result i...

Question 17

If the unemployment rate rises, which policies would both be appropriate to reduce it?

Accepted Answer

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

Question 18

The Federal Open Market Committee

Accepted Answer

A)   operates with almost complete discretion over monetary policy.
B)   is required to increase the money supply by a given growth rate each year.
C)   is required to keep short-term interest rates within a range set by Congress.
D)   is required by its charter to change the money supply using a complex formula that concerns the tradeoff between inflation and unemployment.E) B) and D)
F) A) and B)

Question 19

Which of the following is not an argument in favor of requiring the government to balance its budget?

Accepted Answer

A)   Government debt imposes higher taxes or more borrowing on future generations.
B)   A balanced budget will smooth the business cycle.
C)   Deficits lower national saving.
D)   Recent history shows that Congress will run deficits even when deficits are not justified by war or recession.E) A) and B)
F) A) and D)

Question 20

Means-tested programs tend to favor

Accepted Answer

A)   those with high income as would a consumption tax.
B)   those with high income while a consumption tax would favor those with low income.
C)   those with low income as would a consumption tax.
D)   those with low income while a consumption tax would favor those with high income.E) A) and B)
F) All of the above

Exam 18: Six Debates Over Macroeconomic Policy

Means-tested government benefits base benefits on

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Means-tested programs tend to favor

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Suppose a tax cut affects aggregate demand and aggregate supply. Which of the shifts raise the price level?

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Higher inflation results in

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A higher return on saving the amount a household needs to save to achieve any target level of future consumption. This effect on saving is called the effect. If the income effect is large enough, then a reduction in taxes on saving might tax revenues.

Correct Answerverifiedreduces, i...View AnswerShow 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 demand shifts right, the central bank must

Correct AnswerverifiedShow Answer

As compared to government spending, a tax cut is likely to affect aggregate demand

Correct AnswerverifiedShow Answer

A reduction in the marginal tax-rate includes a substitution effect that tends to increase saving.

Correct AnswerverifiedShow Answer

A policymaker in favor of stabilizing the economy would be likely to believe

Correct AnswerverifiedShow Answer

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 2.5 percent per year. Then the government can have a deficit of about

Correct AnswerverifiedShow Answer

Proponents of zero-inflation policies acknowledge that the public is unconcerned about the inflation rate.

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Explain why fiscal policy actions typically work with a lag.

Correct AnswerverifiedFiscal policy works with a lag primarily...View AnswerShow Answer

The Federal Open Market Committee

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Which of the following is not an argument in favor of requiring the government to balance its budget?

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Which of the following are both correct?

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Those who believe the central bank should aim for zero inflation argue that reducing inflation is a policy with temporary costs and permanent benefits. What are the primary costs and benefits they are referring to?

Correct AnswerverifiedReducing inflation is likely to result i...View AnswerShow Answer

A higher rate of return on saving has

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If real output grows at 3 percent per year and the inflation rate is 3 percent per year then government debt can grow by 6 percent per year and not increase the ratio of debt to income.

Correct AnswerverifiedShow Answer

If the unemployment rate rises, which policies would both be appropriate to reduce it?

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Which of the following is true of stimulus policy enacted in 2009?

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reduces, i...
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Fiscal policy works with a lag primarily...
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Reducing inflation is likely to result i...
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