Question 1

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) None of the above
F) B) and C)

Question 2

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 D)
F) B) and C)

Question 3

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) All of the above
F) A) and B)

Question 4

Last year a country's real GDP grew by 4%, it's inflation rate was 2.5%, and it's government budget deficit was about $250 billion. It's debt to GDP ratio was unchanged. About what was it's debt at the start of last year?

Accepted Answer

A)   16.7 trillion
B)   10.0 trillion
C)   6.25 trillion
D)   3.85 trillionE) All of the above
F) None of the above

Question 5

Opponents of using policy to stabilize the economy generally believe that

Accepted Answer

A)   neither fiscal nor monetary policy have much impact on aggregate demand.
B)   attempts to stabilize the economy decrease the magnitude of economic fluctuations.
C)   unemployment and inflation are not cause for much concern.
D)   economic conditions can easily change between the start of policy action and when it takes effect.E) A) and B)
F) A) and C)

Question 6

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 C)
F) None of the above

Question 7

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) B) and C)
F) A) and B)

Question 8

If a central bank were required to target inflation at zero, then when there was an unanticipated decrease in aggregate demand the central bank

Accepted Answer

A)   would have to increase the money supply. This would move unemployment closer to the natural rate.
B)   would have to increase the money supply. This would move unemployment further from the natural rate.
C)   would have to decrease the money supply. This would move unemployment closer to the natural rate.
D)   would have to decrease the money supply. This would move unemployment further from the natural rate.E) C) and D)
F) A) and B)

Question 9

When wages are set by contract, inflation

Accepted Answer

A)   reduces real wages; this likely makes labor markets more flexible.
B)   reduces real wages; this likely makes labor markets less flexible.
C)   raises real wages; this likely makes labor markets more flexible.
D)   raises real wages; this likely makes labor markets less flexible.E) A) and B)
F) C) and D)

Question 10

Which of the following is not a cost of inflation identified by economists?

Accepted Answer

A)   menu costs associated with more frequent adjustment of prices
B)   confusion and inconvenience resulting from a changing value of the unit of account
C)   reduced price flexibility
D)   arbitrary redistributions of wealth associated with dollar-denominated debtsE) B) and D)
F) None of the above

Question 11

When the government has a deficit, a burden is necessarily imposed on future generations of taxpayers.

Accepted Answer

A) True 
 B)False

Question 12

Why do many economists advocate a consumption tax rather than an income tax?

Accepted Answer

The current income tax means that income...

Question 13

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

Accepted Answer

A)   buy bonds. These purchases also move the price level closer to its original level.
B)   buy bonds. However these purchases move the price level farther from its original level.
C)   sell bonds. These purchases also move the price level closer to its original level.
D)   sell bonds. However these purchase move the price level farther from its original level.E) C) and D)
F) A) and B)

Question 14

If businesses become more pessimistic about the future, what fiscal policies could the government take to stabilize the economy?

Accepted Answer

Increase g...

Question 15

If there is an increase in the money supply, in the short run

Accepted Answer

A)   the interest rises. It takes several weeks for spending to fully respond to this change.
B)   the interest rises. It takes several months for spending to fully respond to this change.
C)   the interest falls. It takes several weeks for spending to fully respond to this change.
D)   the interest falls. It takes several months for spending to fully respond to this change.E) B) and C)
F) A) and C)

Question 16

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Accepted Answer

A) True 
 B)False

Question 17

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

Accepted Answer

Tax policies designed to encourage savin...

Question 18

According to the political business cycle, after an election, unless the central bank acts inflation is likely to

Accepted Answer

A)   have risen. To counter this the central bank would raise interest rates.
B)   have risen. To counter this the central bank would lower interest rates.
C)   have fallen. To counter this the central bank would raise interest rates.
D)   have fallen. To counter this the central bank would lower interest rates.E) B) and D)
F) B) and C)

Question 19

What component of GDP is particularly volatile over the business cycle and can be targeted by tax cuts?

Accepted Answer

Investment...

Question 20

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) B) and C)
F) All of the above

Exam 23: Six Debates Over Macroeconomic Policy

If there is an increase in the money supply, in the short run

Correct AnswerverifiedShow Answer

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

Correct AnswerverifiedTax policies designed to encourage savin...View AnswerShow 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

According to the political business cycle, after an election, unless the central bank acts inflation is likely to

Correct AnswerverifiedShow Answer

What component of GDP is particularly volatile over the business cycle and can be targeted by tax cuts?

Correct AnswerverifiedInvestment...View AnswerShow Answer

Which of the following is not a cost of inflation identified by economists?

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It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Correct AnswerverifiedShow Answer

When the government has a deficit, a burden is necessarily imposed on future generations of taxpayers.

Correct AnswerverifiedShow Answer

Opponents of using policy to stabilize the economy generally believe that

Correct AnswerverifiedShow Answer

If businesses become more pessimistic about the future, what fiscal policies could the government take to stabilize the economy?

Correct AnswerverifiedIncrease g...View AnswerShow Answer

When wages are set by contract, inflation

Correct AnswerverifiedShow Answer

If a central bank were required to target inflation at zero, then when there was an unanticipated decrease in aggregate demand the central bank

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Proponents of zero inflation argue that reducing inflation has

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The national debt

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Why do many economists advocate a consumption tax rather than an income tax?

Correct AnswerverifiedThe current income tax means that income...View AnswerShow Answer

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

Correct AnswerverifiedShow Answer

Last year a country's real GDP grew by 4%, it's inflation rate was 2.5%, and it's government budget deficit was about $250 billion. It's debt to GDP ratio was unchanged. About what was it's debt at the start of last year?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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Tax policies designed to encourage savin...
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Investment...
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Increase g...
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The current income tax means that income...
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