Question 1

The time inconsistency of policy implies that

Accepted Answer

A)  what policymakers say they will do is generally what they will do, but people don't believe them because of current policy.
B)  when people expect that inflation will be low, it is easier for the Fed to increase output by increasing the money supply.
C)  people will believe Fed policy will be less inflationary than the Fed claims.
D)  what policymakers say they will do is usually not what they do, but people believe them anyway.E) C) and D)
F) All of the above

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Advocates of cutting taxes rather than increasing government expenditures in response to a recession argue that the increase in spending by consumers and business may be more effective than that of the government. Explain this argument.

Accepted Answer

Households will spend disposable income ...

Question 4

Which of the following is not a typical justification for running a budget deficit?

Accepted Answer

A)  financing a war
B)  dealing with a recession
C)  fighting inflation
D)  dealing with unemploymentE) A) and D)
F) B) and C)

Question 5

Explain the main arguments in favor of economic stabilization.

Accepted Answer

Fluctuations in the economy-recessions a...

Question 6

Carefully explain how monetary policy can be used to counter a recession. Explain what the central bank does as well as how its actions affect the economy. Under what circumstances is fiscal policy especially useful?

Accepted Answer

To counter a recession, a central bank r...

Question 7

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) C) and D)
F) B) and C)

Question 8

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 D)
F) All of the above

Question 9

In the early 1980's the Fed tightened monetary policy. Over the next few years

Accepted Answer

A)  inflation remained high and unemployment rose.
B)  inflation fell but unemployment rose temporarily.
C)  inflation and unemployment fell.
D)  inflation and unemployment rose.E) C) and D)
F) A) and B)

Question 10

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

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 D)
F) C) and D)

Question 11

Explain how tax provisions to encourage private saving may reduce national saving.

Accepted Answer

Without careful planning it is possible ...

Question 12

Explain how tax cuts can increase aggregate supply.

Accepted Answer

When the government reduces marginal tax...

Question 13

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

Question 14

Suppose tax laws were reformed to encourage saving by increasing the rate of return on savings. Which of the following would be true?

Accepted Answer

A)  Both the income effect and the substitution effect would tend to increase the amount of money a household saved.
B)  The income effect would tend to increase household savings while the substitution effect would tend to decrease household savings.
C)  The income effect would tend to decrease household savings while the substitution effect would tend to increase household savings.
D)  Both the income effect and the substitution effect would tend to decrease the amount of money a household saved.E) B) and C)
F) None of the above

Question 15

A program to reduce inflation is likely to have higher 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) A) and B)
F) All of the above

Question 16

Which of the following is true concerning IRA's, 401(k)  and 403(b)  plans?

Accepted Answer

A)  There are no limits on the amount of funds people can hold in them.
B)  Some people are not eligible to hold them.
C)  There are never penalties for withdrawals.
D)  All of the above are correct.E) A) and C)
F) A) and B)

Question 17

If inflation were high in some country and lawmakers in that country passed a law requiring the central bank to maintain a low level of inflation, it is likely that

Accepted Answer

A)  the short-run Phillips curve would shift right and the cost of disinflation would rise.
B)  the short-run Phillips curve would shift right and the cost of disinflation would fall.
C)  the short-run Phillips curve would shift left and the cost of disinflation would rise.
D)  the short-run Phillips curve would shift left and the cost of disinflation would fall.E) A) and B)
F) None of the above

Question 18

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

Question 19

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 D)
F) All of the above

Question 20

If financial turmoil overseas reduces U.S. net exports, then those in favor of "lean against the wind policies" would advocate

Accepted Answer

A)  decreasing the money supply and cutting taxes.
B)  decreasing the money supply and raising taxes.
C)  increasing the money supply and cutting taxes.
D)  increasing the money supply and raising taxes.E) A) and D)
F) C) and D)

Exam 36: Six Debates Over Macroeconomic Policy

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

Opponents of using policy to stabilize the economy generally believe that

Correct AnswerverifiedShow Answer

Explain the main arguments in favor of economic stabilization.

Correct AnswerverifiedFluctuations in the economy-recessions a...View AnswerShow Answer

Carefully explain how monetary policy can be used to counter a recession. Explain what the central bank does as well as how its actions affect the economy. Under what circumstances is fiscal policy especially useful?

Correct AnswerverifiedTo counter a recession, a central bank r...View AnswerShow Answer

In the early 1980's the Fed tightened monetary policy. Over the next few years

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose tax laws were reformed to encourage saving by increasing the rate of return on savings. Which of the following would be true?

Correct AnswerverifiedShow Answer

Which of the following is not a typical justification for running a budget deficit?

Correct AnswerverifiedShow Answer

If inflation were high in some country and lawmakers in that country passed a law requiring the central bank to maintain a low level of inflation, it is likely that

Correct AnswerverifiedShow Answer

If financial turmoil overseas reduces U.S. net exports, then those in favor of "lean against the wind policies" would advocate

Correct AnswerverifiedShow Answer

The time inconsistency of policy implies that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Explain how tax cuts can increase aggregate supply.

Correct AnswerverifiedWhen the government reduces marginal tax...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Explain how tax provisions to encourage private saving may reduce national saving.

Correct AnswerverifiedWithout careful planning it is possible ...View AnswerShow Answer

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

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

Advocates of cutting taxes rather than increasing government expenditures in response to a recession argue that the increase in spending by consumers and business may be more effective than that of the government. Explain this argument.

Correct AnswerverifiedHouseholds will spend disposable income ...View AnswerShow Answer

Which of the following is true concerning IRA's, 401(k) and 403(b) plans?

Correct AnswerverifiedShow Answer

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Fluctuations in the economy-recessions a...
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To counter a recession, a central bank r...
View Answer

Correct Answer
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Correct Answer
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When the government reduces marginal tax...
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Without careful planning it is possible ...
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Households will spend disposable income ...
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Correct Answer
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