Question 1

"Leaning against the wind" is exemplified by a

Accepted Answer

A)  tax cut when there is a recession.
B)  decrease in the money supply when there is a recession.
C)  decrease in government expenditures when there is a recession.
D)  All of the above are correct.E) A) and B)
F) B) and D)

Question 2

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

Question 3

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 4

The five debates over macroeconomic policy exist mostly because

Accepted Answer

A)  economists disagree over basic issues such as the importance of saving for economic growth.
B)  there are tradeoffs and people disagree about the best way to deal with them.
C)  politicians offer misleading information.
D)  people fail to clearly see the benefits or the costs of most changes.E) B) and D)
F) A) and B)

Question 5

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

Accepted Answer

The current income tax means that income...

Question 6

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 harder for the Fed to increase output by increasing the money supply.
C)  people will believe Fed policy will be more inflationary than the Fed claims.
D)  None of the above is correct.E) B) and D)
F) C) and D)

Question 7

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

Question 8

Advocates of stabilization policy argue that when there is a recession,the government should increase the money supply and increase government expenditures.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

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) None of the above

Question 11

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) B) and C)

Question 12

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 can increase the magnitude of economic fluctuations.
C)  unemployment and inflation are not cause for much concern.
D)  All of the above are correct.E) B) and D)
F) All of the above

Question 13

Explain the main arguments in favor of economic stabilization.

Accepted Answer

Fluctuations in the economy-recessions a...

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Paul Volcker's inflation reduction efforts

Accepted Answer

A)  failed to reduce inflation.
B)  failed to reduce expected inflation.
C)  resulted in the highest unemployment rate since the Great Depression.
D)  All of the above are correct.E) B) and D)
F) B) and C)

Question 16

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

Question 17

A recession has no benefit to society-it represents a sheer waste of resources.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following lowers the rate of return on saving?

Accepted Answer

A)  means-tested programs and IRA's
B)  means-tested programs, but not IRA's
C)  IRA's but not means-tested programs
D)  neither means-tested program, or IRA'sE) A) and B)
F) A) and C)

Question 19

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 20

The average person's share of the U.S.government debt as a percentage of lifetime income is

Accepted Answer

A)  less than 2 percent.
B)  about 5 percent.
C)  about 10 percent.
D)  over 12 percent.E) A) and D)
F) None of the above

Exam 36: Five Debates Over Macroeconomic Policy

A recession has no benefit to society-it represents a sheer waste of resources.

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

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Advocates of stabilization policy argue that when there is a recession,the government should increase the money supply and increase government expenditures.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is a cost of inflation?

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Opponents of using policy to stabilize the economy generally believe that

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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 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

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Which of the following lowers the rate of return on saving?

Correct AnswerverifiedShow Answer

The five debates over macroeconomic policy exist mostly because

Correct AnswerverifiedShow Answer

"Leaning against the wind" is exemplified by a

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The average person's share of the U.S.government debt as a percentage of lifetime income is

Correct AnswerverifiedShow Answer

Stephen Cecchetti argues that the Fed should

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The time inconsistency of policy implies that

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

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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

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

Correct AnswerverifiedShow Answer

Paul Volcker's inflation reduction efforts

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

Explain the main arguments in favor of economic stabilization.

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

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The current income tax means that income...
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Fluctuations in the economy-recessions a...
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