Question 1

If tax rates are raised to avoid a deficit during a recession, then

Accepted Answer

A)   real GDP and deadweight loss from taxes will rise.
B)   real GDP will rise and deadweight loss from taxes will fall.
C)   real GDP will fall and deadweight loss from taxes will rise.
D)   real GDP and deadweight loss from taxes will fall.E) None of the above
F) A) and B)

Question 2

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 3

In general, the longest lag for

Accepted Answer

A)   both fiscal and monetary policy is the time it takes to change policy.
B)   both fiscal and monetary policy is the time it takes for policy to affect aggregate demand.
C)   monetary policy is the time it takes to change policy, while for fiscal policy the longest lag is the time it takes for policy to affect aggregate demand.
D)   fiscal policy is the time it takes to change policy, while for monetary policy the longest lag is the time it takes for policy to affect aggregate demand.E) A) and C)
F) C) and D)

Question 4

As compared to spending generated by a tax cut, an increase in government expenditures is likely to affect aggregate demand

Accepted Answer

A)   more quickly and more likely to be spent on projects with little benefit.
B)   more quickly but less likely to be spent on projects with little benefit.
C)   less quickly but more likely to be spent on projects with little benefit.
D)   less quickly and more likely to be spent on projects with little benefit.E) B) and C)
F) None of the above

Question 5

Means-tested government programs tend to reduce saving. What are means-tested programs and how do they reduce saving?

Accepted Answer

Means-tested benefits give assistance, o...

Question 6

Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could

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 sales also move the price level closer to its original level.
D)   sell bonds. However these sales move the price level farther from its original level.E) A) and C)
F) A) and D)

Question 7

Explain how a higher rate of return on saving could, at least in theory, lead to lower saving.

Accepted Answer

A higher rate of return on saving means ...

Question 8

If aggregate demand shifts because of a wave of optimism about stock prices, those who favor a policy that "leans against the wind" would advocate the

Accepted Answer

A)   Federal Reserve increase the money supply or the government increase taxes.
B)   Federal Reserve increase the money supply or the government decrease taxes.
C)   Federal Reserve decrease the money supply or the government increase taxes.
D)   Federal Reserve decrease the money supply or the government decrease taxes.E) A) and B)
F) None of the above

Question 9

If the Fed followed a rule for monetary policy, the time inconsistency problem would be eliminated.

Accepted Answer

A) True 
 B)False

Question 10

Studies have shown significant spending changes arise from interest rate changes after

Accepted Answer

A)   a few days.
B)   a few weeks.
C)   a few months.
D)   a few years.E) All of the above
F) A) and B)

Question 11

Is it possible that deficits do not burden future generations?

Accepted Answer

Some programs, such as Social Security, ...

Question 12

The time inconsistency of monetary policy means that

Accepted Answer

A)   once people have formed expectations of low inflation based on a promise by the central bank, the central bank is tempted to raise inflation to lower unemployment.
B)   at some times central banks think it is more important to keep unemployment low; at other times, they think it is more important to keep inflation low.
C)   monetary policy is not consistent across time because it is influenced by politics.
D)   monetary policy is not consistent across time because policymakers are incompetent.E) A) and D)
F) All of the above

Question 13

Over time continued budget deficits lead to

Accepted Answer

A)   a higher capital stock and higher real wages.
B)   a higher capital stock and lower real wages.
C)   a lower capital stock and higher real wages.
D)   a lower capital stock and lower real wages.E) A) and B)
F) A) and C)

Question 14

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 exacerbates the magnitude of economic fluctuations.E) None of the above
F) All of the above

Question 15

Some studies have found that saving is not very sensitive to the rate of return on saving.

Accepted Answer

A) True 
 B)False

Question 16

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

Question 17

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

Question 18

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 D)
F) B) and C)

Question 19

What's the basis for arguing that deficits are likely to lead to lower living standards in the future?

Accepted Answer

A government deficit means that the gove...

Question 20

Explain how it is possible for the government debt to grow forever.

Accepted Answer

The debt can grow because the economy gr...

Exam 18: Six Debates Over Macroeconomic Policy

Studies have shown significant spending changes arise from interest rate changes after

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

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As compared to spending generated by a tax cut, an increase in government expenditures is likely to affect aggregate demand

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

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The time inconsistency of monetary policy means that

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If the Fed followed a rule for monetary policy, the time inconsistency problem would be eliminated.

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Over time continued budget deficits lead to

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Opponents of using policy to stabilize the economy generally believe that

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What's the basis for arguing that deficits are likely to lead to lower living standards in the future?

Correct AnswerverifiedA government deficit means that the gove...View AnswerShow Answer

Means-tested government programs tend to reduce saving. What are means-tested programs and how do they reduce saving?

Correct AnswerverifiedMeans-tested benefits give assistance, o...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

If aggregate demand shifts because of a wave of optimism about stock prices, those who favor a policy that "leans against the wind" would advocate the

Correct AnswerverifiedShow Answer

Some studies have found that saving is not very sensitive to the rate of return on saving.

Correct AnswerverifiedShow Answer

Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could

Correct AnswerverifiedShow Answer

In general, the longest lag for

Correct AnswerverifiedShow Answer

Explain how a higher rate of return on saving could, at least in theory, lead to lower saving.

Correct AnswerverifiedA higher rate of return on saving means ...View AnswerShow Answer

If tax rates are raised to avoid a deficit during a recession, then

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Explain how it is possible for the government debt to grow forever.

Correct AnswerverifiedThe debt can grow because the economy gr...View AnswerShow Answer

Is it possible that deficits do not burden future generations?

Correct AnswerverifiedSome programs, such as Social Security, ...View AnswerShow Answer

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A government deficit means that the gove...
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Means-tested benefits give assistance, o...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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A higher rate of return on saving means ...
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The debt can grow because the economy gr...
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Correct Answer
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Some programs, such as Social Security, ...
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