Question 1

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 2

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

Question 3

The Fed raised interest rates in 2004 and 2005. This implies, other things the same, that the Fed

Accepted Answer

A)   increased the money supply because it was concerned about unemployment.
B)   increased the money supply because it was concerned about inflation.
C)   decreased the money supply because it was concerned about unemployment.
D)   decreased the money supply because it was concerned about inflation.E) A) and B)
F) B) and C)

Question 4

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)   about a year and a half..E) A) and B)
F) B) and C)

Question 5

In the summer of 2008, consumers indicated that they were less optimistic about the future of the economy. Such a change in sentiment is likely to

Accepted Answer

A)   shift aggregate demand to the left.
B)   increase output.
C)   decrease unemployment.
D)   increase prices.E) A) and B)
F) B) and C)

Question 6

Proponents of requiring the government to balance its budget argue that debt burdens future generations. Explain one claim they make to support this argument.

Accepted Answer

High debt means that future taxpayers wi...

Question 7

If a reduction in taxes on savings reduced the amount of private saving, then the

Accepted Answer

A)   income effect equaled the substitution effect.
B)   income effect outweighed the substitution effect.
C)   the substitution effect outweighed the income effect.
D)   None of the above.E) B) and D)
F) None of the above

Question 8

Which of the following can tax cuts influence?

Accepted Answer

A)   Aggregate demand
B)   Aggregate supply
C)   Investment spending
D)   All of the aboveE) A) and C)
F) None of the above

Question 9

Why is it desirable, if possible, to use policy to offset the effects of a decrease in aggregate demand?

Accepted Answer

Because a decrease i...

Question 10

There are ways that policymakers could reduce the costs of inflation without reducing inflation.

Accepted Answer

A) True 
 B)False

Question 11

Last year a country's real GDP grew by 2%, it's inflation rate was 3%, and it's government budget deficit was about $200 billion. It's debt­to­GDP ratio was unchanged. About what was it's debt at the start of last year?

Accepted Answer

A)   10.0 trillion
B)   6.7 trillion
C)   4 trillion
D)   None of the above are correct.E) None of the above
F) A) and B)

Question 12

Policies that reduce the incentive for households to save include

Accepted Answer

A)   means-testing.
B)   College and university financial aid administration.
C)   inheritance taxes.
D)   All of the above.E) A) and D)
F) All of the above

Question 13

Changes in tax laws that reduce taxes more for those who save a lot will

Accepted Answer

A)   favor low-income households.
B)   favor people with high income.
C)   create a more egalitarian society.
D)   unambiguously increase national saving.E) None of the above
F) A) and B)

Question 14

Double taxation means that both

Accepted Answer

A)   the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in the United States.
B)   the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the U.S.
C)   wage income and employee benefits are taxed, which is not currently the case in the United States.
D)   wage income and employee benefits are taxed, which is currently the case in the United States.E) B) and D)
F) C) and D)

Question 15

If the public correctly perceives that the central bank will reduce inflation, then

Accepted Answer

A)   the short-run Phillips curve shifts right, and the sacrifice ratio will be higher.
B)   the short-run Phillips curve shifts right, and the sacrifice ratio will be lower.
C)   the short-run Phillips curve shifts left, and the sacrifice ratio will be higher.
D)   the short-run Phillips curve shifts left, and the sacrifice ratio will be lower.E) C) and D)
F) A) and B)

Question 16

Proponents and opponents of balanced-budget policies agree that the government debt cannot continue to increase forever.

Accepted Answer

A) True 
 B)False

Question 17

Real interest rates

Accepted Answer

A)   cannot be negative.
B)   can be negative only if inflation is negative.
C)   can be negative only if inflation is zero.
D)   can be negative only if inflation is greater than zero.E) C) and D)
F) B) and C)

Question 18

All of the following are arguments against stabilization policy except

Accepted Answer

A)   Economic forecasting is highly imprecise.
B)   Long lags may cause stabilization policies to in fact destabilize the economy.
C)   Monetary policy affects aggregate demand by changing interest rates.
D)   Fiscal policy must go through a long political process.E) A) and D)
F) A) and C)

Question 19

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) A) and B)

Question 20

Which of the following is correct?

Accepted Answer

A)   Well designed tax cuts can increase investment which fluctuates more than consumption over the business cycle.
B)   Well designed tax cuts can increase investment but it fluctuates less than consumption over the business cycle.
C)   Tax cuts have little effect on investment which fluctuate more than consumption over the business cycle.
D)   Tax cuts have little effect on investment but it fluctuates less than consumption over the business cycleE) None of the above
F) All of the above

Exam 18: Six Debates Over Macroeconomic Policy

If a reduction in taxes on savings reduced the amount of private saving, then the

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Which of the following can tax cuts influence?

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In the summer of 2008, consumers indicated that they were less optimistic about the future of the economy. Such a change in sentiment is likely to

Correct AnswerverifiedShow Answer

Proponents of requiring the government to balance its budget argue that debt burdens future generations. Explain one claim they make to support this argument.

Correct AnswerverifiedHigh debt means that future taxpayers wi...View AnswerShow Answer

Why is it desirable, if possible, to use policy to offset the effects of a decrease in aggregate demand?

Correct AnswerverifiedBecause a decrease i...View AnswerShow Answer

There are ways that policymakers could reduce the costs of inflation without reducing inflation.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Changes in tax laws that reduce taxes more for those who save a lot will

Correct AnswerverifiedShow Answer

Which of the following is correct?

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Double taxation means that both

Correct AnswerverifiedShow Answer

Last year a country's real GDP grew by 2%, it's inflation rate was 3%, and it's government budget deficit was about $200 billion. It's debt­to­GDP ratio was unchanged. About what was it's debt at the start of last year?

Correct AnswerverifiedShow Answer

Policies that reduce the incentive for households to save include

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Real interest rates

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All of the following are arguments against stabilization policy except

Correct AnswerverifiedShow Answer

The Fed raised interest rates in 2004 and 2005. This implies, other things the same, that the Fed

Correct AnswerverifiedShow Answer

If the public correctly perceives that the central bank will reduce inflation, then

Correct AnswerverifiedShow Answer

When wages are set by contract, inflation

Correct AnswerverifiedShow Answer

Proponents and opponents of balanced-budget policies agree that the government debt cannot continue to increase forever.

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

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High debt means that future taxpayers wi...
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Because a decrease i...
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Last year a country's real GDP grew by 2%, it's inflation rate was 3%, and it's government budget deficit was about $200 billion. It's debttoGDP ratio was unchanged. About what was it's debt at the start of last year?

Correct Answer
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Households will spend disposable income ...
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