Question 1

The Federal Reserve will tend to tighten monetary policy when

Accepted Answer

A)   interest rates are rising too rapidly.
B)   it thinks the unemployment rate is too high.
C)   the growth rate of real GDP is quite sluggish.
D)   it thinks inflation is too high today, or will become too high in the future.E) A) and D)
F) All of the above

Question 2

The cost of inflation reduction is less if people believe that the central bank will really reduce inflation.

Accepted Answer

A) True 
 B)False  True

Question 3

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

Question 4

Time inconsistency will cause the

Accepted Answer

A)   short-run Phillips curve to be higher than otherwise.
B)   short-run Phillips curve to be lower the otherwise.
C)   long-run Phillips curve to be farther to the right than otherwise.
D)   long-run Phillips curve to be farther left than otherwise.E) B) and D)
F) B) and C)

Question 5

At the end of 2012, the government had a debt of about $11.3 trillion. If during 2013 real GDP rose 2% and inflation was 2.2%, what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)   about $226.0 billion
B)   about $248.6 billion
C)   about $474.6 billion
D)   about $561.8 billionE) None of the above
F) A) and C)

Question 6

Are there any situations in which running a budget deficit is justified? Explain.

Accepted Answer

The two primary justifications for running a deficit are wars and recessions. When a military conflict raises government spending it is reasonable to finance the extra spending by borrowing. During a recession, raising taxes or cutting spending to avoid a deficit would reduce aggregate demand at a time when it needs to be stimulated.

Question 7

Double taxation means that both

Accepted Answer

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

Question 8

In theory the severity of recessions can be diminished with

Accepted Answer

A)   an increase in government spending, which the political process cannot delay.
B)   an increase in government spending, which the length of the political process can delay.
C)   a decrease in government expenditures, which the political process cannot delay.
D)   a decrease in government spending, which the length of the political process can delay.E) None of the above
F) A) and C)

Question 9

Demand for workers in some industry declines. These workers are reluctant to have a cut in their nominal wage. However,

Accepted Answer

A)   inflation will raise their real wage and so increase the number of available workers.
B)   inflation will raise their real wage and so decrease the number of available workers
C)   inflation will reduce their real wage and so increase the number of available workers.
D)   inflation will reduce their real wage and so decrease the number of available workers.E) A) and B)
F) B) and C)

Question 10

From fiscal year 2012 to fiscal year 2013 China's budget deficit rose 50%. Other things the same, we would expect this to have

Accepted Answer

A)   decreased interest rates and investment.
B)   decreased interest rates and increased investment.
C)   increased interest rates and investment.
D)   increased interest rates and decreased investment.E) A) and B)
F) All of the above

Question 11

Assuming that the substitution effect is large relative to the income effect, tax reform designed to increase saving

Accepted Answer

A)   increases the interest rate and decreases spending on capital goods.
B)   increases the interest rate and increases spending on capital goods.
C)   decreases the interest rate and increases spending on capital goods.
D)   decreases the interest rate and decreases spending on capital goods.E) B) and C)
F) B) and D)

Question 12

At the end of 2011 the U.S. government had a debt of about $10.12 trillion. During 2012 inflation was about 2.5% and real GDP grew about 1.6%. What is the largest deficit the government could have had in 2012 without raising the ratio of debt to GDP?

Accepted Answer

A)   about 414.9 billion
B)   about 404.8 billion
C)   about 253.0 billion
D)   about 161.9 billionE) B) and C)
F) C) and D)

Question 13

Which costs of inflation could the government take action to reduce without reducing inflation?

Accepted Answer

A)   shoeleather costs
B)   unintended changes in tax liabilities
C)   menu costs
D)   none of the above is correct.E) B) and C)
F) A) and C)

Question 14

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

Question 15

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) A) and D)

Question 16

Tax cuts proposed by the Kennedy and Reagan administrations were followed by robust economic growth.

Accepted Answer

A) True 
 B)False

Question 17

Inflation reduction has the lowest cost when the efforts are

Accepted Answer

A)   credible so that the sacrifice ratio is low.
B)   credible so that the sacrifice ratio is high.
C)   unexpected so that the sacrifice ratio is high.
D)   unexpected so that the sacrifice ratio is low.E) A) and B)
F) None of the above

Question 18

Policymakers following a "lean against the wind" policy would

Accepted Answer

A)   increase government expenditures when output is low and decrease them when output is high.
B)   increase government expenditures when output is low and do nothing when output is high.
C)   decrease government expenditures when output is low and increase them when output is high.
D)   decrease government expenditures when output is high and do nothing when output is low.E) A) and B)
F) B) and D)

Question 19

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

Question 20

A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is

Accepted Answer

A)   small and an increase in private saving tends to have a small impact on the capital stock.
B)   small and an increase in private saving tends to have a large impact on the capital stock.
C)   large and an increase in private saving tends to have a small impact on the capital stock.
D)   large and an increase in private saving tends to have a large impact on the capital stock.E) All of the above
F) A) and B)

Exam 23: Six Debates Over Macroeconomic Policy

The Federal Reserve will tend to tighten monetary policy when

Correct Answer
verified

The cost of inflation reduction is less if people believe that the central bank will really reduce inflation.

Correct Answer
verified
True

"Leaning against the wind" is exemplified by a

Correct Answer
verified

Time inconsistency will cause the

Correct Answer
verified

At the end of 2012, the government had a debt of about $11.3 trillion. If during 2013 real GDP rose 2% and inflation was 2.2%, what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct Answer
verified

Are there any situations in which running a budget deficit is justified? Explain.

Double taxation means that both

Correct Answer
verified

In theory the severity of recessions can be diminished with

Correct Answer
verified

Demand for workers in some industry declines. These workers are reluctant to have a cut in their nominal wage. However,

Correct Answer
verified

From fiscal year 2012 to fiscal year 2013 China's budget deficit rose 50%. Other things the same, we would expect this to have

Correct Answer
verified

Assuming that the substitution effect is large relative to the income effect, tax reform designed to increase saving

Correct Answer
verified

At the end of 2011 the U.S. government had a debt of about $10.12 trillion. During 2012 inflation was about 2.5% and real GDP grew about 1.6%. What is the largest deficit the government could have had in 2012 without raising the ratio of debt to GDP?

Correct Answer
verified

Which costs of inflation could the government take action to reduce without reducing inflation?

Correct Answer
verified

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 Answer
verified

Which of the following is correct?

Correct Answer
verified

Tax cuts proposed by the Kennedy and Reagan administrations were followed by robust economic growth.

Correct Answer
verified

Inflation reduction has the lowest cost when the efforts are

Correct Answer
verified

Policymakers following a "lean against the wind" policy would

Correct Answer
verified

In general, the longest lag for

Correct Answer
verified
D

A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is

Correct Answer
verified

Exam 23: Six Debates Over Macroeconomic Policy

The Federal Reserve will tend to tighten monetary policy when

Correct AnswerverifiedShow Answer

The cost of inflation reduction is less if people believe that the central bank will really reduce inflation.

Correct AnswerverifiedTrue

"Leaning against the wind" is exemplified by a

Correct AnswerverifiedShow Answer

Time inconsistency will cause the

Correct AnswerverifiedShow Answer

At the end of 2012, the government had a debt of about $11.3 trillion. If during 2013 real GDP rose 2% and inflation was 2.2%, what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct AnswerverifiedShow Answer

Are there any situations in which running a budget deficit is justified? Explain.

Double taxation means that both

Correct AnswerverifiedShow Answer

In theory the severity of recessions can be diminished with

Correct AnswerverifiedShow Answer

Demand for workers in some industry declines. These workers are reluctant to have a cut in their nominal wage. However,

Correct AnswerverifiedShow Answer

From fiscal year 2012 to fiscal year 2013 China's budget deficit rose 50%. Other things the same, we would expect this to have

Correct AnswerverifiedShow Answer

Assuming that the substitution effect is large relative to the income effect, tax reform designed to increase saving

Correct AnswerverifiedShow Answer

At the end of 2011 the U.S. government had a debt of about $10.12 trillion. During 2012 inflation was about 2.5% and real GDP grew about 1.6%. What is the largest deficit the government could have had in 2012 without raising the ratio of debt to GDP?

Correct AnswerverifiedShow Answer

Which costs of inflation could the government take action to reduce without reducing inflation?

Correct AnswerverifiedShow Answer

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

Which of the following is correct?

Correct AnswerverifiedShow Answer

Tax cuts proposed by the Kennedy and Reagan administrations were followed by robust economic growth.

Correct AnswerverifiedShow Answer

Inflation reduction has the lowest cost when the efforts are

Correct AnswerverifiedShow Answer

Policymakers following a "lean against the wind" policy would

Correct AnswerverifiedShow Answer

In general, the longest lag for

Correct AnswerverifiedD

A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is

Correct AnswerverifiedShow Answer

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True

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D

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