Question 1

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 2

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

Accepted Answer

A)   would have to increase the money supply. This would move unemployment closer to the natural rate.
B)   would have to increase the money supply. This would move unemployment further from the natural rate.
C)   would have to decrease the money supply. This would move unemployment closer to the natural rate.
D)   would have to decrease the money supply. This would move unemployment further from the natural rate.E) All of the above
F) A) and B)

Question 3

Why might the response of far-sighted consumers reduce the multiplier effect of an increase in government expenditures?

Accepted Answer

Consumers may recognize that b...

Question 4

One concern of those who oppose the central bank targeting inflation at zero is that reducing inflation is costly. What is the cost of reducing the inflation rate?

Accepted Answer

A temporar...

Question 5

Which of the following likely occurs when households and firms become more pessimistic?

Accepted Answer

A)   increased spending
B)   increased aggregate demand
C)   increased real GDP
D)   an increase in the unemployment rateE) B) and C)
F) All of the above

Question 6

Explain what is meant by saying that capital income is taxed twice.

Accepted Answer

Shareholders are part owners o...

Question 7

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 8

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

Question 9

As compared to government spending, a tax cut is likely to affect aggregate demand

Accepted Answer

A)   more quickly but is more likely to be spent on projects with little benefit.
B)   more quickly and is less likely to be spent on projects with little benefit.
C)   less quickly but is less likely to be spent on projects with little benefit.
D)   less quickly and is more likely to be spent on projects with little benefit.E) B) and C)
F) B) and D)

Question 10

What is the benefit of a high saving rate?

Accepted Answer

A high saving rate provides mo...

Question 11

According to traditional Keynesian analysis, if the economy is in a recession, the government can move it back towards full employment by

Accepted Answer

A)   cutting taxes and increasing expenditures. The effect of the tax cut is larger.
B)   cutting taxes and increasing expenditures. The effect of the tax cut is smaller.
C)   raising taxes and decreasing expenditures. The effect of the tax increase is larger.
D)   raising taxes and decreasing expenditures. The effect of the tax increase is smaller.E) B) and D)
F) A) and B)

Question 12

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections the Fed would

Accepted Answer

A)   raise interest rates to shift aggregate demand left.
B)   raise interest rates to shift aggregate demand right.
C)   reduce interest rates to shift aggregate demand left.
D)   reduce interest rates to shift aggregate demand right.E) A) and D)
F) B) and C)

Question 13

Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

Accepted Answer

Both are prone to lags, but the lags are...

Question 14

The Federal Reserve

Accepted Answer

A)   requires little time to change policy and aggregate demand responds quickly.
B)   requires little time to change policy but aggregate demand responds slowly.
C)   usually requires a substantial time to change policy but aggregate demand responds quickly.
D)   usually requires a substantial time to change policy and aggregate demand responds slowly.E) B) and C)
F) A) and B)

Question 15

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

Question 16

Why is there a lag between the Fed's actions and the economy's response?

Accepted Answer

Monetary policy is supposed to...

Question 17

Which of the following is not an argument made by those who oppose reforming the tax laws to encourage saving?

Accepted Answer

A)   A public budget surplus can raise national saving.
B)   The substitution effect of a higher return to saving may be about equal to the income effect of a higher return to saving.
C)   Low-income households save a larger fraction of their income than high-income households.
D)   Tax cuts might cause a budget deficit.E) None of the above
F) B) and C)

Question 18

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 19

Explain what is meant by the time inconsistency of monetary policy.

Accepted Answer

The time inconsistency of monetary polic...

Question 20

According to traditional Keynesian analysis, which has a greater impact on aggregate demand, changing taxes or changing government expenditures? Why?

Accepted Answer

An increase in government expe...

Exam 23: Six Debates Over Macroeconomic Policy

Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

Correct AnswerverifiedBoth are prone to lags, but the lags are...View AnswerShow 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 a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

Correct AnswerverifiedShow Answer

Why is there a lag between the Fed's actions and the economy's response?

Correct AnswerverifiedMonetary policy is supposed to...View AnswerShow Answer

What is the benefit of a high saving rate?

Correct AnswerverifiedA high saving rate provides mo...View AnswerShow Answer

Why might the response of far-sighted consumers reduce the multiplier effect of an increase in government expenditures?

Correct AnswerverifiedConsumers may recognize that b...View AnswerShow Answer

Which of the following is not an argument made by those who oppose reforming the tax laws to encourage saving?

Correct AnswerverifiedShow Answer

Which of the following likely occurs when households and firms become more pessimistic?

Correct AnswerverifiedShow Answer

As compared to government spending, a tax cut is likely to affect aggregate demand

Correct AnswerverifiedShow Answer

One concern of those who oppose the central bank targeting inflation at zero is that reducing inflation is costly. What is the cost of reducing the inflation rate?

Correct AnswerverifiedA temporar...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

According to traditional Keynesian analysis, which has a greater impact on aggregate demand, changing taxes or changing government expenditures? Why?

Correct AnswerverifiedAn increase in government expe...View AnswerShow 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

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

Correct AnswerverifiedShow 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

According to traditional Keynesian analysis, if the economy is in a recession, the government can move it back towards full employment by

Correct AnswerverifiedShow Answer

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections the Fed would

Correct AnswerverifiedShow Answer

The Federal Reserve

Correct AnswerverifiedShow Answer

Explain what is meant by the time inconsistency of monetary policy.

Correct AnswerverifiedThe time inconsistency of monetary polic...View AnswerShow Answer

Explain what is meant by saying that capital income is taxed twice.

Correct AnswerverifiedShareholders are part owners o...View AnswerShow Answer

Correct Answer
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Both are prone to lags, but the lags are...
View Answer

Correct Answer
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A higher rate of return on saving means ...
View Answer

Correct Answer
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Correct Answer
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Monetary policy is supposed to...
View Answer

Correct Answer
verified
A high saving rate provides mo...
View Answer

Correct Answer
verified
Consumers may recognize that b...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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A temporar...
View Answer

Correct Answer
verified

Correct Answer
verified
An increase in government expe...
View Answer

Correct Answer
verified
High debt means that future taxpayers wi...
View Answer

Correct Answer
verified

Correct Answer
verified
Because a decrease i...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The time inconsistency of monetary polic...
View Answer

Correct Answer
verified
Shareholders are part owners o...
View Answer