Deck 36: Five Debates Over Macroeconomic Policy

Question 1

The economy goes into recession.Which of the following lists contains things policymakers could do to try to end the recession?

A)increase the money supply, increase taxes, increase government spending
B)increase the money supply, increase taxes, decrease government spending
C)increase the money supply, decrease taxes, increase government spending
D)decrease the money supply, increase taxes, decrease government spending

Answer 1

C

Question 2

Suppose aggregate demand fell.In order to stabilize the economy,the government might

A)increase the money supply.
B)increase government expenditures.
C)decrease taxes.
D)All of the above are correct.

Answer 2

D

Question 3

President George W.Bush and congress cut taxes and raised government expenditures in 2003.Which of the following is not correct?

A)At the time the economy was just moving into a recession.
B)While there was subsequent improvement in economic performance, it's not entirely clear that this was due to the policy.
C)In general monetary policy can be implemented faster than fiscal policy.
D)In general it is easier to reverse monetary policy than to reverse fiscal policy.

Answer 3

A

Question 4

The principal lag for monetary policy

A)and fiscal policy is the time it takes to implement policy.
B)and fiscal policy is the time it takes for policy to change spending.
C)is the time it takes to implement policy.The principal lag for fiscal policy is the time it takes for policy to change spending.
D)is the time it takes for policy to change spending.The principal lag for fiscal policy is the time it takes to implement it.

Question 5

If firms were faced with greater uncertainty because of concern that oil prices might rise,they might decrease expenditures on capital.In response to this change,someone who advocated "lean against the wind" policies might advocate

A)decreasing the money supply.
B)increasing taxes.
C)increasing government expenditures.
D)None of the above is correct.

Question 6

Those who desire that policymakers stabilize the economy would advocate which of the following when aggregate demand is insufficient to ensure full employment?

A)decrease the money supply
B)decrease taxes
C)decrease government expenditures
D)None of the above is correct.

Question 7

The effects of a decline in the value of financial assets,such as stocks,on consumption and the economy might be offset by

A)increasing government spending.
B)decreasing the money supply.
C)increasing taxes.
D)None of the above is correct.

Question 8

"Leaning against the wind" is exemplified by a

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.

Question 9

In general,the longest lag for

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.

Question 10

Fluctuations in employment and output result from changes in

A)aggregate demand only.
B)aggregate supply only.
C)aggregate demand and aggregate supply.
D)neither aggregate demand nor aggregate supply.

Question 11

How long have studies shown it takes for interest rate changes to lead to significant changes in spending?

A)A few days.
B)A few weeks.
C)A few months.
D)A few years.

Question 12

President George W.Bush and congress cut taxes and raised government expenditures in 2003.According to the aggregate supply and aggregate demand model

A)both the tax cut and the increase in government expenditures would tend to increase output.
B)only the tax cut would tend to increase output.
C)only the increase in government expenditures would tend to increase output.
D)neither the tax cut nor the increase in government expenditures would tend to increase output.

Question 13

In the fall of 2005,consumers indicated that they were less optimistic about the future of the economy.This change in sentiment would likely

A)shift aggregate demand left.
B)decrease output.
C)increase unemployment.
D)All of the above are correct.

Question 14

The Fed lowered interest rates in 2001 and 2002.This implies,other things the same,that the Fed

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.

Question 15

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

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.

Question 16

Policymakers following a "lean against the wind" policy would

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.

Question 17

The Federal Reserve will tend to tighten monetary policy when

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.

Question 18

If the unemployment rate rises,which policies would be appropriate to reduce it?

A)increase the money supply, increase taxes
B)increase the money supply, cut taxes
C)decrease the money supply, increase taxes
D)decrease the money supply, cut taxes

Question 19

"Leaning against the wind" is exemplified by a

A)tax increase when there is a recession.
B)decrease in the money supply when there is an expansion.
C)decrease in government expenditures when there is a recession.
D)All of the above are correct.

Question 20

If aggregate demand shifts because of a wave irrational exuberance,those who favor lean against the wind policy would advocate the

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.

Question 21

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

A)inflation targeting.
B)the monetary policy reaction lag.
C)the time inconsistency of policy.
D)the sacrifice ratio dilemma.

Question 22

Monetary policymakers are allowed

A)almost no discretion and so there is no political business cycle.
B)a lot of discretion which makes it unlikely that there is a political business cycle.
C)almost no discretion so there is no political business cycle.
D)a lot of discretion which makes it possible to have a political business cycle.

Question 23

Which of the following is correct?

A)economic forecasts are precise and aggregate spending responds almost immediately to interest rate changes.
B)economic forecast are precise and aggregate spending responds to interest rate changes with a lag.
C)economic forecasts are imprecise and aggregate spending responds almost immediately to interest rate changes.
D)economic forecast are imprecise and aggregate spending responds to interest rate changes with a lag.

Question 24

Opponents of using policy to stabilize the economy generally believe that

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.

Question 25

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

A)interest rates and output would rise.
B)interest rates would rise and output would fall.
C)interest rates would fall and output would rise.
D)interest rates and output would fall.

Question 26

The principal reason that monetary policy has lags is that it takes a long time for

A)changes in the interest rate to change aggregate demand.
B)changes in the money supply to change interest rates.
C)the Fed to make changes in policy.
D)None of the above is correct.

Question 27

Time inconsistency will cause the

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.

Question 28

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

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.

Question 29

The political business cycle refers to

A)the fact that about every four years some politician advocates greater government control of the Fed.
B)the potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected.
C)the part of the business cycle caused by the reluctance of politicians to smooth the business cycle.
D)changes in output created by the monetary rule the Fed must follow.

Question 30

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

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.

Question 31

The time inconsistency of policy implies that

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.

Question 32

The Federal Open Market Committee

A)operates with almost complete discretion over monetary policy.
B)is required to increase the money supply by a given growth rate each year.
C)is required to keep the interest rate within a range set by Congress.
D)is required by its charter to change the money supply using a complex formula that concerns the tradeoff between inflation and unemployment.

Question 33

If a central bank had to give ups its discretion and follow a rule that required it to keep inflation low,

A)the short-run Phillips curve would shift up.
B)the short-run Phillips curve would shift down.
C)the long-run Phillips curve would shift right.
D)the long-run Phillips curve would shift left.

Question 34

A law that requires the money supply to grow by a fixed percentage each year would eliminate

A)the time inconsistency problem, but not political business cycles.
B)the political business cycle, but not the time inconsistency problem.
C)both the time inconsistency problem and political business cycles.
D)neither the time inconsistency problem nor political business cycles.

Question 35

According to the political business cycle theory,if the Fed wanted to see a President re-elected,prior to the election it might

A)lower the discount rate and sell bonds.
B)lower the discount rate and buy bonds.
C)raise the discount rate and sell bonds.
D)raise the discount rate and buy bonds.

Question 36

If people in countries that have had persistently high inflation are skeptical about efforts to reduce inflation,the short-run Phillips curve will remain far to the

A)left, and the sacrifice ratio will be low.
B)left, and the sacrifice ratio will be high.
C)right, and the sacrifice ratio will be low.
D)right, and the sacrifice ratio will be high.

Question 37

If a government managed to reduce the time inconsistency problem by mandating that the central bank target inflation at a low rate,then

A)the long-run Phillips curve would shift right.
B)the long-run Phillips curve would shift left.
C)the short-run Phillips curve would shift up.
D)the short-run Phillips curve would shift down.

Question 38

Inflation

A)causes people to spend more time reducing money balances.When inflation is unexpectedly high it redistributes wealth from lenders to borrowers.
B)causes people to spend more time reducing money balances.When inflation is unexpectedly high it redistributes wealth from borrowers to lenders.
C)causes people to spend less time reducing money balances.When inflation is unexpectedly high it redistributes wealth from lenders to borrowers.
D)causes people to spend less time reducing money balances.When inflation is unexpectedly high it redistributes wealth from borrowers to lenders.

Question 39

All of the following are arguments against stabilization policy except

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.

Question 40

The time inconsistency of monetary policy means that

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.

Question 41

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

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.

Question 42

Stephen Cecchetti argues that the Fed should

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.

Question 43

A program to reduce inflation is likely to have lower costs if the sacrifice ratio is

A)high, and the reduction is unexpected.
B)high, and the reduction is expected.
C)low, and the reduction is unexpected.
D)low, and the reduction is expected.

Question 44

If inflation falls it

A)causes people to put in more effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from lenders to borrowers.
B)causes people to put in more effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from borrowers to lenders.
C)causes people to put in less effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from lenders to borrowers.
D)causes people to put in less effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from borrowers to lenders.

Question 45

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices.If the economy starts at long-run equilibrium and then aggregate supply shifts right the central bank would have to

A)increase the money supply, which causes output to move closer to its long-run equilibrium.
B)increase the money supply, which causes output to move farther from long-run equilibrium.
C)decrease the money supply, which causes output to move closer to its long-run equilibrium.
D)decrease the money supply, which causes output to move farther from long-run equilibrium.

Question 46

A permanent reduction in inflation would

A)permanently reduce menu costs and permanently lower unemployment.
B)permanently reduce menu costs and temporarily raise unemployment.
C)temporarily reduce menu costs and temporarily lower unemployment.
D)temporarily reduce menu costs and temporarily raise unemployment.

Question 47

If a central bank were required to target inflation at zero,then when there was a negative aggregate supply shock the central bank

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.

Question 48

Which of the following is a cost of inflation?

A)shoeleather costs
B)menu costs
C)relative price variability
D)All of the above are correct.

Question 49

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

A)shoeleather and menu costs
B)menu costs and relative price variability
C)tax issues created by nonindexation, redistribution of wealth from unexpected inflation
D)None of the above is correct.

Question 50

Consider the following rule for monetary policy: r = 2 percent + π + 1/2(y - y*)/y* + 1/2(π- π*),where r is the nominal interest rate,y is real GDP,y* is an estimate of the natural rate of output,π is the inflation rate,and π* is the inflation target.Which of the following statements is not correct?π

A)If aggregate demand shifts right from long-run equilibrium, this rule unambiguously implies that the Fed increases the nominal interest rate.
B)If aggregate supply shifts right from long-run equilibrium at the inflation target, we cannot tell without more information whether the Fed should increase or decrease the nominal interest rate.
C)If output is at its natural level, but inflation is above its target, the Fed must increase the nominal interest rate.
D)If inflation is at its targeted level, but output is above its natural rate, the Fed must decrease the federal funds rate.

Question 51

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

A)avoid unexpected changes in the inflation rate
B)rewrite the tax laws so that nominal gains were taxed instead of real gains
C)make policy that would discourage firms from issuing indexed bonds
D)All of the above are correct.

Question 52

Proponents of zero inflation argue that reducing inflation has

A)permanent costs and temporary benefits.
B)temporary costs and permanent benefits.
C)permanent costs and benefits.
D)temporary costs and benefits.

Question 53

Someone would be less hurt by an unexpectedly higher inflation rate if

A)they held much currency and owned few bonds.
B)they held much currency and owned many bonds.
C)they held little currency and owned few bonds.
D)they held little currency and owned many bonds.

Question 54

A permanent reduction in inflation would

A)permanently reduce shoeleather costs and permanently lower unemployment
B)permanently reduce shoeleather costs and temporarily raise unemployment
C)temporarily reduce shoeleather costs and temporarily lower unemployment
D)temporarily reduce shoeleather costs and temporarily raise unemployment

Question 55

Proponents of zero inflation argue that a successful program to reduce inflation

A)eventually reduces inflation expectations.
B)eventually raises real interest rates.
C)permanently decreases output.
D)permanently raises unemployment.

Question 56

Which of the following is not an argument against rules and for discretion?

A)The economy is subject to a variety of random shocks.
B)Rules would eliminate time inconsistency.
C)Historically, it is not clear how important political business cycles have been.
D)Central banks can achieve credibility over time by backing up their words with deeds.

Question 57

Paul Volcker's inflation reduction efforts

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.

Question 58

Inflation reduction has the lowest cost when the efforts are

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.

Question 59

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?

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)All of the above are correct.

Question 60

Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level rose because of an increase in aggregate demand and a decrease in aggregate supply that kept output unchanged,then

A)the central bank would have to decrease the money supply which would decrease output.
B)the central bank would have to decrease the money supply which would increase output.
C)the central bank would have to increase the money supply which would decrease output.
D)the central bank would have to increase the money supply which would increase output.

Question 61

Suppose that a country has an inflation rate of about 2 percent per year and a real growth rate of about 3 percent per year.Suppose also that it has nominal GDP of about 200 billion units of currency.It can have a deficit of just under

A)4 billion units without raising the debt-to-income ratio.
B)6 billion units without raising the debt-to-income ratio.
C)10 billion units without raising the debt-to-income ratio.
D)12 billion units without raising the debt-to-income ratio.

Question 62

The national debt

A)exists because of past government Budget deficits.
B)is the difference between the government's spending and revenue in a given year.
C)is the amount households owe on credit cards, mortgages and other loans.
D)is the same as the government's budget deficit.

Question 63

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

A)less than 2 percent.
B)about 5 percent.
C)about 10 percent.
D)over 12 percent.

Question 64

If the budget deficit were reduced

A)interest rates and investment would increase.
B)interest rates would increase and investment would decrease.
C)interest rates and investment would decrease.
D)interest rates would decrease and investment would increase.

Question 65

At the end of 2003,the government had a debt of about $3,924 billion.During 2004,real GDP grew by about 4.2 percent and inflation was about 2.6 percent.About what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

A)about $63 billion
B)about $267 billion
C)about $429 billion
D)None of the above is within a few billion dollars of the largest deficit the government could have run without raising the debt to GDP ratio.

Question 66

From the end of 2003 to the end of 2004,the United States ran a deficit of about $121 billion.The debt at the start of this period was about $3,924 billion.Which of the following combinations of inflation and real GDP would have allowed the government to run a deficit and kept the ratio of real GDP to the deficit about the same?

A)about 1% inflation and about 1% real GDP growth
B)about 1% inflation and about 3% real GDP growth
C)about 2% inflation and about 1% real GDP growth
D)about 2% inflation and about 2% real GDP growth

Question 67

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

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.

Question 68

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

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.

Question 69

Which of the following is correct?

A)Deficits require people to consume at the expense of their children.
B)If the government uses funds to pay for useful programs, on net the debt need not burden future generations.
C)If the government runs a deficit, it is necessarily in debt.
D)The current government debt is about $120,000 per person.

Question 70

If in some year,real GDP rises by 4% and inflation is 3%,then the budget deficit could grow as much as

A)12% without raising the ratio of debt to GDP.
B)7% without raising the ratio of debt to GDP.
C)4% without raising the ratio of debt to GDP.
D)1% without raising the ratio of debt to GDP.

Question 71

Part of the argument against deficits is that they

A)increase interest rates and investment.
B)increase interest rates and decrease investment.
C)decrease interest rates and investment.
D)decrease interest rates and increase investment.

Question 72

A program to reduce inflation is likely to have higher costs if the sacrifice ratio is

A)high, and the reduction is unexpected.
B)high, and the reduction is expected.
C)low, and the reduction is unexpected.
D)low, and the reduction is expected.

Question 73

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 3 percent per year.Then the government can have a deficit of about

A)6 percent of GDP without raising the debt-to-income ratio.
B)5 percent of GDP without raising the debt-to-income ratio.
C)1 percent of GDP without raising the debt-to-income ratio.
D)None of the above is correct.

Question 74

Which of the following is not correct?

A)A potential cost of deficits is that they reduce national saving, thereby reducing growth of the capital stock and output growth.
B)Deficits give people the opportunity to consume at the expense of their children, but they do not require them to do so.
C)The U.S.debt per-person is large compared with average lifetime income.
D)In 2005, the U.S.government had a deficit.

Question 75

Zero inflation

A)might be dangerous because it could lead to times of deflation.
B)would limit the flexibility of the labor market and so could at times raise unemployment.
C)might make it impossible for the Central bank to lower the nominal interest rate at times.
D)All of the above are correct.

Question 76

Over time continued Budget deficits lead to

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.

Question 77

In fiscal year 2001,the U.S.government ran a surplus of about $127 billion.In fiscal year 2002,the government ran a deficit of $159 billion.This change would be expected to have

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.

Question 78

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year.The debt created by these continuing deficits is

A)sustainable, but the future burden on your children cannot be offset.
B)sustainable, and the future burden on your children can be offset if you save for them.
C)not sustainable, and the future burden on your children cannot be offset.
D)not sustainable, but the future burden on your children can be offset if you save for them.

Question 79

Which of the following would transfer wealth from old to young?

A)increases in the budget deficit
B)decreased building of highways and bridges
C)more generous education subsidies
D)indexation of Social Security benefits to inflation

Question 80

Which of the following is not correct?

A)Government debt cannot continue to rise forever.
B)If the government uses funds to pay for useful programs, on net the debt need not burden future generations.
C)Social Security transfers wealth from younger generations to older generations.
D)The average U.S.citizens' share of the government debt represents less than 2 percent of her lifetime income.