Deck 36: Five Debates Over Macroeconomic Policy

Question 1

People's skepticism about central bankers' announcements of their intentions stems from the fact that policymakers may act in a fashion that is time inconsistent.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

The Federal Reserve operates under a rule that requires money supply growth by one percentage point for every percentage point that unemployment rises above its natural rate.

Answer 3

False

Question 4

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

Question 5

The laws that created the Fed give the institution only vague recommendations about what goals it should pursue,and they do not tell the Fed how to pursue whatever goals it might choose.

Question 6

In practice,the problems created by time inconsistency and the political business cycle appear to be quite serious.

Question 7

If the central bank has discretion to make policy,it may create economic fluctuations that reflect the electoral calendar.This is called the political business cycle.

Question 8

In effect,a consumption tax would put all saving automatically into a tax-advantaged savings account similar to an Individual Retirement Account (IRA).

Question 9

One prominent debate over macroeconomic policy centers on the question of whether monetary and fiscal policy should be used to try to stabilize the economy.

Question 10

Advocates of stabilization policy argue that when there is a recession,the government should increase the money supply and increase government expenditures.

Question 11

Economists agree that if a monetary policy rule is to be used,the best one makes the growth rate of the money supply constant.

Question 12

The laws that created the Fed give it some specific recommendations about what goals it should pursue so it has little discretion in making policy.

Question 13

The cost of inflation reduction is a large,permanent increase in unemployment.

Question 14

A recession has no benefit to society-it represents a sheer waste of resources.

Question 15

Proponents of zero-inflation policies acknowledge that the public is unconcerned about the inflation rate.

Question 16

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

Question 17

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

Question 18

Many studies indicate changes in monetary policy have most of their effect on aggregate demand about six months after the change is made.

Question 19

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Question 20

Proponents of a balanced government budget acknowledge that running a budget deficit is justifiable in time of war.

Question 21

Explain why policy lags could make stabilization policies counterproductive.

Question 22

A reduction in the marginal tax-rate includes a substitution effect that tends to increase savings.

Question 23

The major driver of future federal spending is rising health care costs.

Question 24

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

Question 25

Once state and federal taxes are added together,a typical worker faces about a 40 percent marginal tax-rate on interest income.

Question 26

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

Question 27

When the government has a deficit,a burden is necessarily imposed on future generations of taxpayers.

Question 28

Forward looking parents can reverse the adverse effects of government debt by saving more and leaving a larger bequest to their children.

Question 29

Explain the main arguments in favor of economic stabilization.

Question 30

In essence,a consumption tax puts all saving into tax-advantaged savings accounts.

Question 31

A reduction in the marginal tax-rate includes an income effect that tends to increase savings.

Question 32

Tax laws do not give preferential treatment to some kinds of retirement saving.

Question 33

The major driver of future federal spending is rising energy costs.

Question 34

Suppose that changes in aggregate demand tended to be infrequent and that it takes a long time for the economy to return to long-run output.How would this affect the arguments of those who oppose using policy to stabilize output?

Question 35

Social Security transfers wealth from younger generations to older generations.

Question 36

The average U.S.citizens' share of the government debt represents about 10 percent of her lifetime income.

Question 37

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Question 38

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Question 39

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

Question 40

If real output grows at 3 percent per year and the inflation rate is 3 percent per year then government debt can grow by 6 percent per year and not increase the ratio of debt to income.

Question 41

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

Question 42

What is the political business cycle and how does it relate to whether the central bank should have discretion or use a rule?

Question 43

Is it possible that deficits do not burden future generations?

Question 44

Suppose that the government goes into deficit in order to help local school districts build better schools.Does this burden future generations?

Question 45

Suppose a country has had a high and relatively stable inflation rate for a long time.How might this affect the costs and benefits of inflation reduction?

Question 46

Explain the time inconsistency of monetary policy.

Question 47

If aggregate demand shifts because of a wave irrational exuberance,those who favor a policy that "leans against the wind" 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 48

Identify three government policies that discourage saving.

Question 49

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

Question 50

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 51

"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 52

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

Question 53

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 54

Why do many economists advocate a consumption tax rather than an income tax?

Question 55

"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) increasing money supply when there is a boom.

Question 56

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

Question 57

In the Summer of 2008,consumers indicated that they were less optimistic about the future of the economy.This change in sentiment would likely

A) shift aggregate demand to the right.
B) increase output.
C) increase unemployment.
D) increase prices.

Question 58

Explain how tax provisions to encourage private saving may reduce national saving.

Question 59

Describe three costs of inflation.

Question 60

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 61

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

Question 62

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 63

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 64

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) decreasing government expenditures.

Question 65

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

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

Question 66

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

A) increase the money supply.
B) decrease government expenditures.
C) increase taxes.
D) do nothing.

Question 67

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 decrease the magnitude of economic fluctuations.
C) unemployment and inflation are not cause for much concern.
D) economic coditions can easily change between the start of policy action and when it takes effect.

Question 68

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

A) Increased spending,increases aggregate demand,rising real GDP and a falling unemployment rate.
B) Decreased spending,increases aggregate demand,rising real GDP and a falling unemployment rate.
C) Decreased spending,decreased aggregate demand,falling real GDP and a falling unemployment rate.
D) Decreased spending,decreased aggregate demand,falling real GDP and a rising unemployment rate.

Question 69

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 70

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 71

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

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.

Question 72

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

A) Increased spending.
B) Increased aggregate demand.
C) Real GDP rises.
D) The unemployment rate increases.

Question 73

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 74

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 75

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) Do nothing and let markets correct themselves.

Question 76

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 77

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) undertaking no policy action.

Question 78

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 79

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) the federal government to change the tax code.

Question 80

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.