Deck 36: Essay

Question 1

Approximately how often does the Federal Open Market Committee meet?

Answer 1

The Federal Open Market Committee.About every six weeks.Short-term interest rates.

Question 2

If net exports fall,what actions could a central bank take to stabilize the economy?

Answer 2

Increase government expenditures and cut taxes.

Question 3

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations.In practice,however,there are obstacles to the use of such policies.What are the primary difficulties with using monetary and fiscal policy to stabilize the economy?

Answer 3

Fiscal policy works with a lag primarily due to the long political process that governs changes in taxes and spending.To make any change in fiscal policy,a bill must go through congressional committees,pass both the House and Senate,and be signed by the president.This process can take a significant amount of time.

Question 4

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations.What are some things policymakers can do when higher inflation becomes a concern?

Question 5

Which part of the Federal Reserve determines monetary policy? How often does it meet? What does it set a target for?

Question 6

Explain why fiscal policy actions typically work with a lag.

Question 7

Monetary policy affects aggregate demand with a lag.Approximately how long does it take for monetary policy actions to affect aggregate demand?

Question 8

What component of GDP is particularly volatile over the business cycle and can be targeted by tax cuts?

Question 9

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations.What are some things policymakers can do to boost the economy when aggregate demand is inadequate to ensure full employment?

Question 10

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

Question 11

According to a 1977 amendment to the Federal Reserve Act of 1913,what are the goals the Fed should promote?

Question 12

List two of the three types of fiscal programs that the President and Congress emphasized in response to the 2008-2009 recession.

Question 13

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

Question 14

Explain how tax cuts can increase aggregate supply.

Question 15

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

Question 16

If businesses become more pessimistic about the future,what fiscal policies could the government take to stabilize the economy?

Question 17

While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy,what are some of the reasons why tax cuts might be preferred to increased government spending?

Question 18

Why might policymakers attempts to stabilize the economy do more harm than good?

Question 19

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.

Question 20

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

Question 21

List two costs of inflation.

Question 22

During recessions,even with no changes in policy,the deficit tends to ------ because -------------.

Question 23

What is meant by the political business cycle?

Question 24

Provide an example of how current expenditures might benefit future generations.

Question 25

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?

Question 26

By law what goals are the Federal Reserve to pursue? What,if any,specific weights are given for these goals?

Question 27

Using typical estimates of the sacrifice ratio,how much output would likely be sacrificed to reduce inflation by 3 percent?

Question 28

Suppose a country has a real growth rate of 3%.Government spending is 75 billion units of currency and its tax revenues are 60 billion units of currency.The current national debt is 300 billion units of currency.At what inflation rate will its debt-to-income ratio remain unchanged?

Question 29

According to a 1977 amendment to the Federal Reserve Act of 1913,what weights should the Fed put on the goals of maximum employment,stable prices,and moderate long-term interest rates?

Question 30

Provide two specific ways in which reducing inflation might leave "permanent scars" on the economy.

Question 31

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

Question 32

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

Question 33

Using typical estimates of the sacrifice ratio,how much output would likely be sacrificed to reduce inflation from 4 percent to 2 percent?

Question 34

Suppose the nation's price level rises as a result of an increase in aggregate demand and a decrease in aggregate supply which leaves output unchanged.If the Fed is required to follow a rule that stabilizes the price level,what will the Fed do to the money supply and what impact will this have on total output in the economy?

Question 35

According to political business cycle theory,if the Fed wanted to increase the chances of a President's re-election,what specific actions might it take?

Question 36

Suppose that a country has an inflation rate of about 3 percent per year and a real GDP growth rate of about 3 percent per year.How large of a deficit can the government run (as a percentage of GDP)without raising the debt-to-income ratio?

Question 37

What did the actions of the Federal Reserve during the 1990's demonstrate about monetary policy and rules?

Question 38

Those who believe the central bank should aim for zero inflation argue that reducing inflation is a policy with temporary costs and permanent benefits.What are the primary costs and benefits they are referring to?

Question 39

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

Question 40

Economists believe that a little bit of inflation may be a good thing.What are the potential benefits of inflation?

Question 41

What fiscal policies did the government implement in response to the 2008-2009 recession? Can we be certain that these policies were effective? Explain.

Question 42

Carefully explain how monetary policy can be used to counter a recession.Explain what the central bank does as well as how its actions affect the economy.Under what circumstances is fiscal policy especially useful?

Question 43

Why might government expenditures be more appropriate than tax cuts to counter recessions? Is there any evidence for this thinking?

Question 44

Why might reforms to encourage saving lead to a less egalitarian society?

Question 45

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 46

In addition to the tax code,other policies reduce the incentives for people to save Provide an example.

Question 47

Explain the time inconsistency of monetary policy.

Question 48

Explain why policy lags could make stabilization policies counterproductive.

Question 49

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

Question 50

Suppose a 25-year-old worker purchases a $5,000 bond that pays 6% interest per year which she plans to withdraw when she retires in 40 years.How much will the $5,000 accumulate to in 40 years? If the worker faces a marginal tax rate of 30% on interest income,how much will the $5,000 accumulate to in 40 years?

Question 51

Suppose tax policies are changed to encourage saving.Explain how the income effect and substitution effect influence the amount saved.

Question 52

Explain the main arguments in favor of economic stabilization.

Question 53

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 54

What is the benefit of a high saving rate?

Question 55

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

Question 56

A higher return on saving ------ the amount a household needs to save to achieve any target level of future consumption.This effect on saving is called the ------- effect.If the income effect is large enough,then a reduction in taxes on saving might ------ tax revenues.

Question 57

Describe three costs of inflation.

Question 58

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 59

Why might tax cuts be more appropriate than increasing government expenditures to counter recessions? Is there any evidence for this thinking?

Question 60

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

Question 61

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

Question 62

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

Question 63

Is it possible that deficits do not burden future generations?

Question 64

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

Question 65

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

Question 66

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

Question 67

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

Question 68

Identify three government policies that discourage saving.