Question 1

All economists agree that some types of government spending are better for the economy than other types of spending.

Accepted Answer

False

Question 2

If wages are flexible, it is very likely that government intervention will be needed to push the economy out of a recessionary gap.

Accepted Answer

If wages are flexible, they can adjust to changes in market conditions and help shift the economy out of a recessionary gap without the need for government intervention.

Question 3

Those economists who believe that the economy is self-regulating argue that wages are flexible, so they think that the economy can remove itself from a recessionary gap without government intervention.

Accepted Answer

Economists who believe in self-regulating economy argue that wages are flexible to adjust to changes in supply and demand, leading to a natural correction of the economy towards full employment without government intervention.

Question 4

There are economists who believe that some types of government spending are better for the economy than other types of government spending.

Accepted Answer

This is a widely held belief among economists, who argue that some types of government spending, such as investments in infrastructure, education, and research and development, can have long-term benefits for the economy and lead to greater economic growth and productivity. Other types of government spending, such as transfer payments and subsidies, may have shorter-term benefits but do not necessarily contribute to long-term economic growth.

Question 5

A theory must be capable of being proved wrong if, in fact, it is wrong.

Accepted Answer

This statement defines the principle of falsifiability, which is one of the key tenants of the scientific method. A theory that cannot be proven wrong or tested is not considered scientific.

Question 6

Those economists who view the AS curve as being vertical see more government tools capable of raising Real GDP than do the economists who view the AS curve as being upward-sloping.

Accepted Answer

Economists who view the AS curve as being vertical believe that Real GDP is already at its maximum potential level, so there are limited government tools available to increase it further. On the other hand, economists who view the AS curve as upward-sloping believe that there is more room for government policies to stimulate economic growth through increased aggregate demand.

Question 7

An economist who believes that increases in government spending will not increase aggregate demand, may cite crowding out as the reason for this belief.

Accepted Answer

Crowding out theory suggests that when the government increases its spending, it may lead to a decrease in private investment or consumption, as interest rates rise and make borrowing more expensive for private entities. This can dampen the overall effect of government spending on aggregate demand.

Question 8

All economists agree that the aggregate supply (AS) curve is vertical.

Accepted Answer

Not all economists agree that the AS curve is vertical. There are different theories and models that propose varying shapes and slopes for the AS curve depending on factors such as input prices, technology, labor market conditions, and government policies. Some economists argue that the AS curve can be upward sloping or even horizontal in the short run, while others contend that it can be irregular or fluctuating over time.

Question 9

It is a fact that the government spending multiplier is always greater than the tax multiplier.

Accepted Answer

The government spending multiplier and the tax multiplier can vary depending on economic conditions, fiscal policies, and other factors. There is no rule that the government spending multiplier is always greater than the tax multiplier.

Question 10

If income tax rates are cut, the size of the budget deficit will necessarily increase.

Accepted Answer

Cutting income tax rates does not necessarily increase the size of the budget deficit because it can lead to increased economic activity, higher overall tax revenues from other sources, and potential reductions in government spending.

Question 11

Some economists believe that government bailouts privatize the benefits of doing business and socialize the costs, leading to more companies needing to be bailed out.

Accepted Answer

This is a common criticism of government bailouts, as companies are able to reap the rewards of profits and bonuses when business is good, but when they fail, taxpayers end up footing the bill for their mistakes. This can create a moral hazard, where companies take on excessive risk knowing that they will be bailed out if things go wrong.

Question 12

The Taylor rule is an example of a rule-based monetary policy system.

Accepted Answer

The Taylor rule is a rule-based monetary policy system that suggests the central bank should adjust interest rates in response to changes in inflation, output, and other economic variables.

Question 13

Wage flexibility is one of the conditions necessary for an economy to be able to bring itself out of a recessionary gap.

Accepted Answer

Wage flexibility allows for wages to adjust downward in response to a decrease in demand for labor, which can help to reduce unemployment and increase employment. This can help to shift aggregate supply to the right and close the recessionary gap. Without wage flexibility, the economy may struggle to adjust to changes in demand for labor and may remain stuck in a recessionary gap.

Question 14

Economists who believe in complete crowding out are not likely to advocate for an increase in government spending to remove the economy from a recessionary gap.

Accepted Answer

Complete crowding out occurs when an increase in government spending leads to an equivalent decrease in private sector spending, resulting in no net increase in overall spending. Economists who believe in complete crowding out would argue that any attempt to increase government spending during a recession would be ineffective as it would not stimulate overall spending and would instead simply displace private sector spending. Therefore, they would not advocate for an increase in government spending to remove the economy from a recessionary gap.

Question 15

Tax revenues can rise as a result of a decrease in income tax rates, as long as the tax base increases sufficiently.

Accepted Answer

This is known as the Laffer Curve theory, where decreasing tax rates can incentivize individuals and businesses to work more and invest more, thus generating more economic activity and ultimately increasing the tax base. However, there is a limit to how much tax revenue can be generated through this mechanism as tax rates continue to decrease.

Question 16

The use of a monetary rule is one way to remove politics from monetary policy.

Accepted Answer

A monetary rule is a pre-established guideline or policy that specifies the actions a central bank should take to control the money supply and achieve economic goals such as price stability or full employment. By following a monetary rule, a central bank can reduce the discretion of policymakers and remove politics from monetary policy.

Question 17

It is possible for a decrease in tax rates to increase tax revenues and decrease the size of a budget deficit.

Accepted Answer

This is known as the Laffer curve, where a decrease in tax rates can stimulate economic growth and incentivize individuals to work harder and earn more income, ultimately leading to an increase in tax revenues. However, this only holds true up to a certain point, beyond which further tax rate reductions lead to a decrease in tax revenues.

Question 18

If the (average) tax rate is cut by 10%, and as a result the tax base rises by 15%, tax revenues will rise.

Accepted Answer

When the tax rate is cut, taxpayers have more disposable income which results in increased spending and investment, hence economic growth. This economic growth further broadens the tax base leading to more tax revenue even though the tax rate is lower. The scenario described in the question is an example of the Laffer Curve theory, which suggests that cutting tax rates can actually increase government revenue in some cases.

Question 19

All economists agree that a monetary rule is preferable to a discretionary Fed.

Accepted Answer

While many economists advocate for a rules-based approach to monetary policy, not all agree that it is necessarily always preferable to a discretionary Fed. Some argue that a flexible approach allows for greater responsiveness to changing economic conditions.

Question 20

When income tax rates rise, tax revenues always rise.

Accepted Answer

This is not always true. If income tax rates rise too high, it may discourage people from working or investing, leading to lower income and lower tax revenues. Additionally, if the economy is in a recession or downturn, raising taxes may further decrease economic activity and lead to lower tax revenues.

Quiz 18: Debates in Macroeconomics Over the Role and Effects of Government