Question 1

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?

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Question 2

What is meant by the political business cycle?

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Question 3

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?

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Question 4

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

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Question 5

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

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Question 6

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

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Question 7

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

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Question 8

List two costs of inflation.

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Question 9

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?

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Question 10

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

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Question 11

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

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Question 12

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?

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Question 13

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?

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Question 14

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

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Question 15

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

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Question 16

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

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Question 17

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

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Question 18

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?

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Question 19

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

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Question 20

What is the benefit of a high saving rate?

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Quiz 36: Six Debates Over Macroeconomic Policy