Deck 37: Six Debates Over Macroeconomic Policy

Question 1

Suppose a tax cut affected aggregate demand and aggregate supply.The shift in aggregate supply would make the

A)price level and real GDP change by more than otherwise.
B)price level change by more than otherwise and real GDP change by less than otherwise.
C)price level change by less than otherwise and real GDP change by more than otherwise.
D)price level and real GDP change by more than otherwise.

Answer 1

C

Question 2

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

A)increase taxes,increase government spending
B)increase taxes,decrease government spending
C)decrease taxes,increase government spending
D)decrease taxes,decrease government spending

Answer 2

C

Question 3

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.

Answer 3

A

Question 4

The argument that an increase in government expenditures will have a larger impact on aggregate demand than tax cuts is based on the idea that

A)tax cuts have no multiplier affect.
B)people will save part of a tax cut.
C)an increase in consumption expenditures has a smaller effect on real GDP than an equal increase in government expenditures.
D)None of the above is correct.

Question 5

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 6

The political business cycle refers to

A)the fact that about every four years some politician advocates greater government control of the central bank
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 central bank must follow.

Question 7

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 conditions can easily change between the start of policy action and when it takes effect.

Question 8

If there is an increase in the money supply,in the short run

A)the interest rises.It takes several weeks for spending to fully respond to this change.
B)the interest rises.It takes several months for spending to fully respond to this change.
C)the interest falls.It takes several weeks for spending to fully respond to this change.
D)the interest falls.It takes several months for spending to fully respond to this change.

Question 9

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 10

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 11

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 12

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 13

An increase in the money supply

A)reduces interest rates and shifts aggregate demand to the right.
B)reduces interest rates and shifts aggregate supply to the right
C)raises interest rates and shifts aggregate demand to the right.
D)raises interest rates and shifts aggregate supply to the right.

Question 14

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 15

Supporters of using government expenditures to respond to recession

A)argue that monetary policy should be used first.An increase in the money supply will reduce interest rates.
B)argue that monetary policy should be used first.An increase in the money supply will raise interest rates.
C)argue that monetary policy should be used only after fiscal policy has been used.An increase in the money supply will reduce interest rates.
D)argue that monetary policy should be used only after fiscal policy has been used.An increase in the money supply will raise interest rates.

Question 16

"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 17

According to the political business cycle theory,if the central bank wanted to see an incumbent 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 18

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 19

A policymaker against stabilizing the economy would be likely to believe

A)policymakers should "do no harm".
B)there are no obstacles to the practical application of policy in real life.
C)policy lags are short enough that implementing policy changes in response to recession is not too risky.
D)policy mitigates the magnitude of economic fluctuations.

Question 20

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 21

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 22

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)1.5 percent of GDP without raising the debt-to-income ratio.
D)1 percent of GDP without raising the debt-to-income ratio.

Question 23

An opponent of monetary policy decisions by rule would point to which of the following as support of his case?

A)time inconsistency of policy
B)flexibility to confront unforeseen circumstances
C)political business cycle
D)the ability to craft rules that account for all possible contingencies in advance

Question 24

Some economists argue that since inflation

A)raises the real value of fixed nominal wages,a little inflation may make it easier for labor markets to adjust.
B)raises the real value of fixed nominal wages,a little inflation may make it harder for labor markets to adjust.
C)reduces the real value of fixed nominal wages,a little inflation may make it easier for labor markets to adjust.
D)reduces the real value of fixed nominal wages,a little inflation may make it harder for labor markets to adjust.

Question 25

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 26

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 27

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)In a country where inflation has been high for a long time,there are no costs to the inflation.

Question 28

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 29

Which of the following is correct?

A)Deficits always require people to consume at the expense of their children.
B)If the government uses funds to pay for investment programs,on net the debt need not burden future generations.
C)If the government is in debt it must be running a deficit currently.
D)The current government debt is a large share of lifetime income.

Question 30

Government deficits mean that

A)national saving is negative so public saving is negative
B)national saving is negative so public saving is lower than otherwise.
C)public saving is negative so national saving is negative
D)public saving is negative so national saving is lower than otherwise.

Question 31

Which of the following is not correct?

A)Deficits give people the opportunity to consume at the expense of their children,but deficits do not require them to do so.
B)Deficits and surpluses could be used to avoid fluctuations in the tax rate.
C)The only times deficits have increased have been during times of war or economic downturns.
D)Reducing the budget deficit rather than funding more education spending could,all things considered,make future generations worse off.

Question 32

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 33

If a country had a rule that required the ratio of debt to GDP to be constant,it would necessarily have to run a surplus if

A)real GDP rose and the inflation rate were positive.
B)real GDP rose and the inflation rate were negative.
C)real GDP fell and the inflation rate were positive.
D)real GDP fell and the inflation rate were negative.

Question 34

A balanced budget would require that when real GDP was growing rapidly,

A)the government raise taxes or cut expenditures.This would increase the magnitude of economic fluctuations.
B)the government raise taxes or cut expenditures.This would decrease the magnitude of economic fluctuations.
C)the government cut taxes or raise expenditures.This would increase the magnitude of economic fluctuations.
D)the government cut taxes or raise expenditures.This would decrease the magnitude of economic fluctuations.

Question 35

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 36

If people in a country that has had persistently high inflation expect it to remain high and are skeptical of promises the central bank makes,then the Phillips curve is

A)farther to the left than otherwise.If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises.
B)farther to the left than otherwise.If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises.
C)farther to the right than otherwise.If the central bank tries to reduce inflation unemployment will rise by more than if people had believed its promises
D)farther to the right than otherwise.If the central bank tries to reduce inflation unemployment will rise by less than if people had believed its promises..

Question 37

Economists

A)agree that the costs of moderate inflation are low and that the cost of reducing inflation is small.
B)agree that the costs of moderate inflation are low,but disagree about the cost of reducing inflation.
C)disagree about the costs of moderate inflation,but agree that the cost of reducing inflation is small.
D)disagree about the costs of moderate inflation and disagree about the cost of reducing inflation.

Question 38

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 39

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 40

If the public correctly perceives that the central bank will reduce inflation,then

A)the short-run Phillips curve shifts right,and the sacrifice ratio will be higher.
B)the short-run Phillips curve shifts right,and the sacrifice ratio will be lower.
C)the short-run Phillips curve shifts left,and the sacrifice ratio will be higher.
D)the short-run Phillips curve shifts left,and the sacrifice ratio will be lower.

Question 41

Reforming tax laws to encourage saving is motivated by which of the Ten Principles of Economics from Chapter 1?

A)The cost of something is what you give up to get it (Principle 2).
B)Trade can make everyone better off (Principle 5).
C)Markets are usually a good way to organize economic activity (Principle 6).
D)A country's standard of living depends on its ability to produce goods and services (Principle 8).

Question 42

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

Question 43

Higher saving is associated with

A)a larger capital stock and a higher standard of living.
B)a larger capital stock but not a higher standard of living.
C)a higher standard of living but not a larger capital stock.
D)neither a higher standard of living nor a higher capital stock.

Question 44

Proponents of tax-law changes to encourage saving would

A)argue that corporate tax rates should be decreased.
B)increase the number of government benefits which are means-tested.
C)argue that state sales tax should be replaced with state income tax.
D)favor none of the above programs.

Question 45

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 46

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 47

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

Question 48

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

Question 49

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

Question 50

Which of the following are taxed?

A)both corporate profits and dividends paid to stockholders
B)corporate profits but not dividends paid to stockholders
C)dividends paid to stockholders but not corporate profits
D)neither corporate profits nor dividends paid to stock holders

Question 51

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.

Question 52

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

Question 53

Which of the following are both correct?

A)Data show no correlation between saving and measures of economic well-being.A reduction in tax rates may reduce saving because of the income effect.
B)Data show no correlation between saving and measures of economic well-being.A reduction in tax rates may reduce saving because of the substitution effect.
C)Data show a positive correlation between saving and measures of economic well-being.A reduction in tax rates may reduce saving because of the income effect.
D)Data show a positive correlation between saving and measures of economic well-being.A reduction in tax rates may reduce saving because of the substitution effect.

Question 54

The six debates over macroeconomic policy exist mostly because

A)economists disagree over basic issues such as the importance of saving for economic growth.
B)there are tradeoffs and people disagree about the best way to deal with them.
C)politicians offer misleading information.
D)people fail to clearly see the benefits or the costs of most changes.

Question 55

Means-tested programs tend to favor

A)those with high income as would a consumption tax.
B)those with high income while a consumption tax would favor those with low income.
C)those with low income as would a consumption tax.
D)those with low income while a consumption tax would favor those with high income.

Question 56

According to traditional Keynesian analysis,a tax cut has a larger effect on aggregate demand than an increase in government expenditures of the same size.

Question 57

Tax cuts affect only aggregate demand not aggregate supply.

Question 58

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

Question 59

Tax policy changes that favor people who save will

A)favor low-income households.
B)favor people with high income.
C)create a more egalitarian society.
D)unambiguously increase national saving.

Question 60

A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is

A)small and an increase in private saving tends to have a small impact on the capital stock.
B)small and an increase in private saving tends to have a large impact on the capital stock.
C)large and an increase in private saving tends to have a small impact on the capital stock.
D)large and an increase in private saving tends to have a large impact on the capital stock.

Question 61

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

Question 62

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

Question 63

Explain the main arguments in favor of economic stabilization.

Question 64

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

Question 65

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

Question 66

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 67

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

Question 68

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

Question 69

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?