Question 1

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

Accepted Answer

This is generally true, as federal taxes alone can range from 10-37% and state taxes vary by location. When combined, the marginal tax-rate on interest income can approach or exceed 40%.

Question 2

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

Accepted Answer

If the Fed committed to following a rule for monetary policy, such as targeting a specific inflation rate or level of interest rates, it would become more credible and predictable to households and businesses. This would reduce the incentive for the Fed to deviate from the rule in the short run to pursue other goals, and therefore eliminate the time inconsistency problem.

Question 3

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

Accepted Answer

Inflation reduction can require significant monetary policy actions, such as increasing interest rates, which can have negative impacts on economic growth and employment. Additionally, the costs of reducing inflation can vary depending on the severity of the inflation and the specific measures taken to combat it. Therefore, the cost of inflation reduction can indeed be quite large compared to the costs associated with moderate inflation.

Question 4

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

Accepted Answer

A nation's saving rate is a primary determinant of its long-run economic prosperity because it affects the amount of capital available for investment, which in turn influences productivity, economic growth, and living standards.

Question 5

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

Accepted Answer

The answer of Proponents and opponents of balanced-budget policies agree...

Question 6

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

Accepted Answer

The answer of In practice, the problems created by time...

Question 7

Social Security transfers wealth from younger generations to older generations.

Accepted Answer

Social Security is funded by payroll taxes from current workers, and a portion of those taxes goes to pay benefits for current retirees. This means that younger generations are effectively transferring wealth to older generations through the Social Security system.

Question 8

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

Accepted Answer

Proponents of zero-inflation policies believe that keeping inflation at zero or close to zero is important for economic stability, but this does not necessarily mean that they believe the public is unconcerned about inflation. In fact, many people may be affected negatively by even low levels of inflation, such as those on fixed incomes or with limited purchasing power.

Question 9

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

Accepted Answer

A government deficit does not necessarily impose a burden on future generations. The impact depends on how the borrowed funds are used. If they are invested in productive projects that boost future economic growth, the benefits can outweigh the costs of the debt. Additionally, debt can be managed through various fiscal policies without directly burdening future taxpayers.

Question 10

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

Accepted Answer

The answer of A reduction in the marginal tax-rate includes...

Question 11

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

Accepted Answer

A consumption tax would effectively tax spending rather than income, and any money not spent would automatically be saved and potentially tax-advantaged, similar to an IRA.

Question 12

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

Accepted Answer

Tax laws often provide preferential treatment to certain types of retirement savings, such as 401(k)s and IRAs, by offering tax advantages like tax-deferred growth or tax-free withdrawals in retirement.

Question 13

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

Accepted Answer

Economists do not universally agree on the best monetary policy rule, and many argue that a constant growth rate of the money supply may not be optimal in all economic conditions. Different situations may require different monetary policy responses.

Question 14

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

Accepted Answer

When marginal tax-rate decreases, individuals have more after-tax income, which increases the incentive to save more. This is the substitution effect. Therefore, a reduction in the marginal tax-rate tends to increase saving.

Question 15

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

Accepted Answer

Running a budget deficit during times of war is often seen as necessary to fund the war effort and ensure national security. This is a commonly accepted exception to a balanced government budget.

Question 16

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

Accepted Answer

If people believe that the central bank will reduce inflation, they are more likely to adjust their expectations and behavior, which can reduce the cost of inflation reduction for the central bank. This is because it can reduce the need for aggressive interest rate hikes or other measures that can have negative effects on the economy. Therefore, when people have more confidence in the central bank's ability to reduce inflation, it can help to minimize the economic and social costs of the process.

Question 17

The average U.S. citizens' share of the government debt represents less than 2 percent of a person's lifetime income.

Accepted Answer

According to the Congressional Budget Office, as of 2021, the total government debt held by the public is approximately $22 trillion. When divided by the number of U.S. citizens, it comes out to be around $66,634 per person. However, over a person's lifetime, assuming an average income of $3.3 million, this amount represents less than 2 percent of their lifetime income.

Question 18

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

Accepted Answer

Policymakers could implement measures such as improving market efficiency, increasing competition, and reducing regulatory burdens to reduce the costs of inflation without reducing the actual inflation rate.

Question 19

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

Accepted Answer

The cost of inflation reduction may involve short-term increases in unemployment as the economy adjusts, but it is not necessarily a large or permanent increase. There are various measures that can be taken to mitigate the impact on employment, such as targeted fiscal policies and retraining programs. Additionally, inflation can have negative effects on certain groups, such as low-income earners and retirees, so reducing inflation can also have potential benefits for distributional equity.

Question 20

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

Accepted Answer

Some studies have shown that people tend to save based on their income and other factors, rather than the interest rate they can earn on their savings.

Quiz 36: Six Debates Over Macroeconomic Policy