Question 1

Suppose the tax rate on interest income from saving were reduced.

Accepted Answer

A)   The income effect, but not the substitution effect, would tend to reduce private saving.
B)   The substitution effect, but not the income effect, would tend to reduce private saving.
C)   Both the income and substitution effect would tend to reduce private saving.
D)   Neither the income nor the substitution effect would tend to reduce private saving.E) A) and C)
F) A) and D)

Question 2

Part of the argument against deficits is that they

Accepted Answer

A)   increase interest rates and investment.
B)   increase interest rates and decrease investment.
C)   decrease interest rates and investment.
D)   decrease interest rates and increase investment.E) A) and B)
F) None of the above

Question 3

Which of the following statements is not true?

Accepted Answer

A)   All U.S. government budget deficits were due to war or recession.
B)   The U.S. federal debt in 2009 was about $7.6 trillion.
C)   Government debt represents about 1 percent of a typical worker's lifetime resources.
D)   Forward looking parents can reverse adverse effects of government debt.E) A) and B)
F) A) and C)

Question 4

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate supply shifts right, the central bank would have to

Accepted Answer

A)   increase the money supply, which causes output to move closer to its long-run equilibrium.
B)   increase the money supply, which causes output to move farther from long-run equilibrium.
C)   decrease the money supply, which causes output to move closer to its long-run equilibrium.
D)   decrease the money supply, which causes output to move farther from long-run equilibrium.E) A) and B)
F) C) and D)

Question 5

Economists

Accepted Answer

A)   agree that the costs of moderate inflation are small. The increase in unemployment from reducing inflation will be smaller if inflation expectations remain high.
B)   agree that the costs of moderate inflation are small. The increase in unemployment from reducing inflation will be larger if inflation expectations remain high.
C)   disagree about the costs of moderate inflation. The increase in unemployment from reducing inflation will be smaller if inflation expectations remain high.
D)   disagree about the costs of moderate inflation. The increase in unemployment from reducing inflation will be larger if inflation expectations remain high.E) B) and C)
F) A) and D)

Question 6

The Obama administration believed that transfer payments to the unemployed would have a larger impact on aggregate demand than tax cuts.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

The Federal Reserve will tend to tighten monetary policy when

Accepted Answer

A)   interest rates are rising too rapidly.
B)   it thinks the unemployment rate is too high.
C)   the growth rate of real GDP is quite sluggish.
D)   it thinks inflation is too high today, or will become too high in the future.E) C) and D)
F) B) and D)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Which of the following support the idea that monetary policy should be made by a rule?

Accepted Answer

A)   the political business cycle and the time-inconsistency problem
B)   the political business cycle but not the time-inconsistency problem
C)   the time-inconsistency problem, but not the political business cycle
D)   neither the political business cycle nor the time-inconsistency problemE) B) and D)
F) A) and D)

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The time inconsistency of policy implies that

Accepted Answer

A)   what policymakers say they will do is generally what they will do, but people don't believe them because of current policy.
B)   when people expect that inflation will be low, it is harder for the Fed to increase output by increasing the money supply.
C)   people will believe Fed policy will be more inflationary than the Fed claims.
D)   what policymakers say they will do is usually not what they do, but people believe them anyway.E) A) and B)
F) C) and D)

Question 13

Social Security transfers wealth from younger generations to older generations.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

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 advanceE) A) and B)
F) A) and C)

Question 15

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

Accepted Answer

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.E) B) and D)
F) C) and D)

Question 16

A country has a growth rate of 2%. Government spending is 50 billion units of currency and its tax revenues are 30 billion units of currency. The current national debt is 400 billion units of currency. At which inflation rate is its debt to income ratio unchanged?

Accepted Answer

A)   2%
B)   3%
C)   5%
D)   7%E) All of the above
F) B) and C)

Question 17

Suppose that the country of Aquilonia has an inflation rate of about 2 percent per year and a real growth rate of about 1 percent per year. Suppose also that it has nominal GDP of about 200 billion units of currency and current nominal national debt of 150 billion units of domestic currency. Which of the following government spending and taxation figures will not raise the debt-to-income ratio?

Accepted Answer

A)   government spending equal to 20 billion units and tax collections equal to 16 billion units
B)   government spending equal to 20 billion units and tax collections equal to 14 billion units
C)   government spending equal to 20 billion units and tax collections equal to 10 billion units
D)   government spending equal to 20 billion units and tax collections equal to 8 billion unitsE) B) and C)
F) A) and B)

Question 18

From the end of 2003 to the end of 2004, the United States ran a deficit of about $121 billion. The debt at the start of this period was about $3,924 billion. Which of the following combinations of inflation and real GDP would have allowed the government to run a deficit and kept the ratio of real GDP to the deficit about the same?

Accepted Answer

A)   about 1% inflation and about 1% real GDP growth
B)   about 1% inflation and about 3% real GDP growth
C)   about 2% inflation and about 1% real GDP growth
D)   about 2% inflation and about 2% real GDP growthE) C) and D)
F) All of the above

Question 19

In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a deficit of $159 billion. This change would be expected to have

Accepted Answer

A)   decreased interest rates and investment.
B)   decreased interest rates and increased investment.
C)   increased interest rates and investment.
D)   increased interest rates and decreased investment.E) C) and D)
F) B) and D)

Question 20

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

Accepted Answer

A)   would have to increase the money supply. This would move unemployment closer to the natural rate.
B)   would have to increase the money supply. This would move unemployment further from the natural rate.
C)   would have to decrease the money supply. This would move unemployment closer to the natural rate.
D)   would have to decrease the money supply. This would move unemployment further from the natural rate.E) A) and B)
F) A) and D)

Exam 18: Six Debates Over Macroeconomic Policy

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

Correct Answer
verified

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

Correct Answer
verified

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

Correct Answer
verified

Social Security transfers wealth from younger generations to older generations.

Correct Answer
verified

Correct Answer
verified

The Obama administration believed that transfer payments to the unemployed would have a larger impact on aggregate demand than tax cuts.

Correct Answer
verified

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

Correct Answer
verified

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate supply shifts right, the central bank would have to

Correct Answer
verified

A country has a growth rate of 2%. Government spending is 50 billion units of currency and its tax revenues are 30 billion units of currency. The current national debt is 400 billion units of currency. At which inflation rate is its debt to income ratio unchanged?

Correct Answer
verified

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

Correct Answer
verified

Economists

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

Correct Answer
verified

Which of the following statements is not true?

Correct Answer
verified

Part of the argument against deficits is that they

Correct Answer
verified

The time inconsistency of policy implies that

Correct Answer
verified

In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a deficit of $159 billion. This change would be expected to have

Correct Answer
verified

Which of the following support the idea that monetary policy should be made by a rule?

Correct Answer
verified

The Federal Reserve will tend to tighten monetary policy when

Correct Answer
verified

Suppose the tax rate on interest income from saving were reduced.

Correct Answer
verified

Correct Answer
verified

Exam 18: Six Debates Over Macroeconomic Policy

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

Correct AnswerverifiedShow Answer

Social Security transfers wealth from younger generations to older generations.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The Obama administration believed that transfer payments to the unemployed would have a larger impact on aggregate demand than tax cuts.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate supply shifts right, the central bank would have to

Correct AnswerverifiedShow Answer

A country has a growth rate of 2%. Government spending is 50 billion units of currency and its tax revenues are 30 billion units of currency. The current national debt is 400 billion units of currency. At which inflation rate is its debt to income ratio unchanged?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Economists

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is not true?

Correct AnswerverifiedShow Answer

Part of the argument against deficits is that they

Correct AnswerverifiedShow Answer

The time inconsistency of policy implies that

Correct AnswerverifiedShow Answer

In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a deficit of $159 billion. This change would be expected to have

Correct AnswerverifiedShow Answer

Which of the following support the idea that monetary policy should be made by a rule?

Correct AnswerverifiedShow Answer

The Federal Reserve will tend to tighten monetary policy when

Correct AnswerverifiedShow Answer

Suppose the tax rate on interest income from saving were reduced.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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