Question 1

Some economists argue that since inflation

Accepted Answer

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

Question 2

If a central bank were required to target inflation at zero, then when there was a positive aggregate supply shock the central bank

Accepted Answer

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

Question 3

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

Accepted Answer

According to the traditional Keynesian m...

Question 4

Which of the following should be kept in mind when policymakers consider efforts to stabilize the economy?

Accepted Answer

A)   The economy responds very quickly to changes in the interest rate and changes in economic conditions are easy to predict.
B)   The economy responds very quickly to changes in the interest rate and changes in economic conditions are nearly impossible to predict.
C)   The economy responds to changes in the interest rate with a lag and changes in economic conditions are easy to predict.
D)   The economy responds to changes in the interest rate with a lag and changes in economic conditions are nearly impossible to predict.E) A) and C)
F) None of the above

Question 5

The political business cycle refers to

Accepted Answer

A)   the fact that about every four years some politician advocates greater government control of the Fed.
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 Fed must follow.E) B) and D)
F) B) and C)

Question 6

Which of the following is an argument against trying to use policy to stabilize the economy?

Accepted Answer

A)   Recessions represent a waste of resources.
B)   Pessimism on the part of households and firms may become a self-fulfilling prophecy.
C)   "Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms.
D)   Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time.E) All of the above
F) A) and D)

Question 7

Which of the following is not correct?

Accepted Answer

A)   A potential cost of deficits is that they reduce national saving, thereby reducing growth of the capital stock and output growth.
B)   Deficits give people the opportunity to consume at the expense of their children, but they do not require them to do so.
C)   The U.S. debt per-person is large compared with average lifetime income.
D)   Current spending may benefit future generations.E) A) and D)
F) A) and B)

Question 8

Paul Volcker's inflation reduction efforts

Accepted Answer

A)   failed to reduce inflation.
B)   failed to reduce expected inflation.
C)   resulted in the highest unemployment rate since the Great Depression.
D)   none of the above are correct.E) B) and D)
F) All of the above

Question 9

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

Accepted Answer

First, economists believe that inflation...

Question 10

The effects of a decline in the value of financial assets, such as stocks, on consumption and the economy might be offset by

Accepted Answer

A)   increasing government spending.
B)   decreasing the money supply.
C)   increasing taxes.
D)   undertaking no policy action.E) A) and B)
F) B) and D)

Question 11

Which of the following raise the incentive for households to save?

Accepted Answer

A)   means-testing of government benefits and inheritance taxes
B)   means-testing of government benefits but not inheritance taxes
C)   inheritance taxes, but not means-testing of government benefits
D)   neither means-testing of government benefits nor inheritance taxesE) All of the above
F) None of the above

Question 12

The six debates over macroeconomic policy exist mostly because

Accepted Answer

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.E) A) and D)
F) A) and C)

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

Accepted Answer

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.E) A) and C)
F) None of the above

Question 15

The Federal Open Market Committee meets about

Accepted Answer

A)   every six days.
B)   every six weeks.
C)   every six months.
D)   every sixteen months.E) A) and C)
F) B) and D)

Question 16

The Federal Open Market Committee

Accepted Answer

A)   by law must focus on maintaining low inflation rather than stabilizing output.
B)   by law must focus on stabilizing output rather than maintaining low inflation.
C)   by law must follow a mechanical rule that takes into account deviations of unemployment from its natural rate and deviations of inflation from a target.
D)   operates with almost complete discretion over monetary policy.E) None of the above
F) A) and B)

Question 17

Explain how tax cuts can increase aggregate supply.

Accepted Answer

When the government reduces marginal tax...

Question 18

If aggregate demand shifts because of a wave of pessimism about stock prices, those who favor a policy that "leans against the wind" would advocate the

Accepted Answer

A)   Federal Reserve increase the money supply or the government increase taxes.
B)   Federal Reserve increase the money supply or the government decrease taxes.
C)   Federal Reserve decrease the money supply or the government increase taxes.
D)   Federal Reserve decrease the money supply or the government decrease taxes.E) A) and C)
F) All of the above

Question 19

Which of the following are taxed?

Accepted Answer

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 holdersE) B) and C)
F) C) and D)

Question 20

If inflation were reduced, then it is

Accepted Answer

A)   likely that real incomes would rise more rapidly and labor markets would be more flexible.
B)   likely that real incomes would rise more rapidly but unlikely that labor markets would be more flexible.
C)   likely that labor markets would be more flexible but unlikely that real incomes would rise more rapidly.
D)   unlikely that real incomes would rise more rapidly and unlikely that labor markets would be more flexible.E) A) and C)
F) A) and B)

Exam 23: Six Debates Over Macroeconomic Policy

Which of the following should be kept in mind when policymakers consider efforts to stabilize the economy?

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Which of the following is an argument against trying to use policy to stabilize the economy?

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Explain how tax cuts can increase aggregate supply.

Correct AnswerverifiedWhen the government reduces marginal tax...View AnswerShow Answer

Which of the following raise the incentive for households to save?

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Paul Volcker's inflation reduction efforts

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The effects of a decline in the value of financial assets, such as stocks, on consumption and the economy might be offset by

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The political business cycle refers to

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Which of the following are taxed?

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According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

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Which of the following is not correct?

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If inflation were reduced, then it is

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

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The Federal Open Market Committee

Correct AnswerverifiedShow Answer

Some economists argue that since inflation

Correct AnswerverifiedShow Answer

The six debates over macroeconomic policy exist mostly because

Correct AnswerverifiedShow Answer

If aggregate demand shifts because of a wave of pessimism about stock prices, those who favor a policy that "leans against the wind" would advocate the

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedAccording to the traditional Keynesian m...View AnswerShow Answer

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

Correct AnswerverifiedFirst, economists believe that inflation...View AnswerShow Answer

The Federal Open Market Committee meets about

Correct AnswerverifiedShow Answer

If a central bank were required to target inflation at zero, then when there was a positive aggregate supply shock the central bank

Correct AnswerverifiedShow Answer

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When the government reduces marginal tax...
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According to the traditional Keynesian m...
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First, economists believe that inflation...
View Answer

Correct Answer
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Correct Answer
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