Question 1

The credibility of monetary policy is the:

Accepted Answer

A) recognition that open market purchases increase the money supply, even though banks and the public affect the money multiplier. 
B) degree to which the public believes the central bank's promises to keep inflation low, even if doing so may impose short-run costs. 
C) pace at which monetary policy can return an economy to potential when inflationary expectations are anchored. 
D) practice of the Federal Reserve of relying primarily on open market operations rather than discount rate lending or changes in reserve requirements. 
A) recognition that open market purchases increase the money supply, even though banks and the public affect the money multiplier. 
B) degree to which the public believes the central bank's promises to keep inflation low, even if doing so may impose short-run costs. 
C) pace at which monetary policy can return an economy to potential when inflationary expectations are anchored. 
D) practice of the Federal Reserve of relying primarily on open market operations rather than discount rate lending or changes in reserve requirements.

Question 2

Relative to workers in Western Europe, workers in the United States:

Accepted Answer

A) face a lower marginal tax rate and work fewer hours per year. 
B) face a higher marginal tax rate and work more hours per year. 
C) face a lower marginal tax rate and work more hours per year. 
D) face a higher marginal tax rate and work fewer hours per year. 
A) face a lower marginal tax rate and work fewer hours per year. 
B) face a higher marginal tax rate and work more hours per year. 
C) face a lower marginal tax rate and work more hours per year. 
D) face a higher marginal tax rate and work fewer hours per year.

Question 3

A tax cut that affects both aggregate demand and potential output is predicted to _____ the long-run equilibrium level of output, while inflation _____.

Accepted Answer

A) increase; increases 
B) increase; decreases 
C) increase; may increase, decrease, or remain unchanged 
D) decrease; decrease 
A) increase; increases 
B) increase; decreases 
C) increase; may increase, decrease, or remain unchanged 
D) decrease; decrease

Question 4

The inside lag is relatively shorter for _____ policy; the outside lag is relatively shorter for _____ policy.

Accepted Answer

A) monetary; fiscal 
B) monetary; monetary 
C) fiscal; monetary 
D) fiscal; fiscal 
A) monetary; fiscal 
B) monetary; monetary 
C) fiscal; monetary 
D) fiscal; fiscal

Question 5

Shocks to _____ require the Fed to choose between inflation and output stability, while shocks to _____ do not require the Fed to choose between inflation and output stability.

Accepted Answer

A) the stock market; aggregate demand 
B) the stock market; aggregate supply 
C) aggregate demand; aggregate supply 
D) aggregate supply; aggregate demand 
A) the stock market; aggregate demand 
B) the stock market; aggregate supply 
C) aggregate demand; aggregate supply 
D) aggregate supply; aggregate demand

Question 6

Shocks to aggregate demand ______ require the Fed to choose between inflation and output stability; shocks to aggregate supply ______ require the Fed to choose between inflation and output stability.

Accepted Answer

A) do; do 
B) do; do not 
C) may or may not; may or may not 
D) do not; do 
A) do; do 
B) do; do not 
C) may or may not; may or may not 
D) do not; do

Question 7

Following an adverse supply shock, people with anchored inflation expectations believe the Fed will:

Accepted Answer

A) raise it target inflation rate. 
B) lower its target inflation rate. 
C) keep its target inflation rate unchanged. 
D) accommodate the shock. 
A) raise it target inflation rate. 
B) lower its target inflation rate. 
C) keep its target inflation rate unchanged. 
D) accommodate the shock.

Question 8

Lower taxes on interest income:

Accepted Answer

A) permanently lower growth rates by encouraging saving rather than consuming. 
B) increase growth rates by increasing consumption rates. 
C) increase growth rates by increasing saving and thus investment. 
D) lower growth rates by reducing government expenditures. 
A) permanently lower growth rates by encouraging saving rather than consuming. 
B) increase growth rates by increasing consumption rates. 
C) increase growth rates by increasing saving and thus investment. 
D) lower growth rates by reducing government expenditures.

Question 9

Which of the following policies is likely to enhance a central bank's credibility?

Accepted Answer

A) Announcing inflation targets 
B) Appointing inflation doves as central bankers 
C) Making the central bank obligated to finance the national deficit 
D) Appointing central bankers for short terms that coincide with those in the legislative and executive branches of government 
A) Announcing inflation targets 
B) Appointing inflation doves as central bankers 
C) Making the central bank obligated to finance the national deficit 
D) Appointing central bankers for short terms that coincide with those in the legislative and executive branches of government

Question 10

The speed at which an economy returns to potential following an adverse inflation shock depends on:

Accepted Answer

A) the Federal Reserve's target inflation rate. 
B) the Federal Reserve's target real interest rate. 
C) the level of potential output. 
D) the public's expectations of how the Federal Reserve will act. 
A) the Federal Reserve's target inflation rate. 
B) the Federal Reserve's target real interest rate. 
C) the level of potential output. 
D) the public's expectations of how the Federal Reserve will act.

Question 11

A tax increase that affects both aggregate demand and potential output is predicted to _____ the long-run equilibrium level of output, while inflation _____.

Accepted Answer

A) decrease; increases 
B) increase; decreases 
C) decrease; may increase, decrease, or remain unchanged 
D) decrease; decrease 
A) decrease; increases 
B) increase; decreases 
C) decrease; may increase, decrease, or remain unchanged 
D) decrease; decrease

Question 12

The time between when Congress decides to cut taxes to stimulate aggregate demand and when the tax cuts are implemented is an example of:

Accepted Answer

A) the outside lag of macroeconomic policy. 
B) the inside lag of macroeconomic policy. 
C) the outside lag of fiscal policy. 
D) the inside lag of monetary policy. 
A) the outside lag of macroeconomic policy. 
B) the inside lag of macroeconomic policy. 
C) the outside lag of fiscal policy. 
D) the inside lag of monetary policy.

Question 13

Announced numerical inflation targets are advocated for all of the following reasons except that announced inflation targets:

Accepted Answer

A) reduce inflation uncertainty. 
B) anchor inflationary expectations. 
C) enhance central bank credibility. 
D) eliminate the tradeoff between maintaining output or inflation in the event of adverse inflationary shocks. 
A) reduce inflation uncertainty. 
B) anchor inflationary expectations. 
C) enhance central bank credibility. 
D) eliminate the tradeoff between maintaining output or inflation in the event of adverse inflationary shocks.

Question 14

By changing incentives, reductions in marginal tax rates can increase potential output in each of the following ways except by encouraging households to:

Accepted Answer

A) enjoy more hours of leisure. 
B) work more hours. 
C) take more entrepreneurial risk. 
D) invest in more human capital. 
A) enjoy more hours of leisure. 
B) work more hours. 
C) take more entrepreneurial risk. 
D) invest in more human capital.

The credibility of monetary policy is the:

Relative to workers in Western Europe, workers in the United States:

A tax cut that affects both aggregate demand and potential output is predicted to _ the long-run equilibrium level of output, while inflation _.

The inside lag is relatively shorter for _ policy; the outside lag is relatively shorter for _ policy.

Shocks to _ require the Fed to choose between inflation and output stability, while shocks to _ do not require the Fed to choose between inflation and output stability.

Shocks to aggregate demand require the Fed to choose between inflation and output stability; shocks to aggregate supply require the Fed to choose between inflation and output stability.

Following an adverse supply shock, people with anchored inflation expectations believe the Fed will:

Lower taxes on interest income:

Which of the following policies is likely to enhance a central bank's credibility?

The speed at which an economy returns to potential following an adverse inflation shock depends on:

A tax increase that affects both aggregate demand and potential output is predicted to _ the long-run equilibrium level of output, while inflation _.

The time between when Congress decides to cut taxes to stimulate aggregate demand and when the tax cuts are implemented is an example of:

Announced numerical inflation targets are advocated for all of the following reasons except that announced inflation targets:

By changing incentives, reductions in marginal tax rates can increase potential output in each of the following ways except by encouraging households to:

Thinking Like an Economist

Comparative Advantage

Spending, Income, and GDP

Inflation and the Price Level

Wages and Unemployment

Economic Growth

Saving, Capital Formation, and Financial Markets

Money, Prices, and the Financial System

Short-Term Economic Fluctuations

Spending, Output, and Fiscal Policy

Monetary Policy and the Federal Reserve

Aggregate Demand, Aggregate Supply, and Business Cycles

Exchange Rates, International Trade, and Capital Flows

Filters

Exam 14: Macroeconomic Policy

The credibility of monetary policy is the:

Relative to workers in Western Europe, workers in the United States:

A tax cut that affects both aggregate demand and potential output is predicted to _____ the long-run equilibrium level of output, while inflation _____.

The inside lag is relatively shorter for _____ policy; the outside lag is relatively shorter for _____ policy.

Shocks to _____ require the Fed to choose between inflation and output stability, while shocks to _____ do not require the Fed to choose between inflation and output stability.

Shocks to aggregate demand ______ require the Fed to choose between inflation and output stability; shocks to aggregate supply ______ require the Fed to choose between inflation and output stability.

Following an adverse supply shock, people with anchored inflation expectations believe the Fed will:

Lower taxes on interest income:

Which of the following policies is likely to enhance a central bank's credibility?

The speed at which an economy returns to potential following an adverse inflation shock depends on:

A tax increase that affects both aggregate demand and potential output is predicted to _____ the long-run equilibrium level of output, while inflation _____.

The time between when Congress decides to cut taxes to stimulate aggregate demand and when the tax cuts are implemented is an example of:

Announced numerical inflation targets are advocated for all of the following reasons except that announced inflation targets:

By changing incentives, reductions in marginal tax rates can increase potential output in each of the following ways except by encouraging households to:

Thinking Like an Economist

Comparative Advantage

Spending, Income, and GDP

Inflation and the Price Level

Wages and Unemployment

Economic Growth

Saving, Capital Formation, and Financial Markets

Money, Prices, and the Financial System

Short-Term Economic Fluctuations

Spending, Output, and Fiscal Policy

Monetary Policy and the Federal Reserve

Aggregate Demand, Aggregate Supply, and Business Cycles

Exchange Rates, International Trade, and Capital Flows

Filters

A tax cut that affects both aggregate demand and potential output is predicted to _ the long-run equilibrium level of output, while inflation _.

The inside lag is relatively shorter for _ policy; the outside lag is relatively shorter for _ policy.

Shocks to _ require the Fed to choose between inflation and output stability, while shocks to _ do not require the Fed to choose between inflation and output stability.

Shocks to aggregate demand require the Fed to choose between inflation and output stability; shocks to aggregate supply require the Fed to choose between inflation and output stability.

A tax increase that affects both aggregate demand and potential output is predicted to _ the long-run equilibrium level of output, while inflation _.