Question 1

Provide an example of how current expenditures might benefit future generations.

Accepted Answer

Expenditures on education raise the productivity of workers and so make the wages of future generations higher than otherwise.

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

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

Accepted Answer

A) True 
 B)False  True

Question 4

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. 
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.

Question 5

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. What are some things policymakers can do when higher inflation becomes a concern?

Accepted Answer

Policymakers can cut governmen

Question 6

Zero inflation

Accepted Answer

A) would limit the flexibility of the labor market and so could at times raise unemployment. 
B) might be dangerous because it could lead to rapidly increasing prices. 
C) would make it easy for the Central bank to create negative real interest rates. 
D) is impossible to achieve in the real world. 
A) would limit the flexibility of the labor market and so could at times raise unemployment. 
B) might be dangerous because it could lead to rapidly increasing prices. 
C) would make it easy for the Central bank to create negative real interest rates. 
D) is impossible to achieve in the real world.

Question 7

An increase in government expenditures may lead people to expect that in the future taxes will rise and create greater distortions. By themselves these changes in expectations lead people to

Accepted Answer

A) raise both consumption and investment. 
B) raise consumption but reduce investment. 
C) raise investment but reduce consumption. 
D) reduce both consumption and investment. 
A) raise both consumption and investment. 
B) raise consumption but reduce investment. 
C) raise investment but reduce consumption. 
D) reduce both consumption and investment.

Question 8

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?

Accepted Answer

If inflation is usually about what peopl

Question 9

According to political business cycle theory, if the Fed wanted to increase the chances of a President's re-election, what specific actions might it take?

Accepted Answer

If the Fed wanted to see the President r

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

Accepted Answer

Tax policies designed to encourage savin

Question 12

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 13

Double taxation means that both

Accepted Answer

A) wage income and interest income are taxed, which is currently the case in the United States. 
B) wage income and interest income are taxed, which is not currently the case in the United States. 
C) the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the United States. 
D) the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in the United States. 
A) wage income and interest income are taxed, which is currently the case in the United States. 
B) wage income and interest income are taxed, which is not currently the case in the United States. 
C) the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the United States. 
D) the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in the United States.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

An economist would be more likely to argue for reducing inflation if she thought that the central bank

Accepted Answer

A) lacked credibility and if bonds were usually not indexed for inflation. 
B) lacked credibility and if bonds were usually indexed for inflation. 
C) had credibility and if bonds were usually not indexed for inflation. 
D) had credibility and if bonds were usually indexed for inflation. 
A) lacked credibility and if bonds were usually not indexed for inflation. 
B) lacked credibility and if bonds were usually indexed for inflation. 
C) had credibility and if bonds were usually not indexed for inflation. 
D) had credibility and if bonds were usually indexed for inflation.

Question 17

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. 
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

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) True 
 B)False

Question 19

According to traditional Keynesian analysis, which has a greater impact on aggregate demand, changing taxes or changing government expenditures? Why?

Accepted Answer

An increase in government expe

Question 20

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

Accepted Answer

A) inflation targeting. 
B) the monetary policy reaction lag. 
C) the time inconsistency of policy. 
D) the sacrifice ratio dilemma. 
A) inflation targeting. 
B) the monetary policy reaction lag. 
C) the time inconsistency of policy. 
D) the sacrifice ratio dilemma.

Exam 36: Six Debates Over Macroeconomic Policy

Provide an example of how current expenditures might benefit future generations.

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

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

Part of the argument against deficits is that they

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. What are some things policymakers can do when higher inflation becomes a concern?

Zero inflation

An increase in government expenditures may lead people to expect that in the future taxes will rise and create greater distortions. By themselves these changes in expectations lead people to

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?

According to political business cycle theory, if the Fed wanted to increase the chances of a President's re-election, what specific actions might it take?

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.

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

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

Double taxation means that both

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

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

An economist would be more likely to argue for reducing inflation if she thought that the central bank

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

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

According to traditional Keynesian analysis, which has a greater impact on aggregate demand, changing taxes or changing government expenditures? Why?

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Tools of Finance

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

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