Deck 36: Six Debates Over Macroeconomic Policy

Question 1

As opposed to an increase in government expenditures,a tax cut

A) is likely to impact spending faster and according to traditional theory has a larger multiplier.
B) is likely to impact spending faster,but according to traditional theory has a smaller multiplier.
C) is likely to impact spending with a longer lag,but according to traditional theory has a larger multiplier.
D) is likely to impact spending with a longer lag and according to traditional theory has a smaller multiplier

Answer 1

B

Question 2

In June of 2010,the government had a debt of about $8.6 trillion.Over the next year real GDP grew by about 1.6% and inflation was about 2%.What is the largest deficit the government could have run over this time without raising the debt-to-GDP ratio?

A) about $68.8 billion
B) about $137.6 billion
C) about $275.2 billion
D) about $309.6 billion

Answer 2

D

Question 3

An increase in government spending financed by borrowing changes people's expecations about future taxation such that current consumption expenditures

A) fall.The increase in expenditures makes it likely that future taxes will create smaller distortions.
B) fall.The increase in expenditures makes it likely that future taxes will create larger distortions.
C) rise.The increase in expenditures makes it likely that future taxes will create smaller distortions.
D) rise.The increase in expenditures makes it likely that future taxes will create larger distortions.

Answer 3

B

Question 4

Economists agree that at least in the short run disinflation

A) leads to a period of higher unemployment.They also agree that the costs of even moderate inflation is high.
B) leads to a period of higher unemployment.They disagree about the cost of moderate inflation.
C) leads to a period of lower unemployment.They also agree that the cost of even moderate inflation is high.
D) leads to a period of lower unemployment.They disagree about the cost of moderate inflation.

Question 5

Why is there a lag between the Fed's actions and the economy's response?

Question 6

If net exports fall,what actions could a central bank take to stabilize the economy?

Question 7

Which of the following does the U.S.currently have?

A) means-tested government benefits and tax laws that tax capital income only once
B) means-tested government benefits and tax laws that tax some capital income twice
C) tax laws that tax capital income only once,but not means-tested government benefits
D) tax laws that tax some capital income twice,but not means-tested government benefits

Question 8

Why is it desirable,if possible,to use policy to offset the effects of a decrease in aggregate demand?

Question 9

The effect of budget deficits on interest rates

A) increases private investment,so eventually the capital stock rises.
B) increases private investment,so eventually the capital stock falls.
C) decreases private investment,so eventually the capital stock rises.
D) decreases private investment,so eventually the capital stock falls.

Question 10

The Federal Open Market Committee

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.

Question 11

If businesses become more pessimistic about the future,what fiscal policies could the government take to stabilize the economy?

Question 12

Tax cuts

A) can easily target investment spending,but investment spending falls by only a small percentage during recessions.
B) can easily target investment spending,which falls by a large percentage during recessions.
C) cannot easily target investment spending,but investment spending falls by only a small percentage during recessions.
D) cannot easily target investment spending,which falls by a large percentage during recessions.

Question 13

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

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.

Question 14

Demand for workers in some industry declines.These workers are reluctant to have a cut in their nominal wage.However,

A) inflation will raise their real wage and so increase the number of available workers.
B) inflation will raise their real wage and so decrease the number of available workers
C) inflation will reduce their real wage and so increase the number of available workers.
D) inflation will reduce their real wage and so decrease the number of available workers.

Question 15

If financial turmoil overseas reduces U.S.net exports,then those in favor of "lean against the wind policies" would advocate

A) decreasing the money supply and cutting taxes.
B) decreasing the money supply and raising taxes.
C) increasing the money supply and cutting taxes.
D) increasing the money supply and raising taxes.

Question 16

Inflation

A) leads people to use more resources to reduce money holdings.There is no way it can make labor markets work more efficiently.
B) leads people to use more resources to reduce money holdings.However,it can make labor markets work more efficiently.
C) leads people to use fewer resources to reduce money holdings.There is no way it can make labor markets work more efficiently
D) leads people to use fewer resources to reduce money holdings.However,it can make labor markets work more efficiently.

Question 17

Opponents of tax reforms intended to raise saving argue that such reforms

A) favor those with high income,and that saving may not rise because of the substitution effect.
B) favor those with high income,and that saving may not rise because of the income effect.
C) favor those with low income,and that saving may not rise because of the substitution effect.
D) favor those with low income,and that saving may not rise because of the income effect.

Question 18

According to the political business cycle,after an election,unless the central bank acts inflation is likely to

A) have risen.To counter this the central bank would raise interest rates.
B) have risen.To counter this the central bank would lower interest rates.
C) have fallen.To counter this the central bank would raise interest rates.
D) have fallen.To counter this the central bank would lower interest rates.

Question 19

Why might policymakers attempts to stabilize the economy do more harm than good?

Question 20

If the Fed announced its intention to buy bonds,then it would be signaling that it was going to

A) raise the money supply.It could do this to counter high unemployment.
B) raise the money supply.It could do this to counter high inflation.
C) reduce the money supply.It could do this to counter high unemployment.
D) reduce the money supply.It could do this to counter high inflation.

Question 21

Provide two specific ways in which reducing inflation might leave "permanent scars" on the economy.

Question 22

What is meant by the political business cycle?

Question 23

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

Question 24

Proponents of requiring the government to balance its budget argue that debt burdens future generations.Explain one claim they make to support this argument.

Question 25

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

Question 26

Explain what is meant by saying that capital income is taxed twice,

Question 27

List two of the three types of fiscal programs that the President and Congress emphasized in response to the 2008-2009 recession.

Question 28

What is the benefit of a high saving rate?

Question 29

In addition to the tax code,other policies reduce the incentives for people to save Provide an example.

Question 30

List two costs of inflation.

Question 31

By law what goals are the Federal Reserve to pursue? What,if any,specific weights are given for these goals?

Question 32

Advocates of cutting taxes rather than increasing government expenditures in response to a recession argue that the increase in spending by consumers and business may be more effective than that of the government.Explain this argument.

Question 33

Why might reforms to encourage saving lead to a less egalitarian society?

Question 34

Which part of the Federal Reserve determines monetary policy? How often does it meet? What does it set a target for?

Question 35

During recessions,even with no changes in policy,the deficit tends to ______ because _____________.

Question 36

Why might the response of far-sighted consumers reduce the multiplier effect of an increase in government expenditures?

Question 37

A higher return on saving ______ the amount a household needs to save to achieve any target level of future consumption.This effect on saving is called the _______ effect.If the income effect is large enough,then a reduction in taxes on saving might ______ tax revenues.

Question 38

What did the Fed actions in the 1990's demonstrate about monetary policy and rules?

Question 39

What component of GDP is particularly volatile over the business cycle and can be targeted by tax cuts?

Question 40

One concern of those who oppose the central bank targeting inflation at zero is that reducing inflation is costly.What is the cost of reducing the inflation rate?

Question 41

"Leaning against the wind" is exemplified by a

A) tax cut when there is a recession.
B) decrease in the money supply when there is a recession.
C) decrease in government expenditures when there is a recession.
D) increasing money supply when there is a boom.

Question 42

The Fed raised interest rates in 2004 and 2005.This implies,other things the same,that the Fed

A) increased the money supply because it was concerned about unemployment.
B) increased the money supply because it was concerned about inflation.
C) decreased the money supply because it was concerned about unemployment.
D) decreased the money supply because it was concerned about inflation.

Question 43

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

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

Question 44

If the unemployment rate rises,which policies would be appropriate to reduce it?

A) increase the money supply,increase taxes
B) increase the money supply,cut taxes
C) decrease the money supply,increase taxes
D) decrease the money supply,cut taxes

Question 45

President George W.Bush and congress cut taxes and raised government expenditures in 2003.According to the aggregate supply and aggregate demand model

A) both the tax cut and the increase in government expenditures would tend to increase output.
B) only the tax cut would tend to increase output.
C) only the increase in government expenditures would tend to increase output.
D) neither the tax cut nor the increase in government expenditures would tend to increase output.

Question 46

If firms were faced with greater uncertainty because of concern that oil prices might rise,they might decrease expenditures on capital.In response to this change,someone who advocated "lean against the wind" policies might advocate

A) decreasing the money supply.
B) increasing taxes.
C) increasing government expenditures.
D) decreasing government expenditures.

Question 47

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

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.

Question 48

Suppose aggregate demand fell.In order to stabilize the economy,the government might

A) increase the money supply.
B) decrease government expenditures.
C) increase taxes.
D) do nothing.

Question 49

Fluctuations in employment and output result from changes in

A) aggregate demand only.
B) aggregate supply only.
C) aggregate demand and aggregate supply.
D) neither aggregate demand nor aggregate supply.

Question 50

Those who desire that policymakers stabilize the economy would advocate which of the following when aggregate demand is insufficient to ensure full employment?

A) Decrease the money supply.
B) Decrease taxes.
C) Decrease government expenditures.
D) Do nothing and let markets correct themselves.

Question 51

Policymakers following a "lean against the wind" policy would

A) increase government expenditures when output is low and decrease them when output is high.
B) increase government expenditures when output is low and do nothing when output is high.
C) decrease government expenditures when output is low and increase them when output is high.
D) decrease government expenditures when output is high and do nothing when output is low.

Question 52

The Fed lowered interest rates in 2007 and 2008.This implies,other things the same,that the Fed

A) increased the money supply because it was concerned about unemployment.
B) increased the money supply because it was concerned about inflation.
C) decreased the money supply because it was concerned about unemployment.
D) decreased the money supply because it was concerned about inflation.

Question 53

The economy goes into recession.Which of the following lists contains things policymakers could do to try to end the recession?

A) increase the money supply,increase taxes,increase government spending
B) increase the money supply,increase taxes,decrease government spending
C) increase the money supply,decrease taxes,increase government spending
D) decrease the money supply,increase taxes,decrease government spending

Question 54

The Federal Reserve will tend to tighten monetary policy when

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.

Question 55

The Fed lowered interest rates in 2001 and 2002.This implies,other things the same,that the Fed

A) increased the money supply because it was concerned about unemployment.
B) increased the money supply because it was concerned about inflation.
C) decreased the money supply because it was concerned about unemployment.
D) decreased the money supply because it was concerned about inflation.

Question 56

If the unemployment rate rises,which policies would both be appropriate to reduce it?

A) increase taxes,increase government spending
B) increase taxes,decrease government spending
C) decrease taxes,increase government spending
D) decrease taxes,decrease government spending

Question 57

"Leaning against the wind" is exemplified by a

A) tax increase when there is a recession.
B) decrease in the money supply when there is an expansion.
C) decrease in government expenditures when there is a recession.
D) All of the above are correct.

Question 58

President Barrack Obama and Congress cut taxes and raised government expenditures during the recent financial crisis.According to the aggregate supply and aggregate demand model which of these policies would tend to reduce unemployment?

A) both the tax cut and the increase in government expenditures
B) the tax cut but not the increase in government expenditures
C) the increase in government expenditures but not the tax cut
D) neither the increase in government expenditures nor the tax cut

Question 59

In the Summer of 2008,consumers indicated that they were less optimistic about the future of the economy.Such a change in sentiment is likely to

A) shift aggregate demand to the right.
B) increase output.
C) increase unemployment.
D) increase prices.

Question 60

Studies have shown significant spending changes arise from interest rate changes after

A) a few days.
B) a few weeks.
C) a few months.
D) a few years.

Question 61

A policymaker in favor of stabilizing the economy would be likely to believe

A) recessions are a waste of resources.
B) economies must suffer through the booms and busts of the business cycle.
C) the long policy lags make implementing policy changes in response to recession too risky.
D) policy exacerbates the magnitude of economic fluctuations.

Question 62

A policymaker against stabilizing the economy would be likely to believe

A) policymakers should "do no harm".
B) there are no obstacles to the practical application of policy in real life.
C) policy lags are short enough that implementing policy changes in response to recession is not too risky.
D) policy mitigates the magnitude of economic fluctuations.

Question 63

All of the following are arguments against stabilization policy except

A) Economic forecasting is highly imprecise.
B) Long lags may cause stabilization policies to in fact destabilize the economy.
C) Monetary policy affects aggregate demand by changing interest rates.
D) Fiscal policy must go through a long political process.

Question 64

Opponents of using policy to stabilize the economy generally believe that

A) neither fiscal nor monetary policy have much impact on aggregate demand.
B) attempts to stabilize the economy decrease the magnitude of economic fluctuations.
C) unemployment and inflation are not cause for much concern.
D) economic conditions can easily change between the start of policy action and when it takes effect.

Question 65

In general,the longest lag for

A) both fiscal and monetary policy is the time it takes to change policy.
B) both fiscal and monetary policy is the time it takes for policy to affect aggregate demand.
C) monetary policy is the time it takes to change policy,while for fiscal policy the longest lag is the time it takes for policy to affect aggregate demand.
D) fiscal policy is the time it takes to change policy,while for monetary policy the longest lag is the time it takes for policy to affect aggregate demand.

Question 66

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

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.

Question 67

Which of the following likely occurs when households and firms are pessimistic?

A) Increased spending.
B) Increased aggregate demand.
C) Real GDP rises.
D) The unemployment rate increases.

Question 68

Suppose there is a decrease in short-run aggregate supply.If the Federal Reserve wants to stabilize output it should

A) buy bonds.These purchases also move the price level closer to its original level.
B) buy bonds.However these purchases move the price level farther from its original level.
C) sell bonds.These purchases also move the price level closer to its original level.
D) sell bonds.However these purchase move the price level farther from its original level.

Question 69

In 2009 Barack Obama responded to recession

A) only by cutting taxes.
B) by cutting taxes and reducing government expenditures.
C) only by raising government expenditures.
D) by cutting taxes and by raising government expenditures.

Question 70

The Federal Reserve

A) requires little time to change policy and aggregate demand responds quickly.
B) requires little time to change policy but aggregate demand responds slowly.
C) usually requires a substantial time to change policy but aggregate demand responds quickly.
D) usually requires a substantial time to change policy and aggregate demand responds slowly.

Question 71

The principal reason that monetary policy has lags is that it takes a long time for

A) changes in the interest rate to change aggregate demand.
B) changes in the money supply to change interest rates.
C) the Fed to make changes in policy.
D) the federal government to change the tax code.

Question 72

In theory the severity of recessions can be diminished with

A) an increase in government spending,which the political process cannot delay.
B) an increase in government spending,which the length of the political process can delay.
C) a decrease in government expenditures,which the political process cannot delay.
D) a decrease in government spending,which the length of the political process can delay.

Question 73

If the natural rate of unemployment is 6%,but the Fed thinks it is 5% and attempts to use monetary policy to move unemployment from 6% to 5% then in the short run which of the following variables will the Fed's policy raise above their long-run levels?

A) the price level and real GDP
B) the price level but not real GDP
C) real GDP but not the price level
D) neither real GDP nor the price level

Question 74

If aggregate demand shifts right and the President and Congress want to use fiscal policy to reverse the change in output,they could

A) increase government expenditures.If by the time policy has been implemented the economy has moved back to long-run equilibrium,then this policy will raise output above its long-run level.
B) increase government expenditures.If by the time policy has been implemented the economy has moved back to long-run equilibrium,then this policy will reduce output to below its long-run level.
C) decrease government expenditures.If by the time policy has been implemented the economy has moved back to long-run equilibrium,then this policy will raise output above its long-run level.
D) decrease government expenditures.If by the time policy has been implemented the economy has moved back to long-run equilibrium,then this policy will reduce output to below its long-run level.

Question 75

Which of the following is correct?

A) Economic forecasts are precise and aggregate spending responds almost immediately to interest rate changes.
B) Economic forecast are precise and aggregate spending responds to interest rate changes with a lag.
C) Economic forecasts are imprecise and aggregate spending responds almost immediately to interest rate changes.
D) Economic forecast are imprecise and aggregate spending responds to interest rate changes with a lag.

Question 76

Suppose there is a decrease in aggregate demand.If the Fed wants to stabilize output it could

A) buy bonds.These purchases also move the price level closer to its original level.
B) buy bonds.However these purchases move the price level farther from its original level.
C) sell bonds.These sales also move the price level closer to its original level.
D) sell bonds.However these sales move the price level farther from its original level.

Question 77

Which of the following likely occurs when households and firms are pessimistic?

A) Increased spending,increased aggregate demand,rising real GDP and a falling unemployment rate.
B) Decreased spending,increased aggregate demand,rising real GDP and a falling unemployment rate.
C) Decreased spending,decreased aggregate demand,falling real GDP and a falling unemployment rate.
D) Decreased spending,decreased aggregate demand,falling real GDP and a rising unemployment rate.

Question 78

The principal lag for monetary policy

A) and fiscal policy is the time it takes to implement policy.
B) and fiscal policy is the time it takes for policy to change spending.
C) is the time it takes to implement policy.The principal lag for fiscal policy is the time it takes for policy to change spending.
D) is the time it takes for policy to change spending.The principal lag for fiscal policy is the time it takes to implement it.

Question 79

Part of the lag in monetary policy effects is due to

A) the long political process of monetary policy decisions.
B) precise economic forecasts.
C) the time required for firms and households to alter their spending plans.
D) changes in the unemployment rate.

Question 80

If there is an increase in the money supply,in the short run

A) the interest rises.It takes several weeks for spending to fully respond to this change.
B) the interest rises.It takes several months for spending to fully respond to this change.
C) the interest falls.It takes several weeks for spending to fully respond to this change.
D) the interest falls.It takes several months for spending to fully respond to this change.