Deck 18: Six Debates Over Macroeconomic Policy

Question 1

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.

Answer 1

A

Question 2

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 left.
B) increase output.
C) decrease unemployment.
D) increase prices.

Answer 2

A

Question 3

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.

Answer 3

C

Question 4

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 5

When aggregate demand is high, risking higher inflation, those in favor of using monetary and fiscal policy to stabilize the economy might recommend

A) increasing government spending.
B) expanding the money supply.
C) lowering taxes.
D) the Fed sell government bonds.

Question 6

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 7

When aggregate demand is too low to ensure full employment, those in favor of using monetary and fiscal policy to stabilize the economy might recommend

A) cutting government spending.
B) raising taxes.
C) having the Fed purchase government bonds.
D) reducing the money supply.

Question 8

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 9

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) increase taxes
C) increase government expenditures
D) Do nothing and let markets correct themselves.

Question 10

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

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

Question 11

"Leaning against the wind" is exemplified by an)

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

Question 12

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

A) increased spending
B) increased aggregate demand
C) increased real GDP
D) an increase in the unemployment rate

Question 13

"Leaning against the wind" is exemplified by an)

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

Question 14

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 15

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) All of the above

Question 16

"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) All of the above are correct.

Question 17

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

A) increased spending, increased aggregate demand, rising real GDP, and a rising 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 rising unemployment rate
D) decreased spending, decreased aggregate demand, falling real GDP, and a falling unemployment rate

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

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 19

If the unemployment rate falls below its long-run level, which policies would be appropriate to stabilize output?

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 20

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 21

President Barrack Obama and Congress cut taxes and raised government expenditures during the 2008 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 22

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 23

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 24

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?

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 25

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) Congress and the President to approve Fed policy.

Question 26

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 27

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) about a year and a half..

Question 28

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 29

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 30

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.

Question 31

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 32

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 33

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 34

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 35

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 36

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 37

For which of the following policies is there a significant implementation lag?

A) fiscal policy and monetary policy
B) fiscal policy but not monetary policy
C) monetary policy but not fiscal policy
D) neither monetary policy nor fiscal policy

Question 38

If the Fed announced its intention to sell 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 39

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 40

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 41

According to traditional Keynesian analysis, if the economy is in a recession, the government can move it back towards full employment by

A) cutting taxes and increasing expenditures. The effect of the tax cut is larger.
B) cutting taxes and increasing expenditures. The effect of the tax cut is smaller.
C) raising taxes and decreasing expenditures. The effect of the tax increase is larger.
D) raising taxes and decreasing expenditures. The effect of the tax increase is smaller.

Question 42

In 2009 President 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 43

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 44

Supporters of using government expenditures to respond to recession

A) argue that monetary policy should be used first. To respond to a recession the Fed would increase the money supply.
B) argue that monetary policy should be used first. To respond to a recession the Fed would decrease the money supply.
C) argue that monetary policy should be used only after fiscal policy has been used. To respond to a recession the Fed would increase the money supply.
D) argue that monetary policy should be used only after fiscal policy has been used. To respond to a recession the Fed would decrease the money supply.

Question 45

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 46

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 increases the magnitude of economic fluctuations.

Question 47

In response to recession, who primarily raised expenditures rather than cut taxes?

A) President George W. Bush and President Barack Obama
B) President George W. Bush but not President Barack Obama
C) President Barack Obama but not President George W. Bush
D) Neither President George W. Bush nor President Barack Obama

Question 48

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 49

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 50

According to computer estimates using a traditional macroeconomic model, the Obama administration found that the multiplier for tax cuts and government expenditures were respectively

A) .99 and 1.59.
B) 1.59 and .99
C) 1.3 and 1.7
D) 1.7 and 1.3

Question 51

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 52

Suppose a tax cut affected aggregate demand and aggregate supply. The shift in aggregate supply would make the

A) price level and real GDP change by more than otherwise.
B) price level change by more than otherwise and real GDP change by less than otherwise.
C) price level change by less than otherwise and real GDP change by more than otherwise.
D) price level and real GDP change by more than otherwise.

Question 53

In response to recession, who primarily cut taxes rather than raised expenditures?

A) President George W. Bush and President Barack Obama
B) President George W. Bush but not President Barack Obama
C) President Barack Obama but not President George W. Bush
D) neither President George W. Bush nor President Barack Obama

Question 54

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 55

In which cases were tax cuts followed by robust growth?

A) the ones of the Kennedy administration in 1964 and the ones of the Reagan administration in 1981
B) the ones of the Kennedy administration in 1964 but not the ones of the Reagan administration in 1981
C) the ones of the Reagan administration in 1981 but not the ones of the Kennedy administration in 1964
D) neither the ones of the Kennedy administration in 1964 nor the ones of the Reagan administration in 1981

Question 56

An increase in the money supply

A) reduces interest rates and shifts aggregate demand to the right.
B) reduces interest rates and shifts aggregate supply to the right
C) raises interest rates and shifts aggregate demand to the right.
D) raises interest rates and shifts aggregate supply to the right.

Question 57

Which of the following is true of stimulus policy enacted in 2009?

A) We can be sure that it reduced the severity of the recession because the recession was less severe than the Great Depression.
B) We can be sure that it reduced the severity of the recession even though the recession was more severe than the Great Depression.
C) We can not be sure that it reduced the severity of the recession, but the recession was less severe than the Great Depression.
D) We can not be sure that it reduced the severity of the recession because the recession was more severe than the Great Depression.

Question 58

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 59

Critics of active monetary and fiscal policy emphasize

A) that policy affects the economy with a lag and our ability to forecast future economic conditions is poor.
B) "leaning against the wind" of economic change to stabilize the economy.
C) cutting government spending, raising taxes, and reducing the money supply when aggregate demand is excessive.
D) boosting government spending, lowering taxes, and increasing the money supply when aggregate demand is low.

Question 60

Stimulus spending in 2009 was used for

A) building roads and bridges.
B) providing aid to local and state governments.
C) making payments to the unemployed.
D) All of the above are correct.

Question 61

As compared to a tax cut, an increase in government expenditures is likely to affect aggregate demand

A) more quickly but is more likely to be spent on projects with little benefit.
B) more quickly and is less likely to be spent on projects with little benefit.
C) less quickly but is less likely to be spent on projects with little benefit.
D) less quickly and is more likely to be spent on projects with little benefit.

Question 62

A 1977 amendment to the Federal Reserve Act of 1913

A) requires the Federal Reserve to place more weight on promoting price stability than on promoting maximum employment.
B) requires the Federal Reserve to place more weight on promoting maximum employment than on promoting price stability.
C) requires the Federal Reserve to place equal weight on promoting price stability and maximum employment.
D) says the Federal Reserve should promote price stability and maximum employment, but does not specify how the Federal Reserve should weight these goals.

Question 63

As compared to government spending, a tax cut is likely to affect aggregate demand

A) more quickly but is more likely to be spent on projects with little benefit.
B) more quickly and is less likely to be spent on projects with little benefit.
C) less quickly but is less likely to be spent on projects with little benefit.
D) less quickly and is more likely to be spent on projects with little benefit.

Question 64

Suppose a tax cut affects aggregate demand and aggregate supply. Which of the shifts raise the price level?

A) both the shift of aggregate demand and the shift of aggregate supply
B) the shift of aggregate demand, but not the shift of aggregate supply
C) the shift of aggregate supply, but not the shift of aggregate demand
D) neither the shift of aggregate demand nor the shift of aggregate supply

Question 65

When the Federal Open Market Committee meets it

A) looks only at the state of economy to determine how to conduct monetary operations in order to follow the monetary policy rule set by law.
B) looks at the state of the economy and economic forecasts to determine how to conduct monetary operations in order to follow the monetary policy rule set by law.
C) looks only at the state of the economy to determine the target it will set for the federal funds rate.
D) looks at the state of the economy and economic forecasts to determine the target it will set for the federal funds rate.

Question 66

A 1977 amendment to the Federal Reserve Act of 1913 says the Fed should "promote" which of the following goals?

A) only price stability
B) only maximum employment
C) only price stability and maximum employment
D) price stability, maximum employment, and moderate long-term interest rates

Question 67

Which of the following is correct? Investment tax credits

A) can increase investment, but stimulating investment is not a key to ending a recession.
B) can increase investment, which is a key to ending a recession.
C) can not increase spending on investment goods, but stimulating investment is not a key to ending a recession.
D) can not increase spending on investment goods, but stimulating investment is a key to ending a recession.

Question 68

A 1977 amendment to the Federal Reserve Act of 1913

A) says the Federal Reserve should only promote maximum employment
B) says the Federal Reserve should only promote price stability
C) says the Federal Reserve should promote price stability and maximum employment, but does not specify how the Federal Reserve should weight these goals.
D) says the Federal Reserve should promote price stability and maximum employment, but specifies that it place more weight on promoting price stability.

Question 69

Which of the following can tax cuts influence?

A) Aggregate demand
B) Aggregate supply
C) Investment spending
D) All of the above

Question 70

Which of the following is not a valid point in debating the merits of increasing government expenditures or cutting taxes during a recession?

A) A cut in the marginal tax rate increases the incentives to find a job and work longer hours.
B) Consumers will save a portion of a tax cut.
C) The government may use the increase in expenditures on projects with little value, particularly if it wishes to respond quickly.
D) There is no evidence that tax cuts have been followed by increases in economic growth.

Question 71

The Federal Open Market Committee meets about

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

Question 72

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 73

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

Question 74

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 75

Which of the following would those in favor of increasing government spending rather than decreasing taxes to prop up aggregate demand probably not agree with?

A) Traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes for increasing aggregate demand.
B) Increased government spending on "shovel­ready" projects can be helpful to boost aggregate demand.
C) Increases in government spending offer a greater "bang for the buck" than decreases in taxes.
D) When the government gives a dollar in tax cuts to a household, that dollar immediately and fully adds to aggregate demand.

Question 76

Which of the following is correct?

A) Well designed tax cuts can increase investment which fluctuates more than consumption over the business cycle.
B) Well designed tax cuts can increase investment but it fluctuates less than consumption over the business cycle.
C) Tax cuts have little effect on investment which fluctuate more than consumption over the business cycle.
D) Tax cuts have little effect on investment but it fluctuates less than consumption over the business cycle

Question 77

An increase in government spending financed by borrowing changes people's expectations 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.

Question 78

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

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 79

Suppose a tax cut affects aggregate demand and aggregate supply. Which of the shifts raise real GDP?

A) both the shift of aggregate demand and the shift of aggregate supply
B) the shift of aggregate demand, but not the shift of aggregate supply
C) the shift of aggregate supply, but not the shift of aggregate demand
D) neither the shift of aggregate demand nor the shift of aggregate supply

Question 80

Which of the following can tax cuts influence?

A) aggregate demand and aggregate supply
B) aggregate demand but not aggregate supply
C) aggregate supply but not aggregate demand
D) neither aggregate demand nor aggregate supply