Deck 22: Should Policy Makers Be Restrained

Question 1

Econometric models of the U.S.economy generally agree

A)on the quantitative impact of monetary policy over a horizon of several years.
B)that an increase in money growth will increase output in the short run.
C)that an increase in money growth will decrease output in the short run.
D)that an increase in money growth will decrease output in the long run.
E)that "rational expectations" is the best way to generate policy forecasts.

Answer 1

B

Question 2

To solve the "time inconsistency" problem in macro policy,a nation may well have to

A)restrict itself in the present from taking certain policy moves in the future.
B)lift all restrictions on future policy moves.
C)present policy moves to the public,for example,in a referendum.
D)use the courts to settle policy disputes.
E)make the central bank more responsive to the popular will.

Answer 2

A

Question 3

The idea that the economy operates like a complicated,predictable machine is an important aspect of

A)game theory.
B)attrition theory.
C)the theory of strategic interaction.
D)time inconsistency theory.
E)optimal control theory.

Answer 3

E

Question 4

Once people believe the Fed's commitment to keep unemployment at the natural rate,the Fed can reduce unemployment below the natural rate

A)in both the short run and the long run.
B)in both the short run and the long run,but only after changing peoples' expectations.
C)in the long run,but not the short run.
D)in the short run,but not in the long run.
E)none of the above

Question 5

For this question,assume that the there exists uncertainty about the impact of monetary policy on the macroeconomy.Given this information,it would be most appropriate for the central bank to increase money growth

A)at the midpoint of a recession.
B)by more than the increase that will yield the desired response.
C)by less than the increase that will yield the desired response.
D)by an amount equal to the increase that will yield the desired response.
E)only after it is certain that the economy has entered a recession.

Question 6

Suppose we compare the average growth rates of output for Republican and Democratic administrations.In which year,on average,is the difference in growth rates for Republican and Democratic administrations greatest?

A)first
B)second
C)third
D)fourth
E)the growth rates are nearly identical for both parties

Question 7

In the United States,presidential elections occur every four years.If a political business cycle exists in the United States,in which year of a presidential term,all else fixed,would we expect output growth to be highest?

A)the first year
B)the second year
C)the third year
D)the fourth year

Question 8

The existence of the time inconsistency problem in macro policy suggests which of the following?

A)use fiscal and monetary policy to fine tune the economy.
B)reduce the independence of the central bank.
C)appoint someone who is more conservative (economically)than the rest of the government to head the central bank.
D)intervene frequently in the foreign exchange market.
E)eliminate rational expectations from econometric models used for forecasting.

Question 9

In macroeconomics,game theory focuses on the strategic interactions between which of the following groups of agents?

A)individuals; firms
B)individuals and firms; policy makers
C)policy makers; economic forecasters
D)individuals and firms; economic forecasters

Question 10

One surprising insight from viewing policy as a "game" is that

A)central bankers should project an image of being conservative on economic policy matters,regardless of their personal views.
B)it is more difficult to control inflation when the central bank is highly independent.
C)uncertainty over the impact of policy makes little difference in designing an optimal policy.
D)money growth has little or no impact on inflation in the long run.
E)decreasing money growth may substantially increase the rate of inflation in the long run.

Question 11

Research indicates that the more independent the central bank,

A)the smaller the budget deficit.
B)the higher the nominal interest rate.
C)the lower the rate of inflation.
D)the larger the time inconsistency problem in making policy.
E)the greater the likelihood of a "war of attrition" over policy.

Question 12

All of the macroeconometric models currently in use

A)originate in the United States.
B)incorporate rational expectations into their predictions.
C)originate with government or international agencies.
D)originate with commercial firms who sell their forecasts to other firms and governments.
E)none of the above

Question 13

In which of the following political systems would a political business cycle be more likely to occur?

A)a democracy with elections that occur on a regular basis
B)a parliamentary
C)communist-type economies
D)socialist-type economies
E)a democracy with elections that occur on an irregular basis

Question 14

In 1994,Republicans introduced their "Contract with America." This plan

A)included a PAYGO rule.
B)would restrict the ability of monetary policy to affect the economy in the short run.
C)included a line item veto.
D)would make the Federal Reserve even more independent than it already is.
E)all of the above

Question 15

Which of the following is the most powerful argument for putting restraints on policy makers (as opposed to self-restraint by policy makers themselves)?

A)time inconsistency
B)uncertainty about Okun's coefficient
C)uncertainty about the natural rate of unemployment
D)uncertainty about the timing of policy impacts
E)disagreements about the proper structure of an econometric model

Question 16

Which of the following statements is true about the United States over the past fifty years?

A)there is no evidence of political business cycles in the United States
B)the debt-to-GDP ratio has been roughly constant
C)under either party,output growth has been generally higher in the year preceding an election than in other years
D)none of the above

Question 17

Given the uncertainty about the effects of macro policy,economists generally propose that

A)macro policies should be more active,the lower the level of unemployment or inflation.
B)changes in money growth should only be used for fine tuning the economy,not for correcting large imbalances (such as high inflation).
C)money growth should be set at zero by constitutional amendment.
D)elected officials should have more input in the determination of monetary policy.
E)none of the above

Question 18

Which of the following best defines time inconsistency?

A)the increasing inaccuracy of econometric models as the time horizon becomes longer.
B)the tendency for the rise in output to be greater in the early years of a president's term,and smaller in the later years.
C)the effects of political electoral cycles on the business cycle.
D)the tendency for policy makers to deviate from a pre-announced optimal policy once agents in the economy have adjusted their behavior and expectations based on the pre-announced policy
E)the effect of economic uncertainty on short-run stabilization policy.

Question 19

In the United States,presidential elections occur every four years.If a political business cycle exists in the United States,in which year of a presidential term,all else fixed,would we expect output growth to be lowest?

A)the first or second year
B)the second or third year
C)the third or fourth year
D)the fourth year

Question 20

During which of the following decades was the debt-to-GDP ratio generally highest in the United States?

A)1930s
B)1940s
C)1960s
D)1980s
E)1990s

Question 21

Analysis of macro policy and theory has resulted in of the following views?

A)there should be no constraints imposed on fiscal or monetary policy.
B)a constitutional amendment is the most appropriate method to constrain fiscal policy.
C)the heads of the central bank should be chosen by popular elections.
D)all of the above
E)none of the above

Question 22

Analysis of U.S.budget deficits in the United States between 1990 and 2000 indicates that which of the following is primarily responsible for the reduction in the budget deficit?

A)decrease in spending
B)increase in tax revenues
C)decrease in spending and increase in tax revenues
D)lower interest rates
E)increases in tax rates

Question 23

Suppose an elected official wishes to introduce a new government program.Under a PAYGO rule,this new program would be adopted only if

A)the budget deficit is reduced by the same amount as the costs of the new program.
B)the budget deficit is reduced by half the amount of the costs of the new program.
C)the new program does not result in an increase in the current or future budget deficit.
D)none of the above

Question 24

Those who are concerned about balanced budget amendments typically argue that balanced budget amendments

A)cause interest rates to be higher than they otherwise would be.
B)would make fluctuations in output around the natural level of output greater.
C)would increase spending in a recession.
D)would reduce national saving.

Question 25

As uncertainty about the effects of policy on output decreases,we would expect that

A)policy makers would be more frequently implement fine tuning policies.
B)policy makers would implement more active policies.
C)policy makers would implement less active policies.
D)both A and B
E)both A and C

Question 26

Analysis of U.S.growth rates shows that growth rate of output tends to be highest in which year of a presidential administration?

A)the first
B)the second
C)the third
D)the fourth

Question 27

Research for a number of OECD countries suggests that inflation will be lower

A)the more independent the central bank.
B)the less independent the central bank.
C)if the heads of central banks are chosen by election.
D)when the terms of the heads of central banks coincide with the terms of elected officials.

Question 28

Which of the following was one of the main rules in the 1990 "Budget Enforcement Act"?

A)flat tax rate
B)PAYGO rule
C)indexation of income tax brackets
D)consumption tax
E)none of the above

Question 29

Republican administrations generally are relatively more concerned about which of the following?

A)increasing expenditures
B)reducing the rate of inflation
C)reducing unemployment
D)raising taxes
E)none of the above

Question 30

Assume that political business cycles do NOT exist.Given this assumption,we would expect,all else fixed,the output growth to be highest in which period?

A)just prior to an election
B)just after an election
C)in the first year of an administration
D)in the second year of an administration
E)none of the above

Question 31

Democratic administrations generally are relatively more concerned about which of the following?

A)reducing government expenditures
B)reducing the rate of inflation
C)reducing the unemployment rate
D)balancing budget deficits
E)balancing trade deficits

Question 32

To deal with the time inconsistency problem associated with monetary policy,some have suggested that

A)the head of the central bank be chosen by election.
B)the central bank implement expansionary monetary policy prior to election years.
C)elected officials should have a direct influence on the implementation of monetary policy.
D)all of the above
E)none of the above

Question 33

Arguments for placing restraints on policy makers fall into which of the following?

A)policy makers understand completely how the economy operates
B)policy makers have good intentions,but end up doing more harm than good
C)policy makers do what is best for them,not necessarily what is best for the country
D)all of the above
E)both B and C

Question 34

Fine tuning represents which of the following?

A)policy makers' attempts to minimize the deviations of actual output from the natural level of output
B)policy makers' attempts to achieve zero inflation
C)policy makers' attempts to minimize fluctuations in interest rates
D)policy makers' attempts to maintain a given rate of growth in the nominal money supply
E)policy makers' attempts to minimize variations in the real exchange rate

Question 35

Game theory analysis of macro policy suggests that as voters become more short-sighted

A)policy makers will be tempted to raise taxes.
B)policy makers will be forced to balance the budget.
C)policy makers will adopt policies today to achieve balanced budgets in the future.
D)all of the above
E)none of the above

Question 36

The PAYGO rule was allowed to expire in which year?

A)1990
B)1991
C)2002
D)the PAYGO rule still exists

Question 37

Which of the following was one of the main rules in the 1990 "Budget Enforcement Act"?

A)flat tax rate
B)spending caps
C)indexation of income tax brackets
D)consumption tax
E)none of the above

Question 38

Based on an analysis of macroeconomic outcomes under Republican and Democratic administrations,we would expect which of the following to occur?

A)growth rates to be generally higher under Republican administrations.
B)macroeconomic policy to be relatively contractionary under Democratic administrations.
C)unemployment rates to be generally higher under Democratic administrations.
D)inflation rates to be generally lower under Democratic administrations.
E)none of the above

Question 39

Who is best known for arguing about the long and variable lags of monetary policy?

A)Friedman
B)Keynes
C)Phillips
D)Greenspan
E)Bernanke

Question 40

Which of the following policies toward kidnappings would you recommend to authorities?

A)State policy of NO negotiations.If a kidnapping occurs,authorities should negotiate.
B)State policy of negotiations.If a kidnapping occurs,authorities should NOT negotiate
C)State policy of negotiations.If a kidnapping occurs,authorities should negotiate.
D)none of the above

Question 41

Balanced budget amendments are believed to be destabilizing.Explain why this is so.

Question 42

Explain whether uncertainty should cause policy makers to do more or do less to stabilize the economy.

Question 43

During republican presidential administration since 1948,economic growth was highest in ________ year of the administration?

A)first
B)second
C)third
D)fourth

Question 44

In ________,would-be members of the Euro area signed the Stability and Growth Pact (SPG).

A)1997
B)1998
C)1999
D)2000

Question 45

Who is best known for arguing about the fine tuning of monetary policy?

A)Friedman
B)Keynes
C)Modigliani
D)Greenspan
E)Bernanke

Question 46

Explain what a PAYGO rule is.

Question 47

Which of the theory is better to think about policy?

A)game theory
B)optimal control theory
C)expectations theory
D)none of the above

Question 48

Suppose a government implements rules that result in a more independent central bank.What effect do you think this more independent central bank will eventually have on money growth and inflation in that country? Explain.

Question 49

What were some of the key features in terms of fiscal policy of the Stability and Growth Pact signed in 1997 by would-be members of the Euro?

Question 50

The Masstricht treaty set the budget ratio to GDP to be ________ in order for countries to qualify to join the Euro area.

A)below 3%
B)below 4%
C)below 5%
D)below 6%

Question 51

Which of the following is NOT an example of the issue of time inconsistency?

A)a central bank announced to maintain low inflation and at the same time increased money supply
B)a government stated that they will not negotiate with hostage takers.When someone is taken hostage,it negotiates
C)a mom says to her kids no cookie before meals and she never gives cookies before her kids eat their meals.
D)a person on diet eats ice cream for dinner

Question 52

Research by Alberto Alesina has documented differences and similarities in the average annual rates of growth in output during each year of Democratic and Republican administrations.Briefly explain what the pattern of these differences and similarities is.

Question 53

Discuss the time inconsistency problem and explain how it relates to monetary policy.

Question 54

Wars of attrition arise in which of the following contexts?

A)fiscal policy
B)deficit reduction
C)hyperinflation
D)all of above
E)A and B

Question 55

First,what can be done to increase central bank credibility? Second,why is central bank credibility important?

Question 56

During democratic presidential administration since 1948,economic growth was highest in ________ year of the administration?

A)first
B)second
C)third
D)fourth

Question 57

A "conservative" central banker cares

A)less about inflation and more about unemployment than the government.
B)more about economic growth and less about inflation.
C)more about inflation and less about unemployment than the government.
D)less about economic growth and more about inflation.

Question 58

The Masstricht treaty set the budget ratio to GDP to be ________ in order for countries to qualify to join the Euro area.

A)below 60%
B)below 70%
C)below 80%
D)below 90%

Question 59

Assume a country has presidential elections every three years.If a political business cycle exists in this country,explain any differences in the average annual growth rates of output for each year of a typical administration.

Question 60

The hostage taking example was developed by

A)John Nash.
B)Kydland and Prescott.
C)John Harsanyi.
D)Reinhard Selten.

Question 61

What are the new rules of the Euro Plus Pact adopted in 2011?

Question 62

Explain spending caps set by the Budget Enforcement Act.

Question 63

What are the main rules of the Budget Enforcement Act of 1990?

Question 64

Use "wars of attrition" to explain the debate about deficit reduction.

Question 65

Suppose a government have a stated policy that it will not negotiate with hostage takers.Now someone is taken hostage,what would be the best policy for the government? Explain.