Question 1

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. In practice, however, there are obstacles to the use of such policies. What are the primary difficulties with using monetary and fiscal policy to stabilize the economy?

Accepted Answer

Both monetary and fiscal policy work wit...

Question 2

The Federal Open Market Committee

Accepted Answer

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.E) C) and D)
F) A) and D)

Question 3

Explain how tax cuts can increase aggregate supply.

Accepted Answer

When the government reduces marginal tax...

Question 4

List two costs of inflation.

Accepted Answer

shoeleather costs, menu costs,...

Question 5

If the Fed followed a rule for monetary policy, the time inconsistency problem would be eliminated.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

Households will spend disposable income ...

Question 7

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

Accepted Answer

"Shovel ready" public works pr...

Question 8

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Accepted Answer

A) True 
 B)False

Question 9

What is the benefit of a high saving rate?

Accepted Answer

A high saving rate provides mo...

Question 10

According to a 1977 amendment to the Federal Reserve Act of 1913, what weights should the Fed put on the goals of maximum employment, stable prices, and moderate long-term interest rates?

Accepted Answer

While the amendment indicates ...

Question 11

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

Accepted Answer

Increase g...

Question 12

While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy, what are some of the reasons why tax cuts might be preferred to increased government spending?

Accepted Answer

First, tax cuts can influence both aggre...

Question 13

When wages are fixed by contract, inflation reduces

Accepted Answer

A)  nominal wages; this likely makes labor markets more flexible.
B)  nominal wages; this likely makes labor markets less flexible.
C)  real wages; this likely makes labor markets more flexible.
D)  real wages; this likely makes labor markets less flexible.E) None of the above
F) C) and D)

Question 14

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

Accepted Answer

A)  sustainable, but the future burden on future generations cannot be offset.
B)  sustainable, and the future burden on future generations can be offset if the current generation saves enough for them.
C)  not sustainable, and the future burden on future generations cannot be offset.
D)  not sustainable, but the future burden on future generations can be offset if the current generation saves enough for them.E) A) and C)
F) A) and B)

Question 15

The laws that created the Fed give it some specific recommendations about what goals it should pursue so it has little discretion in making policy.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

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.E) A) and C)
F) B) and C)

Question 17

When measured over a long span of time, a tax on interest income

Accepted Answer

A)  removes all benefits from saving.
B)  reduces the benefits from saving by a small amount.
C)  reduces the benefits from saving by a large amount.
D)  does nor reduce any of the benefits from saving.E) All of the above
F) B) and C)

Question 18

The time inconsistency of policy implies that

Accepted Answer

A)  what policymakers say they will do is generally what they will do, but people don't believe them because of current policy.
B)  when people expect that inflation will be low, it is harder for the Fed to increase output by increasing the money supply.
C)  people expect Fed policy to be more inflationary than the Fed claims.
D)  what policymakers say they will do is usually not what they do, but people believe them anyway.E) A) and C)
F) All of the above

Question 19

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

Accepted Answer

rise, income falls so tax reve...

Question 20

A policymaker opposed to using government policy to stabilize the economy would be likely to believe

Accepted Answer

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.E) B) and C)
F) None of the above

Exam 36: Six Debates Over Macroeconomic Policy

The time inconsistency of policy implies that

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If the Fed followed a rule for monetary policy, the time inconsistency problem would be eliminated.

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

Correct AnswerverifiedIncrease g...View AnswerShow Answer

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. In practice, however, there are obstacles to the use of such policies. What are the primary difficulties with using monetary and fiscal policy to stabilize the economy?

Correct AnswerverifiedBoth monetary and fiscal policy work wit...View AnswerShow Answer

When measured over a long span of time, a tax on interest income

Correct AnswerverifiedShow Answer

Explain how tax cuts can increase aggregate supply.

Correct AnswerverifiedWhen the government reduces marginal tax...View AnswerShow Answer

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

Correct Answerverified"Shovel ready" public works pr...View AnswerShow Answer

A policymaker opposed to using government policy to stabilize the economy would be likely to believe

Correct AnswerverifiedShow Answer

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

Correct Answerverifiedrise, income falls so tax reve...View AnswerShow Answer

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.

Correct AnswerverifiedHouseholds will spend disposable income ...View AnswerShow Answer

What is the benefit of a high saving rate?

Correct AnswerverifiedA high saving rate provides mo...View AnswerShow Answer

The Federal Open Market Committee

Correct AnswerverifiedShow Answer

While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy, what are some of the reasons why tax cuts might be preferred to increased government spending?

Correct AnswerverifiedFirst, tax cuts can influence both aggre...View AnswerShow Answer

According to a 1977 amendment to the Federal Reserve Act of 1913, what weights should the Fed put on the goals of maximum employment, stable prices, and moderate long-term interest rates?

Correct AnswerverifiedWhile the amendment indicates ...View AnswerShow Answer

List two costs of inflation.

Correct Answerverifiedshoeleather costs, menu costs,...View AnswerShow Answer

When wages are fixed by contract, inflation reduces

Correct AnswerverifiedShow Answer

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

Correct AnswerverifiedShow Answer

The laws that created the Fed give it some specific recommendations about what goals it should pursue so it has little discretion in making policy.

Correct AnswerverifiedShow Answer

Correct Answer
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Increase g...
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Both monetary and fiscal policy work wit...
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Correct Answer
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Correct Answer
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When the government reduces marginal tax...
View Answer

Correct Answer
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"Shovel ready" public works pr...
View Answer

Correct Answer
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During recessions, even with no changes in policy, the deficit tends to because _______.

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rise, income falls so tax reve...
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Correct Answer
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Households will spend disposable income ...
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Correct Answer
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A high saving rate provides mo...
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Correct Answer
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Correct Answer
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First, tax cuts can influence both aggre...
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While the amendment indicates ...
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Correct Answer
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shoeleather costs, menu costs,...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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