Question 1

Why do many economists advocate a consumption tax rather than an income tax?

Accepted Answer

The current income tax means that income...

Question 2

Identify three government policies that discourage saving.

Accepted Answer

First, the returns to saving are heavily...

Question 3

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate supply shifts right, what should the central bank do, and what will happen to output?

Accepted Answer

A)  The central bank should increase the money supply, which causes output to move closer to its long-run equilibrium.
B)  The central bank should increase the money supply, which causes output to move farther from its long-run equilibrium.
C)  The central bank should decrease the money supply, which causes output to move closer to its long-run equilibrium.
D)  The central bank should decrease the money supply, which causes output to move farther from its long-run equilibrium.E) B) and C)
F) None of the above

Question 4

Identify three of the five costs of inflation.

Accepted Answer

There are several costs of inflation, including the following: shoeleather costs, because people spend resources to economize on their holdings of money; menu costs created by having to change prices; increased relative price variability, which distorts signals provided by relative price changes; distortions in the tax laws that discourage saving; arbitrary redistribution of wealth from unexpected inflation; and the general inconvenience created by the lack of a fixed unit of account.

Question 5

Why should monetary policy be made by rule rather than discretion?

Accepted Answer

A)  because the economy is subject to a variety of random shocks
B)  because monetary policymakers are now allowed undisciplined discretion
C)  because it is not clear how important political business cycles have been in the past
D)  because central banks can achieve credibility over time by backing up their words with deedsE) All of the above
F) B) and C)

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

To stimulate savings in retirement plans, suppose the capital gain is not taxed until it is realized (the money is effectively withdrawn from the account.) To simplify, suppose that when she is 70, our worker withdraws the entire amount in her account. How much will she receive if the capital gain tax is 40 percent?

Accepted Answer

If interest is not taxed until realized,...

Question 8

Explain the time inconsistency of monetary policy.

Accepted Answer

Time inconsistency refers to the idea th...

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Suppose that a country has an inflation rate of about 3 percent per year and a real growth rate of about 6 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest deficit it can have without raising the debt-to-income ratio?

Accepted Answer

A)  just under 1 billion units
B)  just under 3 billion units
C)  just under 6 billion units
D)  just under 9 billion unitsE) B) and D)
F) C) and D)

Question 11

The cost of inflation reduction is a small but permanent increase in unemployment.

Accepted Answer

A) True 
 B)False

Question 12

What is the relationship between deficit and debt?

Accepted Answer

A)  Deficits require people to consume at the expense of their children.
B)  If the government uses funds to pay for useful programs, on net the debt need not burden future generations.
C)  If the government runs a deficit, it is necessarily in debt.
D)  High deficit implies high debt. n.E) All of the above
F) None of the above

Question 13

Suppose the budget deficit is rising 2 percent per year and nominal GDP is rising 7 percent per year. Which of the following best describes the debt created by these continuing deficits?

Accepted Answer

A)  sustainable, but the future burden on your children cannot be offset
B)  not sustainable, and the future burden on your children cannot be offset
C)  not sustainable, but the future burden on your children can be offset if you save for them
D)  sustainable, and the future burden on your children can be offset if you save for themE) B) and D)
F) C) and D)

Question 14

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

Accepted Answer

A)  It increases the interest rate and decreases spending on capital goods.
B)  It increases the interest rate and increases spending on capital goods.
C)  It decreases the interest rate and increases spending on capital goods.
D)  It decreases the interest rate and decreases spending on capital goods.E) A) and B)
F) B) and C)

Question 15

Consider the following rule for monetary policy: r = 2 percent +  π\piπ  + 1/2(y - y*) /y* + 1/2( π\piπ -  π\piπ *) , where r is the nominal interest rate, y is real GDP, y* is an estimate of the natural rate of output,  π\piπ  is the inflation rate, and  π\piπ * is the inflation target. What is the implication of this rule?

Accepted Answer

A)  If aggregate demand shifts right from long-run equilibrium, this rule unambiguously implies that the Bank of Canada decreases the nominal interest rate.
B)  If aggregate supply shifts right from long-run equilibrium, we cannot tell without more information whether the Bank of Canada should increase or decrease the nominal interest rate.
C)  If output is at its natural level, but inflation is above its target, the Bank of Canada must decrease the nominal interest rate.
D)  If inflation is at its targeted level, but output is above its natural rate, the Bank of Canada must decrease the federal funds rate. E) A) and B)
F) A) and D)

Question 16

Suppose people in countries that have had persistently high inflation are sceptical about efforts to reduce inflation. What will happen to the short-run Phillips curve and the sacrifice ratio?

Accepted Answer

A)  The short-run Phillips curve remains to the left, and the sacrifice ratio will be low.
B)  The short-run Phillips curve remains to the left, and the sacrifice ratio will be high.
C)  The short-run Phillips curve remains to the right, and the sacrifice ratio will be low.
D)  The short-run Phillips curve remains to the right, and the sacrifice ratio will be high.E) All of the above
F) None of the above

Question 17

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

Accepted Answer

A) True 
 B)False  True

Question 18

What is the principal reason that monetary policy has lags?

Accepted Answer

A)  It takes a long time for changes in the interest rate to change aggregate demand.
B)  It takes a long time for changes in the money supply to change interest rates.
C)  It takes a long time for the Bank of Canada to make changes in policy.
D)  It takes a long time for the government to pass the necessary laws.E) A) and C)
F) A) and B)

Question 19

Some social programs transfer wealth from younger generations to older generations.

Accepted Answer

A) True 
 B)False

Question 20

Explain how it is possible for the government debt to grow forever.

Accepted Answer

The debt can grow because the economy grows. If, for example, nominal GDP grows at 3 percent per year, and the debt also grows at 3 percent per year, then the debt will be a constant fraction of GDP. This is perfectly sustainable. Problems arise only if the debt grows faster than GDP. Such a situation cannot prevail forever, because that would imply that the debt would eventually be many times larger than GDP, and the government would no longer be able to pay the interest payments on its debt.

Exam 17: Five Debates Over Macroeconomic Policy

Why do many economists advocate a consumption tax rather than an income tax?

Correct Answer
verified
The current income tax means that income...
View Answer

Identify three government policies that discourage saving.

Correct Answer
verified
First, the returns to saving are heavily...
View Answer

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate supply shifts right, what should the central bank do, and what will happen to output?

Correct Answer
verified

Identify three of the five costs of inflation.

Why should monetary policy be made by rule rather than discretion?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified
If interest is not taxed until realized,...
View Answer

Explain the time inconsistency of monetary policy.

Correct Answer
verified
Time inconsistency refers to the idea th...
View Answer

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

Correct Answer
verified

Suppose that a country has an inflation rate of about 3 percent per year and a real growth rate of about 6 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest deficit it can have without raising the debt-to-income ratio?

Correct Answer
verified

The cost of inflation reduction is a small but permanent increase in unemployment.

Correct Answer
verified

What is the relationship between deficit and debt?

Correct Answer
verified

Suppose the budget deficit is rising 2 percent per year and nominal GDP is rising 7 percent per year. Which of the following best describes the debt created by these continuing deficits?

Correct Answer
verified

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

Correct Answer
verified

Correct Answer
verified

Suppose people in countries that have had persistently high inflation are sceptical about efforts to reduce inflation. What will happen to the short-run Phillips curve and the sacrifice ratio?

Correct Answer
verified

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

Correct Answer
verified
True

What is the principal reason that monetary policy has lags?

Correct Answer
verified

Some social programs transfer wealth from younger generations to older generations.

Correct Answer
verified

Explain how it is possible for the government debt to grow forever.

Exam 17: Five Debates Over Macroeconomic Policy

Why do many economists advocate a consumption tax rather than an income tax?

Correct AnswerverifiedThe current income tax means that income...View AnswerShow Answer

Identify three government policies that discourage saving.

Correct AnswerverifiedFirst, the returns to saving are heavily...View AnswerShow Answer

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate supply shifts right, what should the central bank do, and what will happen to output?

Correct AnswerverifiedShow Answer

Identify three of the five costs of inflation.

Why should monetary policy be made by rule rather than discretion?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedIf interest is not taxed until realized,...View AnswerShow Answer

Explain the time inconsistency of monetary policy.

Correct AnswerverifiedTime inconsistency refers to the idea th...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Suppose that a country has an inflation rate of about 3 percent per year and a real growth rate of about 6 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest deficit it can have without raising the debt-to-income ratio?

Correct AnswerverifiedShow Answer

The cost of inflation reduction is a small but permanent increase in unemployment.

Correct AnswerverifiedShow Answer

What is the relationship between deficit and debt?

Correct AnswerverifiedShow Answer

Suppose the budget deficit is rising 2 percent per year and nominal GDP is rising 7 percent per year. Which of the following best describes the debt created by these continuing deficits?

Correct AnswerverifiedShow Answer

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose people in countries that have had persistently high inflation are sceptical about efforts to reduce inflation. What will happen to the short-run Phillips curve and the sacrifice ratio?

Correct AnswerverifiedShow Answer

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

Correct AnswerverifiedTrue

What is the principal reason that monetary policy has lags?

Correct AnswerverifiedShow Answer

Some social programs transfer wealth from younger generations to older generations.

Correct AnswerverifiedShow Answer

Explain how it is possible for the government debt to grow forever.

Correct Answer
verified
The current income tax means that income...
View Answer

Correct Answer
verified
First, the returns to saving are heavily...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
If interest is not taxed until realized,...
View Answer

Correct Answer
verified
Time inconsistency refers to the idea th...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
True

Correct Answer
verified

Correct Answer
verified