Question 1

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

Accepted Answer

Tax policies designed to encourage savin...

Question 2

Proponents of zero-inflation policies acknowledge that the public is unconcerned about the inflation rate.

Accepted Answer

A) True 
 B)False

Question 3

Suppose a country has had a high and relatively stable inflation rate for a long time. How might this affect the costs and benefits of inflation reduction?

Accepted Answer

If inflation is usually about what peopl...

Question 4

In effect, a consumption tax would put all saving automatically into a tax-advantaged savings account similar to an Individual Retirement Account (IRA).

Accepted Answer

A) True 
 B)False

Question 5

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. What are some things policymakers can do when higher inflation becomes a concern?

Accepted Answer

Policymakers can cut governmen...

Question 6

Proponents of a balanced government budget acknowledge that running a budget deficit is justifiable in time of war.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False  True

Question 8

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

Accepted Answer

A)  raise both consumption and investment.
B)  raise consumption but reduce investment.
C)  raise investment but reduce consumption.
D)  reduce both consumption and investment.E) B) and D)
F) A) and B)

Question 9

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

Accepted Answer

A)  inflation targeting.
B)  the monetary policy reaction lag.
C)  the time inconsistency of policy.
D)  the sacrifice ratio dilemma.E) None of the above
F) B) and C)

Question 10

According to political business cycle theory, if the Fed wanted to increase the chances of a President's re-election, what specific actions might it take?

Accepted Answer

If the Fed wanted to see the President r...

Question 11

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

Accepted Answer

A)  lower the discount rate and sell bonds.
B)  lower the discount rate and buy bonds.
C)  raise the discount rate and sell bonds.
D)  raise the discount rate and buy bonds.E) A) and B)
F) None of the above

Question 12

Part of the argument against deficits is that they

Accepted Answer

A)  increase interest rates and investment.
B)  increase interest rates and decrease investment.
C)  decrease interest rates and investment.
D)  decrease interest rates and increase investment.E) A) and D)
F) A) and C)

Question 13

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

Accepted Answer

An increase in government expe...

Question 14

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Accepted Answer

A) True 
 B)False

Question 15

If the central bank has discretion to make policy, it may create economic fluctuations that reflect the electoral calendar. This is called the political business cycle.

Accepted Answer

A) True 
 B)False

Question 16

Zero inflation

Accepted Answer

A)  would limit the flexibility of the labor market and so could at times raise unemployment.
B)  might be dangerous because it could lead to rapidly increasing prices.
C)  would make it easy for the Central bank to create negative real interest rates.
D)  is impossible to achieve in the real world.E) B) and C)
F) A) and D)

Question 17

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

Accepted Answer

A) True 
 B)False  True

Question 18

Double taxation means that both

Accepted Answer

A)  wage income and interest income are taxed, which is currently the case in the United States.
B)  wage income and interest income are taxed, which is not currently the case in the United States.
C)  the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the United States.
D)  the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in the United States.E) All of the above
F) A) and D)

Question 19

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

Accepted Answer

Expenditures on education raise the productivity of workers and so make the wages of future generations higher than otherwise.

Question 20

An economist would be more likely to argue for reducing inflation if she thought that the central bank

Accepted Answer

A)  lacked credibility and if bonds were usually not indexed for inflation.
B)  lacked credibility and if bonds were usually indexed for inflation.
C)  had credibility and if bonds were usually not indexed for inflation.
D)  had credibility and if bonds were usually indexed for inflation.E) C) and D)
F) None of the above

Exam 36: Six Debates Over Macroeconomic Policy

Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

Correct AnswerverifiedTax policies designed to encourage savin...View AnswerShow Answer

Proponents of zero-inflation policies acknowledge that the public is unconcerned about the inflation rate.

Correct AnswerverifiedShow Answer

Suppose a country has had a high and relatively stable inflation rate for a long time. How might this affect the costs and benefits of inflation reduction?

Correct AnswerverifiedIf inflation is usually about what peopl...View AnswerShow Answer

In effect, a consumption tax would put all saving automatically into a tax-advantaged savings account similar to an Individual Retirement Account (IRA).

Correct AnswerverifiedShow Answer

Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. What are some things policymakers can do when higher inflation becomes a concern?

Correct AnswerverifiedPolicymakers can cut governmen...View AnswerShow Answer

Proponents of a balanced government budget acknowledge that running a budget deficit is justifiable in time of war.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedTrue

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

Correct AnswerverifiedShow Answer

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

Correct AnswerverifiedShow Answer

According to political business cycle theory, if the Fed wanted to increase the chances of a President's re-election, what specific actions might it take?

Correct AnswerverifiedIf the Fed wanted to see the President r...View AnswerShow Answer

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

Correct AnswerverifiedShow Answer

Part of the argument against deficits is that they

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedAn increase in government expe...View AnswerShow Answer

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Correct AnswerverifiedShow Answer

If the central bank has discretion to make policy, it may create economic fluctuations that reflect the electoral calendar. This is called the political business cycle.

Correct AnswerverifiedShow Answer

Zero inflation

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedTrue

Double taxation means that both

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedExpenditures on education raise the productivity of workers and so make the wages of future generations higher than otherwise.

An economist would be more likely to argue for reducing inflation if she thought that the central bank

Correct AnswerverifiedShow Answer

Correct Answer
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Tax policies designed to encourage savin...
View Answer

Correct Answer
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Correct Answer
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If inflation is usually about what peopl...
View Answer

Correct Answer
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Correct Answer
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Policymakers can cut governmen...
View Answer

Correct Answer
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True

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Correct Answer
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If the Fed wanted to see the President r...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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An increase in government expe...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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True

Correct Answer
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Correct Answer
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Expenditures on education raise the productivity of workers and so make the wages of future generations higher than otherwise.

Correct Answer
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