Question 1

Inflation reduction has the lowest cost when the efforts are

Accepted Answer

A)   credible so that the sacrifice ratio is low.
B)   credible so that the sacrifice ratio is high.
C)   unexpected so that the sacrifice ratio is high.
D)   unexpected so that the sacrifice ratio is low.E) A) and C)
F) B) and D)

Question 2

A permanent reduction in inflation would

Accepted Answer

A)   permanently reduce menu costs and permanently lower unemployment.
B)   permanently reduce menu costs and temporarily raise unemployment.
C)   temporarily reduce menu costs and temporarily lower unemployment.
D)   temporarily reduce menu costs and temporarily raise unemployment.E) None of the above
F) A) and B)

Question 3

Why might the response of far-sighted consumers reduce the multiplier effect of an increase in government expenditures?

Accepted Answer

Consumers may recognize that b...

Question 4

Using typical estimates of the sacrifice ratio, how much output would likely be sacrificed to reduce inflation by 3 percent?

Accepted Answer

The typical estimate of the sacrifice ra...

Question 5

Which of the following is not an argument by those who oppose tax-law changes to encourage saving?

Accepted Answer

A)   Saving is not very responsive to changes in the tax rate.
B)   Saving is not an important determinant of a nation's ability to produce output.
C)   Reducing the budget deficit instead of changing the tax laws could raise saving.
D)   Changes in the tax laws to induce saving would distribute the tax burden less fairly.E) C) and D)
F) A) and B)

Question 6

Zero inflation

Accepted Answer

A)   might be dangerous because it could lead to rapidly increasing prices.
B)   would limit the flexibility of the labor market and so could at times raise unemployment.
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) A) and D)
F) None of the above

Question 7

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) B) and D)
F) B) and C)

Question 8

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

Accepted Answer

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.E) B) and C)
F) All of the above

Question 9

The Fed lowered interest rates in 2007 and 2008. This implies, other things the same, that the Fed

Accepted Answer

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

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

When the Federal Open Market Committee meets it

Accepted Answer

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

Question 12

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

Accepted Answer

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

Question 13

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

Accepted Answer

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.E) B) and D)
F) B) and C)

Question 14

Which of the following is correct?

Accepted Answer

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.E) All of the above
F) B) and C)

Question 15

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections

Accepted Answer

A)   interest rates and output would rise.
B)   interest rates would rise and output would fall.
C)   interest rates would fall and output would rise.
D)   interest rates and output would fall.E) All of the above
F) B) and C)

Question 16

Higher saving is associated with

Accepted Answer

A)   a larger capital stock and a higher standard of living.
B)   a larger capital stock but not a higher standard of living.
C)   a higher standard of living but not a larger capital stock.
D)   neither a higher standard of living nor a higher capital stock.E) All of the above
F) A) and B)

Question 17

Using typical estimates of the sacrifice ratio, how much output would likely be sacrificed to reduce inflation from 4 percent to 2 percent?

Accepted Answer

The typical estimate of the sacrifice ra...

Question 18

Many studies indicate changes in monetary policy have most of their effect on aggregate demand about six months after the change is made.

Accepted Answer

A) True 
 B)False

Question 19

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)   buy bonds to raise interest rates.
B)   buy bonds to reduce interest rates.
C)   sell bonds to raise interest rates.
D)   sell bonds to reduce interest rates.E) All of the above
F) A) and B)

Question 20

A reduction in the tax rate on income from saving would

Accepted Answer

A)   most directly benefit the poor in the short run.
B)   increase real wages over time.
C)   decrease the capital stock over time.
D)   decrease productivity over time.E) C) and D)
F) B) and C)

Exam 18: Six Debates Over Macroeconomic Policy

Zero inflation

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Part of the argument against deficits is that they

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The Fed lowered interest rates in 2007 and 2008. This implies, other things the same, that the Fed

Correct AnswerverifiedShow Answer

Using typical estimates of the sacrifice ratio, how much output would likely be sacrificed to reduce inflation by 3 percent?

Correct AnswerverifiedThe typical estimate of the sacrifice ra...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

Why might the response of far-sighted consumers reduce the multiplier effect of an increase in government expenditures?

Correct AnswerverifiedConsumers may recognize that b...View AnswerShow Answer

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections

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Many studies indicate changes in monetary policy have most of their effect on aggregate demand about six months after the change is made.

Correct AnswerverifiedShow Answer

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

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Which of the following is correct?

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Using typical estimates of the sacrifice ratio, how much output would likely be sacrificed to reduce inflation from 4 percent to 2 percent?

Correct AnswerverifiedThe typical estimate of the sacrifice ra...View AnswerShow Answer

When the Federal Open Market Committee meets it

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow 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

Higher saving is associated with

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A reduction in the tax rate on income from saving would

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Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

Correct AnswerverifiedShow Answer

A permanent reduction in inflation would

Correct AnswerverifiedShow Answer

Which of the following is not an argument by those who oppose tax-law changes to encourage saving?

Correct AnswerverifiedShow Answer

Inflation reduction has the lowest cost when the efforts are

Correct AnswerverifiedShow Answer

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The typical estimate of the sacrifice ra...
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While the amendment indicates ...
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Consumers may recognize that b...
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The typical estimate of the sacrifice ra...
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