Question 1

Which of the following is not an argument in favor of requiring the government to balance its budget?

Accepted Answer

A)   Government debt imposes higher taxes or more borrowing on future generations.
B)   A balanced budget will smooth the business cycle.
C)   Deficits lower national saving.
D)   Recent history shows that Congress will run deficits even when deficits are not justified by war or recession.E) A) and B)
F) A) and C)

Question 2

A policymaker in favor of stabilizing the economy would be likely to believe

Accepted Answer

A)   recessions are a waste of resources.
B)   economies must suffer through the booms and busts of the business cycle.
C)   the long policy lags make implementing policy changes in response to recession too risky.
D)   policy exacerbates the magnitude of economic fluctuations.E) None of the above
F) A) and C)

Question 3

Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level rose because of an increase in aggregate demand and a decrease in aggregate supply that kept output unchanged,then

Accepted Answer

A)   the central bank would have to decrease the money supply which would decrease output.
B)   the central bank would have to decrease the money supply which would increase output.
C)   the central bank would have to increase the money supply which would decrease output.
D)   the central bank would have to increase the money supply which would increase output.E) B) and C)
F) C) and D)

Question 4

If real output grows at 3 percent per year and the inflation rate is 3 percent per year then government debt can grow by 6 percent per year and not increase the ratio of debt to income.

Accepted Answer

A) True 
 B)False

Question 5

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Accepted Answer

A) True 
 B)False

Question 6

Tax policy changes that favor people who save will

Accepted Answer

A)   favor low-income households.
B)   favor people with high income.
C)   create a more egalitarian society.
D)   unambicuously increase national saving.E) All of the above
F) B) and C)

Question 7

When the government has a deficit,a burden is necessarily imposed on future generations of taxpayers.

Accepted Answer

A) True 
 B)False

Question 8

Suppose the tax rate on interest income from saving were reduced.

Accepted Answer

A)   The income effect,but not the substitution effect,would tend to reduce private saving.
B)   The substitution effect,but not the income effect,would tend to reduce private saving.
C)   Both the income and substitution effect would tend to reduce private saving.
D)   Neither the income nor the substitution effect would tend to reduce private saving.E) A) and B)
F) B) and D)

Question 9

Reforming tax laws to encourage saving is motivated by which of the Ten Principles of Economics from Chapter 1?

Accepted Answer

A)   The cost of something is what you give up to get it (Principle 2) .
B)   Trade can make everyone better off (Principle 5) .
C)   Markets are usually a good way to organize economic activity (Principle 6) .
D)   A country's standard of living depends on its ability to produce goods and services (Principle 8) .E) A) and B)
F) None of the above

Question 10

All of the following are arguments against stabilization policy except

Accepted Answer

A)   Economic forecasting is highly imprecise.
B)   Long lags may cause stabilization policies to in fact destabilize the economy.
C)   Monetary policy affects aggregate demand by changing interest rates.
D)   Fiscal policy must go through a long political process.E) C) and D)
F) None of the above

Question 11

Describe three costs of inflation.

Accepted Answer

There are several costs of inflation.Sho...

Question 12

Which of the following is not correct?

Accepted Answer

A)   Government debt can continue to rise forever.
B)   If the government uses funds to pay for investment programs,on net the debt need not burden future generations.
C)   Social Security does not transfer wealth from younger generations to older generations.
D)   The average U.S.citizens' share of the government debt represents about 1 percent of her lifetime income.E) B) and D)
F) None of the above

Question 13

Policymakers following a "lean against the wind" policy would

Accepted Answer

A)   increase government expenditures when output is low and decrease them when output is high.
B)   increase government expenditures when output is low and do nothing when output is high.
C)   decrease government expenditures when output is low and increase them when output is high.
D)   decrease government expenditures when output is high and do nothing when output is low.E) None of the above
F) All of the above

Question 14

Proponents of tax-law changes to encourage saving would

Accepted Answer

A)   argue that corporate tax rates should be increased.
B)   eliminate or reduce the means-tests for government benefits.
C)   argue that state sales tax should be replaced with state income tax.
D)   favor none of the above programs.E) A) and D)
F) C) and D)

Question 15

Which inflation costs could the government take actions to reduce without reducing inflation?

Accepted Answer

A)   shoeleather and menu costs
B)   menu costs and relative price variability
C)   unintended changes in tax liabilities and arbitrary redistributions of wealth
D)   None of the above is correct.E) B) and C)
F) C) and D)

Question 16

A law that requires the money supply to grow by a fixed percentage each year would eliminate

Accepted Answer

A)   the time inconsistency problem,but not political business cycles.
B)   the political business cycle,but not the time inconsistency problem.
C)   both the time inconsistency problem and political business cycles.
D)   neither the time inconsistency problem nor political business cycles.E) B) and C)
F) C) and D)

Question 17

The discussion in this chapter should

Accepted Answer

A)   make you a better participant in our national debates.
B)   make it easy to choose between policy alternatives.
C)   mislead you into political discussions.
D)   show you the benefits but not the costs of policy options.E) A) and B)
F) A) and C)

Question 18

Some studies have found that saving is not very sensitive to the rate of return on saving.

Accepted Answer

A) True 
 B)False

Question 19

A reduction in the marginal tax-rate includes a substitution effect that tends to increase savings.

Accepted Answer

A) True 
 B)False

Question 20

The political business cycle refers to

Accepted Answer

A)   the fact that about every four years some politician advocates greater government control of the Fed.
B)   the potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected.
C)   the part of the business cycle caused by the reluctance of politicians to smooth the business cycle.
D)   changes in output created by the monetary rule the Fed must follow.E) A) and D)
F) B) and C)

Exam 36: Five Debates Over Macroeconomic Policy

When the government has a deficit,a burden is necessarily imposed on future generations of taxpayers.

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A law that requires the money supply to grow by a fixed percentage each year would eliminate

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Tax policy changes that favor people who save will

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Which of the following is not correct?

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Proponents of tax-law changes to encourage saving would

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Which of the following is not an argument in favor of requiring the government to balance its budget?

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The discussion in this chapter should

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A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

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Describe three costs of inflation.

Correct AnswerverifiedThere are several costs of inflation.Sho...View AnswerShow Answer

If real output grows at 3 percent per year and the inflation rate is 3 percent per year then government debt can grow by 6 percent per year and not increase the ratio of debt to income.

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Which inflation costs could the government take actions to reduce without reducing inflation?

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A policymaker in favor of stabilizing the economy would be likely to believe

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All of the following are arguments against stabilization policy except

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Policymakers following a "lean against the wind" policy would

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Reforming tax laws to encourage saving is motivated by which of the Ten Principles of Economics from Chapter 1?

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Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level rose because of an increase in aggregate demand and a decrease in aggregate supply that kept output unchanged,then

Correct AnswerverifiedShow Answer

Suppose the tax rate on interest income from saving were reduced.

Correct AnswerverifiedShow Answer

A reduction in the marginal tax-rate includes a substitution effect that tends to increase savings.

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Some studies have found that saving is not very sensitive to the rate of return on saving.

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The political business cycle refers to

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There are several costs of inflation.Sho...
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