Question 1

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.

Question 2

Suppose the economy goes into recession.Which of the following is a list of things policymakers could do to try to end the recession?

Accepted Answer

A)  increase the money supply, increase taxes, and increase government spending
B)  increase the money supply, increase taxes, and decrease government spending
C)  increase the money supply, decrease taxes, and increase government spending
D)  decrease the money supply, increase taxes, and decrease government spending

Question 3

Suppose that a country has an inflation rate of about 4 percent per year and a real GDP growth rate of about 3 percent per year.What is the highest deficit the government can afford without raising the debt-to-income ratio?

Accepted Answer

A)  about 12 percent of GDP
B)  about 7 percent of GDP
C)  about 5 percent of GDP
D)  about 1 percent of GDP

Question 4

Suppose that at the start of fiscal year 2013 the government had a debt of $6250 billion.Suppose that during the same fiscal year,real GDP grew by about 4 percent and inflation was about 2 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)  about $122 billion
B)  about $184 billion
C)  about $245 billion
D)  about $375 billion

Question 5

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 units

Question 6

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Accepted Answer

A)  avoid unexpected changes in the inflation rate
B)  rewrite the tax laws so that nominal gains were taxed instead of real gains
C)  make policy that would discourage firms from issuing indexed bonds
D)  pass legislation to discourage inflation-adjusted work contracts

Question 7

Suppose that a central bank is required to follow a monetary policy rule to stabilize prices.If the economy starts at long-run equilibrium and then aggregate demand 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.

Question 8

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.

Question 9

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.

Question 10

If you deposit $100 now with interest rate of 3 percent,after the first period you will have an amount equal to (100 + 100× 0.03)= 100(1 + 0.03);after the second period the amount will be 100(1 + 0.03)+ [100(1 + 0.03)]×0.03 = 100(1 + 0.03) (1 + 0.03)= 100(1 + 0.03)2.If we continue this reasoning,we find out that the amount in the account after n periods is equal to $100(1 + 0.03)n.In general,if the interest rate is i percent,the formula for compound interest rate becomes (1 + i%/100)n.Suppose there is a tax rate of t percent on interest income.How does our formula change?

Accepted Answer

Typically,if the tax...

Question 11

Suppose that the government goes into deficit in order to help local school districts build better schools.Does this action burden future generations?

Accepted Answer

The benefits of the project ac...

Question 12

Explain why a government deficit is likely to lead to lower living standards in the future.

Accepted Answer

A government deficit means that the gove...

Question 13

Why should the tax laws to encourage saving remain as they are?

Accepted Answer

A)  because a decrease in taxes would benefit the wealthy
B)  because tax rates on savings are relatively low
C)  because people would probably save more than if taxes were lowered
D)  because tax cuts might cause a budget deficit

Question 14

The following citation is from the Wall Street Journal article "Low Inflation Poses a Growth Test." (http://goo.gl/LatY8B)
"Consumer prices fell 0.4% in April,the second straight month of declines,the Labor Department said Thursday.Over the past year,prices have risen just 1.7%,omitting food and energy,below the roughly 2% level that Federal Reserve officials consider healthy for the economy.While tame inflation is good news for consumers,it also reflects the considerable slack in the economy: including factories with spare capacity that isn't being used and the nearly 12 million Americans who are looking for work but can't find it.The slowing price growth: and the risk of deflation,however small: gives the Federal Reserve more room to continue its easy-money policy,designed to boost growth.The Fed could also increase the amount of bonds it is buying to help push more money into the economy and perhaps lift inflation toward its target."
a. What does the quantity theory of money predict about prices when the central bank increases the money supply? Does the reality described in the article confirm this prediction?
a.k.a. "easy money," fail to increase inflation?
b. In the author's opinion, why do the expansionary monetary policies pursued by the central bank,
c. What does the reality of "easy money-low inflation" suggest about the shape of the short-run aggregate-supply curve? Does such a shape of the short-run aggregate-supply curve explain the evidence of low inflation and low employment?

Accepted Answer

a.The quantity theory of money predicts,...

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

Suppose that at the start of fiscal year 2013 the government had a debt of $6800 billion.Suppose that during fiscal year 2013,real GDP grew by about 5 percent and inflation was about 3 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)  about $544 billion
B)  about $375 billion
C)  about $245 billion
D)  about $184 billion

Question 17

Suppose that changes in aggregate demand tended to be infrequent and that it took a long time for the economy to return to long-run output.How would this affect the arguments of those who oppose using policy to stabilize output?

Accepted Answer

Those who oppose stabilization policy mo...

Question 18

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 19

Identify three government policies that discourage saving.

Accepted Answer

First,the returns to saving are heavily ...

Question 20

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

Accepted Answer

The current income tax means that income...

Exam 17: Five Debates over Macroeconomic Policy

Correct Answer
verified
a.The quantity theory of money predicts,...
View Answer

Suppose that at the start of fiscal year 2013 the government had a debt of $6250 billion.Suppose that during the same fiscal year,real GDP grew by about 4 percent and inflation was about 2 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct Answer
verified

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

Explain why a government deficit is likely to lead to lower living standards in the future.

Correct Answer
verified
A government deficit means that the gove...
View Answer

Correct Answer
verified
Typically,if the tax...
View Answer

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

Correct Answer
verified

Why should the tax laws to encourage saving remain as they are?

Correct Answer
verified

Suppose that at the start of fiscal year 2013 the government had a debt of $6800 billion.Suppose that during fiscal year 2013,real GDP grew by about 5 percent and inflation was about 3 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct Answer
verified

Suppose that a country has an inflation rate of about 4 percent per year and a real GDP growth rate of about 3 percent per year.What is the highest deficit the government can afford without raising the debt-to-income ratio?

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

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Correct Answer
verified

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

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

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 Answer
verified

Identify three government policies that discourage saving.

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

Suppose the economy goes into recession.Which of the following is a list of things policymakers could do to try to end the recession?

Correct Answer
verified

What is the principal reason that monetary policy has lags?

Correct Answer
verified

Suppose that changes in aggregate demand tended to be infrequent and that it took a long time for the economy to return to long-run output.How would this affect the arguments of those who oppose using policy to stabilize output?

Correct Answer
verified
Those who oppose stabilization policy mo...
View Answer

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

Correct Answer
verified

Suppose that the government goes into deficit in order to help local school districts build better schools.Does this action burden future generations?

Correct Answer
verified
The benefits of the project ac...
View Answer

Exam 17: Five Debates over Macroeconomic Policy

Correct Answerverifieda.The quantity theory of money predicts,...View AnswerShow Answer

Suppose that at the start of fiscal year 2013 the government had a debt of $6250 billion.Suppose that during the same fiscal year,real GDP grew by about 4 percent and inflation was about 2 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct AnswerverifiedShow Answer

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

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

Explain why a government deficit is likely to lead to lower living standards in the future.

Correct AnswerverifiedA government deficit means that the gove...View AnswerShow Answer

Correct AnswerverifiedTypically,if the tax...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Why should the tax laws to encourage saving remain as they are?

Correct AnswerverifiedShow Answer

Suppose that at the start of fiscal year 2013 the government had a debt of $6800 billion.Suppose that during fiscal year 2013,real GDP grew by about 5 percent and inflation was about 3 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct AnswerverifiedShow Answer

Suppose that a country has an inflation rate of about 4 percent per year and a real GDP growth rate of about 3 percent per year.What is the highest deficit the government can afford without raising the debt-to-income ratio?

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

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Correct AnswerverifiedShow 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

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

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

Identify three government policies that discourage saving.

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

Suppose the economy goes into recession.Which of the following is a list of things policymakers could do to try to end the recession?

Correct AnswerverifiedShow Answer

What is the principal reason that monetary policy has lags?

Correct AnswerverifiedShow Answer

Suppose that changes in aggregate demand tended to be infrequent and that it took a long time for the economy to return to long-run output.How would this affect the arguments of those who oppose using policy to stabilize output?

Correct AnswerverifiedThose who oppose stabilization policy mo...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Suppose that the government goes into deficit in order to help local school districts build better schools.Does this action burden future generations?

Correct AnswerverifiedThe benefits of the project ac...View AnswerShow Answer

Correct Answer
verified
a.The quantity theory of money predicts,...
View Answer

Correct Answer
verified

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

Correct Answer
verified
A government deficit means that the gove...
View Answer

Correct Answer
verified
Typically,if the tax...
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

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Those who oppose stabilization policy mo...
View Answer

Correct Answer
verified

Correct Answer
verified
The benefits of the project ac...
View Answer