Question 1

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. In response to this change, someone who advocated "lean against the wind" policies might advocate

Accepted Answer

A)   decreasing the money supply.
B)   increasing taxes.
C)   increasing government expenditures.
D)   decreasing government expenditures.

Question 2

Suppose that changes in aggregate demand tended to be infrequent and that it takes 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 3

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level fell because of a decrease in aggregate demand and an increase 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.

Question 4

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, the central bank must

Accepted Answer

A)   decrease the money supply, which will move output back towards its long-run level.
B)   decrease the money supply, which will move output farther from its long-run level.
C)   increase the money supply, which will move output back towards its long-run level.
D)   increase the money supply, which will move output farther from its long-run level.

Question 5

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 6

A policymaker against stabilizing the economy would be likely to believe

Accepted Answer

A)   policymakers should "do no harm".
B)   there are no obstacles to the practical application of policy in real life.
C)   policy lags are short enough that implementing policy changes in response to recession is not too risky.
D)   policy mitigates the magnitude of economic fluctuations.

Question 7

According to traditional Keynesian analysis, a tax cut has a larger effect on aggregate demand than an increase in government expenditures of the same size.

Accepted Answer

A) True 
 B)False

Question 8

Stimulus spending in 2009 was used for

Accepted Answer

A)   building roads and bridges.
B)   providing aid to local and state governments.
C)   making payments to the unemployed.
D)   All of the above are correct.

Question 9

Which of the following is a cost of inflation?

Accepted Answer

A)   shoeleather costs
B)   menu costs
C)   relative price variability
D)   All of the above are correct.

Question 10

If the natural rate of unemployment is 6%, but the Fed thinks it is 5% and attempts to use monetary policy to move unemployment from 6% to 5% then in the short run which of the following variables will the Fed's policy raise above their long-run levels?

Accepted Answer

A)   the price level and real GDP
B)   the price level but not real GDP
C)   real GDP but not the price level
D)   neither real GDP nor the price level

Question 11

An increase in the money supply

Accepted Answer

A)   reduces interest rates and shifts aggregate demand to the right.
B)   reduces interest rates and shifts aggregate supply to the right
C)   raises interest rates and shifts aggregate demand to the right.
D)   raises interest rates and shifts aggregate supply to the right.

Question 12

People's skepticism about central bankers' announcements of their intentions stems from the fact that policymakers may act in a fashion that is time inconsistent.

Accepted Answer

A) True 
 B)False

Question 13

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.

Question 14

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.

Question 15

Proponents and opponents of balanced-budget policies agree that the government debt cannot continue to increase forever.

Accepted Answer

A) True 
 B)False

Question 16

At the end of 2003, the government had a debt of about $3,924 billion. During 2004, real GDP grew by about 4.2 percent and inflation was about 2.6 percent. About what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)   About $63 billion.
B)   About $165 billion.
C)   About $267 billion.
D)   About $429 billion.

Question 17

Paul Volcker, former chair of the Fed, implemented

Accepted Answer

A)   contractionary policy which increased the popularity of the U.S. president who had appointed him.
B)   contractionary policy which decreased the popularity of the U.S. president who had appointed him.
C)   expansionary policy which increased the popularity of the U.S. president who had appointed him.
D)   expansionary policy which decreased the popularity of the U.S. president who had appointed him.

Question 18

In 2009 Barack Obama responded to recession

Accepted Answer

A)   only by cutting taxes.
B)   by cutting taxes and reducing government expenditures.
C)   only by raising government expenditures.
D)   by cutting taxes and by raising government expenditures.

Question 19

"Leaning against the wind" is exemplified by a

Accepted Answer

A)   tax cut when there is a recession.
B)   decrease in the money supply when there is a recession.
C)   decrease in government expenditures when there is a recession.
D)   increasing money supply when there is a boom.

Question 20

The Federal Reserve

Accepted Answer

A)   does not have an inflation targe; if it did it would likely be 1% or less.
B)   does not have an inflation target; if it did it would likely be in the range of 2%.
C)   does have an inflation target; it is 1%.
D)   does have an inflation target; it is a range from 1-3%.

Exam 18: Six Debates Over Macroeconomic Policy

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, the central bank must

Correct AnswerverifiedShow Answer

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. In response to this change, someone who advocated "lean against the wind" policies might advocate

Correct AnswerverifiedShow Answer

At the end of 2003, the government had a debt of about $3,924 billion. During 2004, real GDP grew by about 4.2 percent and inflation was about 2.6 percent. About what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct AnswerverifiedShow Answer

The Federal Reserve

Correct AnswerverifiedShow Answer

Paul Volcker, former chair of the Fed, implemented

Correct AnswerverifiedShow Answer

In 2009 Barack Obama responded to recession

Correct AnswerverifiedShow Answer

Zero inflation

Correct AnswerverifiedShow Answer

According to traditional Keynesian analysis, a tax cut has a larger effect on aggregate demand than an increase in government expenditures of the same size.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Proponents and opponents of balanced-budget policies agree that the government debt cannot continue to increase forever.

Correct AnswerverifiedShow Answer

A policymaker against stabilizing the economy would be likely to believe

Correct AnswerverifiedShow Answer

If the natural rate of unemployment is 6%, but the Fed thinks it is 5% and attempts to use monetary policy to move unemployment from 6% to 5% then in the short run which of the following variables will the Fed's policy raise above their long-run levels?

Correct AnswerverifiedShow Answer

An increase in the money supply

Correct AnswerverifiedShow Answer

"Leaning against the wind" is exemplified by a

Correct AnswerverifiedShow Answer

Suppose that changes in aggregate demand tended to be infrequent and that it takes 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

Stimulus spending in 2009 was used for

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

Which of the following is a cost of inflation?

Correct AnswerverifiedShow Answer

People's skepticism about central bankers' announcements of their intentions stems from the fact that policymakers may act in a fashion that is time inconsistent.

Correct AnswerverifiedShow Answer

A reduction in the tax rate on income from saving would

Correct AnswerverifiedShow Answer

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Those who oppose stabilization policy mo...
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