Quiz 538

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Quiz 538

Related: Economics, Microeconomics

83 Questions

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Quiz 538

Subjective Short Answer

1. Why is it desirable, if possible, to use policy to offset the effects of a decrease in aggregate demand?

2. 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 to boost the economy when aggregate demand is inadequate to ensure full employment?

3. 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?

4. If net exports fall, what actions could a central bank take to stabilize the economy?

5. If businesses become more pessimistic about the future, what fiscal policies could the government take to stabilize the economy?

6. Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. In practice, however, there are obstacles to the use of such policies. What are the primary difficulties with using monetary and fiscal policy to stabilize the economy?

7. Explain why fiscal policy actions typically work with a lag.

8. Why is there a lag between the Fed’s actions and the economy’s response?

9. Monetary policy affects aggregate demand with a lag. Approximately how long does it take for monetary policy actions to affect aggregate demand?

10. Why might policymakers attempts to stabilize the economy do more harm than good?

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

12. List two of the three types of fiscal programs that the President and Congress emphasized in response to the 2008-2009 recession.

13. What component of GDP is particularly volatile over the business cycle and can be targeted by tax cuts?

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

15. Explain how tax cuts can increase aggregate supply.

16. Advocates of cutting taxes rather than increasing government expenditures in response to a recession argue that the increase in spending by consumers and business may be more effective than that of the government. Explain this argument.

17. While traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes to stimulate the economy, what are some of the reasons why tax cuts might be preferred to increased government spending?

18. Approximately how often does the Federal Open Market Committee meet?

19. Which part of the Federal Reserve determines monetary policy? How often does it meet? What does it set a target for?

20. According to a 1977 amendment to the Federal Reserve Act of 1913, what are the goals the Fed should promote?

21. 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?

22. By law what goals are the Federal Reserve to pursue? What, if any, specific weights are given for these goals?

23. What is meant by the political business cycle?

24. Explain what is meant by the time inconsistency of monetary policy.

25. 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?

26. Suppose the nation’s price level rises as a result of an increase in aggregate demand and a decrease in aggregate supply which leaves output unchanged. If the Fed is required to follow a rule that stabilizes the price level, what will the Fed do to the money supply and what impact will this have on total output in the economy?

27. What did the actions of the Federal Reserve during the 1990’s demonstrate about monetary policy and rules?

28. List two costs of inflation.

29. Economists believe that a little bit of inflation may be a good thing. What are the potential benefits of inflation?

30. One concern of those who oppose the central bank targeting inflation at zero is that reducing inflation is costly. What is the cost of reducing the inflation rate?

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

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

33. Provide two specific ways in which reducing inflation might leave “permanent scars” on the economy.

34. Those who believe the central bank should aim for zero inflation argue that reducing inflation is a policy with temporary costs and permanent benefits. What are the primary costs and benefits they are referring to?

35. Proponents of requiring the government to balance its budget argue that debt burdens future generations. Explain one claim they make to support this argument.

36. Suppose a country has a real growth rate of 3%. Government spending is 75 billion units of currency and its tax revenues are 60 billion units of currency. The current national debt is 300 billion units of currency. At what inflation rate will its debt-to-income ratio remain unchanged?

37. Suppose that a country has an inflation rate of about 3 percent per year and a real GDP growth rate of about 3 percent per year. How large of a deficit can the government run (as a percentage of GDP) without raising the debt-to-income ratio?

38. During recessions, even with no changes in policy, the deficit tends to ______ because _____________.

39. Are there any situations in which running a budget deficit is justified? Explain.

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

41. What is the benefit of a high saving rate?

42. Suppose a 25-year-old worker purchases a $5,000 bond that pays 6% interest per year which she plans to withdraw when she retires in 40 years. How much will the $5,000 accumulate to in 40 years? If the worker faces a marginal tax rate of 30% on interest income, how much will the $5,000 accumulate to in 40 years?

43. In addition to the tax code, other policies reduce the incentives for people to save Provide an example.

44. A higher return on saving ______ the amount a household needs to save to achieve any target level of future consumption. This effect on saving is called the _______ effect. If the income effect is large enough, then a reduction in taxes on saving might ______ tax revenues.

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

46. Explain what is meant by saying that capital income is taxed twice.

47. Why might reforms to encourage saving lead to a less egalitarian society?

48. Explain the main arguments in favor of economic stabilization.

49. Explain why policy lags could make stabilization policies counterproductive.

50. Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

51. 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?

52. 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?

53. Carefully explain how monetary policy can be used to counter a recession. Explain what the central bank does as well as how its actions affect the economy. Under what circumstances is fiscal policy especially useful?

54. Why might government expenditures be more appropriate than tax cuts to counter recessions? Is there any evidence for this thinking?

55. Why might tax cuts be more appropriate than increasing government expenditures to counter recessions? Is there any evidence for this thinking?

56. What fiscal policies did the government implement in response to the 2008-2009 recession? Can we be certain that these policies were effective? Explain.

57. What is the political business cycle and how does it relate to whether the central bank should have discretion or use a rule?

58. Explain the time inconsistency of monetary policy.

59. Describe three costs of inflation.

60. 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?

61. What’s the basis for arguing that deficits are likely to lead to lower living standards in the future?

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

63. Explain how it is possible for the government debt to grow forever.

64. Is it possible that deficits do not burden future generations?

65. Identify three government policies that discourage saving.

66. Means-tested government programs tend to reduce saving. What are means-tested programs and how do they reduce saving?

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

68. Explain how a higher rate of return on saving could, at least in theory, lead to lower saving.

69. Explain how tax provisions to encourage private saving may reduce national saving.

70. Closely watched indicators such as the inflation rate and unemployment are released each month by the
a. Bureau of the Budget.
b. Bureau of Labor Statistics.
c. Department of the Treasury.
d. President’s Council of Economic Advisors.

71. The misery index is calculated as the
a. inflation rate plus the unemployment rate.
b. unemployment rate minus the inflation rate.
c. actual inflation rate minus the expected inflation rate.
d. natural unemployment rate times the inflation rate

72. The misery index is supposed to measure the
a. social cost of unemployment.
b. health of the economy.
c. lost output associated with a particular unemployment rate.
d. short-run tradeoff between inflation and unemployment.

73. One determinant of the natural rate of unemployment is the
a. rate of growth of the money supply.
b. minimum wage rate.
c. expected inflation rate.
d. All of the above are correct.

74. In the long run,
a. the natural rate of unemployment depends primarily on the level of aggregate demand.
b. inflation depends primarily upon the money supply growth rate.
c. there is a tradeoff between the inflation rate and the natural rate of unemployment.
d. All of the above are correct.

75. One determinant of the long-run average unemployment rate is the
a. market power of unions, while the inflation rate depends primarily upon government spending.
b. minimum wage, while the inflation rate depends primarily upon the money supply growth rate.
c. rate of growth of the money supply, while the inflation rate depends primarily upon the market power of unions.
d. existence of efficiency wages, while the inflation rate depends primarily upon the extent to which firms are competitive.

76. In the long run,
a. the natural rate of unemployment depends primarily on the level of aggregate demand.
b. inflation depends primarily upon the money supply growth rate.
c. there is a tradeoff between the inflation rate and the natural rate of unemployment.
d. All of the above are correct.

77. In the long run, inflation
a. and unemployment are primarily determined by labor market factors.
b. and unemployment are primarily determined by the rate of money supply growth.
c. is primarily determined by the rate of money supply growth while unemployment is primarily determined by labor market factors.
d. is primarily determined by labor market factors while unemployment is primarily determined by the rate of money supply growth.

78. Which of the following statements is correct?
a. In the short run, unemployment and inflation are positively related. In the long run they are largely unrelated problems.
b. Inflation and unemployment are positively related in the short run and in the long run.
c. In the short run, unemployment and inflation are negatively related. In the long run they are largely unrelated problems.
d. Inflation and unemployment are negatively related in the short run and in the long run.

79. Which of the following depends primarily on the growth rate of the money supply?
a. inflation and the natural rate of unemployment
b. inflation but not the natural rate of unemployment
c. the natural rate of unemployment but not inflation
d. neither inflation nor the natural rate of unemployment

80. A basis for the slope of the short-run Phillips curve is that when unemployment is high there are
a. downward pressures on prices and wages.
b. downward pressures on prices and upward pressures on wages.
c. upward pressures on prices and downward pressures on wages.
d. upward pressures on prices and wages.

81. In the long run, which of the following depends primarily on the growth rate of the money supply?
a. the natural rate of unemployment and the inflation rate
b. the natural rate of unemployment but not the inflation rate
c. the inflation rate but not the natural rate of unemployment
d. neither the natural rate of unemployment nor the inflation rate

82. When monetary and fiscal policymakers expand aggregate demand, which of the following costs is incurred in the short run?
a. Short-run aggregate supply decreases.
b. The natural rate of unemployment increases.
c. The price level increases more rapidly.
d. The money supply increases less rapidly.

83. Suppose policymakers take actions that cause a contraction of aggregate demand. Which of the following is a short-run consequence of this contraction?
a. The inflation rate decreases.
b. The level of output decreases.
c. The unemployment rate increases.
d. All of the above are correct.

Quiz 538