Question 1

Why should the central bank aim for a moderate rate,instead of a zero rate,of inflation?

Accepted Answer

A)   to keep the natural rate of unemployment low
B)   because the social costs of moderate inflation are high
C)   because it is very difficult to maintain a zero rate of inflation in the long run
D)   the benefits of zero inflation are small but the costs of reaching zero inflation are large.E) A) and B)
F) All of the above

Question 2

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

Accepted Answer

The current income tax means that income...

Question 3

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.If the interest rate is 10 percent and there is a tax of 40 percent on interest income,how much will her savings be worth at the age of 70?

Accepted Answer

With a tax rate of 40 percent,...

Question 4

In which of the following situations does the government NOT need to balance its budget?

Accepted Answer

A)   if nominal GDP grows faster than the growth in debt
B)   if nominal GDP grows slower than the growth in debt
C)   if inflation is zero
D)   if inflation is higher than the growth in debtE) A) and B)
F) A) and C)

Question 5

The following excerpt from a Wall Street Journal article,"Japan's Revival Bid Has Global Consequences" (http: / / goo.gl / umZMId):
"Mr.Abe's government has fired the first of the "three arrows" of Abenomics: It installed a new central-bank governor who has flooded the economy with money.The second arrow,fiscal policy,has only been half-fired.It has embarked on a fiscal stimulus,but hasn't yet announced a medium-term plan to raise taxes and cut spending."
Discuss the possible effects of Prime Minister Shinzo Abe's macroeconomic policy approach given that Japan's government debt is excessive.

Accepted Answer

Mr.Abe's macroeconomic policies are esse...

Question 6

Which statement is consistent with the political business cycle theory?

Accepted Answer

A)   The economy expands after the elections.
B)   The economy contracts after the elections.
C)   The economy expands before the elections.
D)   The economy contracts before the elections.E) A) and B)
F) A) and C)

Question 7

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

Accepted Answer

A)   because a decrease in taxes would primarily 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 deficitE) C) and D)
F) A) and D)

Question 8

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 9

Economists agree that if a monetary policy rule is to be used,the best one is one that makes the growth rate of the money supply constant.

Accepted Answer

A) True 
 B)False

Question 10

In which situation is a program to reduce inflation likely to have the lowest costs?

Accepted Answer

A)   if the sacrifice ratio is high and the reduction is unexpected
B)   if the sacrifice ratio is high and the reduction is expected
C)   if the sacrifice ratio is low and the reduction is unexpected
D)   if the sacrifice ratio is low and the reduction is expectedE) B) and C)
F) A) and B) D

Question 11

Suppose that in fiscal year 2015 the government ran a deficit of about $249 billion.The debt at the start of this period was about $5971 billion.Which of the following combinations of inflation and real GDP would have allowed the government to run a deficit this large without raising the debt-to-income ratio?

Accepted Answer

A)   inflation = 2 percent; real GDP growth = 3 percent
B)   inflation = 3 percent; real GDP growth = -1.5 percent
C)   inflation = 3 percent; real GDP growth = 1 percent
D)   inflation = 1.5 percent; real GDP growth = 1 percentE) B) and D)
F) None of the above C

Question 12

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year.How are the debt and the burden on future generations created by these continuing deficits?

Accepted Answer

A)   The debt is sustainable,but the future burden on your children cannot be offset.
B)   The debt is sustainable,and the future burden on your children can be offset if you save for them.
C)   The debt is not sustainable,and the future burden on your children cannot be offset.
D)   The debt is not sustainable,but the future burden on your children can be offset if you save for them.E) None of the above
F) B) and C)

Question 13

What effects does a higher rate of return have on saving?

Accepted Answer

A)   A higher rate of return has an income effect that discourages saving and a substitution effect that encourages saving.
B)   A higher rate of return has an income effect that encourages saving and a substitution effect that discourages saving.
C)   A higher rate of return has income and substitution effects that both decrease saving.
D)   A higher rate of return has income and substitution effects that both increase saving.E) A) and B)
F) A) and C)

Question 14

In practice,the problems created by time inconsistency and the political business cycle appear to be quite serious.

Accepted Answer

A) True 
 B)False

Question 15

Why should the tax laws be reformed to encourage saving?

Accepted Answer

A)   because saving is a key determinant of long-run prosperity
B)   because taxes on capital gains are too low
C)   because higher-income households are taxed too much
D)   because economic theory clearly predicts that a higher rate of return encourages savingE) None of the above
F) B) and D)

Question 16

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?

Accepted Answer

If inflation is usually about what peopl...

Question 17

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

Question 18

Which of the following would transfer wealth from the young to the old?

Accepted Answer

A)   Taxes are raised to provide better education.
B)   Taxes are raised to improve government infrastructure such as roads and bridges.
C)   Taxes are raised to provide more generous pensions.
D)   Taxes are raised to pay back part of the government debt.E) A) and B)
F) A) and C)

Question 19

Deficits do not necessarily burden future generations.Discuss and provide some examples.

Accepted Answer

Some programs tax younger generations to provide benefits for older generations.Some programs,such as education,have benefits primarily for younger generations.These programs may have greater benefits than costs for younger generations.The older generation can increase their saving when the government increases the deficit and gives these savings to younger generations to offset the delayed tax burden.

Question 20

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...

Exam 17: Five Debates Over Macroeconomic Policy

Why should the central bank aim for a moderate rate,instead of a zero rate,of inflation?

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

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.If the interest rate is 10 percent and there is a tax of 40 percent on interest income,how much will her savings be worth at the age of 70?

Correct Answer
verified
With a tax rate of 40 percent,...
View Answer

In which of the following situations does the government NOT need to balance its budget?

Correct Answer
verified

Correct Answer
verified
Mr.Abe's macroeconomic policies are esse...
View Answer

Which statement is consistent with the political business cycle theory?

Correct Answer
verified

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

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

Economists agree that if a monetary policy rule is to be used,the best one is one that makes the growth rate of the money supply constant.

Correct Answer
verified

In which situation is a program to reduce inflation likely to have the lowest costs?

Correct Answer
verified
D

Correct Answer
verified
C

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year.How are the debt and the burden on future generations created by these continuing deficits?

Correct Answer
verified

What effects does a higher rate of return have on saving?

Correct Answer
verified

In practice,the problems created by time inconsistency and the political business cycle appear to be quite serious.

Correct Answer
verified

Why should the tax laws be reformed to encourage saving?

Correct Answer
verified

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?

Correct Answer
verified
If inflation is usually about what peopl...
View 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 Answer
verified

Which of the following would transfer wealth from the young to the old?

Correct Answer
verified

Deficits do not necessarily burden future generations.Discuss and provide some examples.

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

Exam 17: Five Debates Over Macroeconomic Policy

Why should the central bank aim for a moderate rate,instead of a zero rate,of inflation?

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

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.If the interest rate is 10 percent and there is a tax of 40 percent on interest income,how much will her savings be worth at the age of 70?

Correct AnswerverifiedWith a tax rate of 40 percent,...View AnswerShow Answer

In which of the following situations does the government NOT need to balance its budget?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedMr.Abe's macroeconomic policies are esse...View AnswerShow Answer

Which statement is consistent with the political business cycle theory?

Correct AnswerverifiedShow Answer

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

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

Economists agree that if a monetary policy rule is to be used,the best one is one that makes the growth rate of the money supply constant.

Correct AnswerverifiedShow Answer

In which situation is a program to reduce inflation likely to have the lowest costs?

Correct AnswerverifiedD

Correct AnswerverifiedC

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year.How are the debt and the burden on future generations created by these continuing deficits?

Correct AnswerverifiedShow Answer

What effects does a higher rate of return have on saving?

Correct AnswerverifiedShow Answer

In practice,the problems created by time inconsistency and the political business cycle appear to be quite serious.

Correct AnswerverifiedShow Answer

Why should the tax laws be reformed to encourage saving?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedIf inflation is usually about what peopl...View AnswerShow 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

Which of the following would transfer wealth from the young to the old?

Correct AnswerverifiedShow Answer

Deficits do not necessarily burden future generations.Discuss and provide some examples.

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

Correct Answer
verified

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

Correct Answer
verified
With a tax rate of 40 percent,...
View Answer

Correct Answer
verified

Correct Answer
verified
Mr.Abe's macroeconomic policies are esse...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
D

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
If inflation is usually about what peopl...
View Answer

Correct Answer
verified

Correct Answer
verified

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