Deck 36: Six Debates Over Macroeconomic Policy

Question 1

Advocates of stabilization policy argue that when there is a recession, the government should increase the money supply and increase government expenditures.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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.

Question 5

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

Question 6

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

Question 7

If the Fed followed a rule for monetary policy, the time inconsistency problem would be eliminated.

Question 8

To counter the recession of 2008-2009 President Obama and congress created a large increase in government expenditures.

Question 9

The laws that created the Fed give it only vague recommendations about what goals it should pursue, and they do not tell the Fed how to pursue whatever goals it might choose.

Question 10

A recession has no benefit to society-it represents a sheer waste of resources.

Question 11

The Obama administration believed that transfer payments to the unemployed would have a larger impact on aggregate demand than tax cuts.

Question 12

The Federal Reserve operates under a rule that requires money supply growth to increase by one percentage point for every percentage point that unemployment rises above its natural rate.

Question 13

Proponents of zero-inflation policies acknowledge that the public is unconcerned about the inflation rate.

Question 14

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

Question 15

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

Question 16

The laws that created the Fed give it some specific recommendations about what goals it should pursue so it has little discretion in making policy.

Question 17

Tax cuts proposed by the Kennedy and Reagan administrations were followed by robust economic growth.

Question 18

One prominent debate over macroeconomic policy centers on the question of whether monetary and fiscal policy should be used to try to stabilize the economy.

Question 19

Tax cuts affect only aggregate demand not aggregate supply.

Question 20

Many studies indicate changes in monetary policy have most of their effect on aggregate demand about six months after the change is made.

Question 21

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

Question 22

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

Question 23

The average U.S. citizens' share of the government debt represents less than 2 percent of a person's lifetime income.

Question 24

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

Question 25

Social Security transfers wealth from younger generations to older generations.

Question 26

Once state and federal taxes are added together, a typical worker faces about a 40 percent marginal tax-rate on interest income.

Question 27

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

Question 28

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

Question 29

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.

Question 30

Forward-looking parents can reverse the adverse effects of government debt by saving more and leaving a larger bequest to their children.

Question 31

There are ways that policymakers could reduce the costs of inflation without reducing inflation.

Question 32

The cost of inflation reduction is a large, permanent increase in unemployment.

Question 33

In effect, a consumption tax would put all saving automatically into a tax-advantaged savings account similar to an Individual Retirement Account (IRA).

Question 34

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

Question 35

Tax laws do not give preferential treatment to some kinds of retirement saving.

Question 36

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Question 37

Proponents of a balanced government budget acknowledge that running a budget deficit is justifiable in time of war.

Question 38

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

Question 39

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Question 40

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

Question 41

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

Question 42

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?

Question 43

Approximately how often does the Federal Open Market Committee meet?

Question 44

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?

Question 45

Explain why fiscal policy actions typically work with a lag.

Question 46

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

Question 47

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

Question 48

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

Question 49

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?

Question 50

Explain how tax cuts can increase aggregate supply.

Question 51

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

Question 52

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

Question 53

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

Question 54

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?

Question 55

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

Question 56

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

Question 57

Why is there a lag between the Fed's actions and the economy's response?

Question 58

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

Question 59

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?

Question 60

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.

Question 61

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?

Question 62

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

Question 63

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?

Question 64

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

Question 65

What is the benefit of a high saving rate?

Question 66

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

Question 67

List two costs of inflation.

Question 68

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

Question 69

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

Question 70

What is meant by the political business cycle?

Question 71

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

Question 72

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

Question 73

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

Question 74

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

Question 75

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?

Question 76

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

Question 77

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?

Question 78

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?

Question 79

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?

Question 80

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