Multiple Choice Answers

1. A reduction in the tax rate on income from saving would (Points : 1)most directly benefit the poor in the short run.
increase real wages over time.
decrease the capital stock over time.
decrease productivity over time.

2.According to the political business cycle theory, if the Fed wanted tosee a President re-elected, prior to the election it might (Points : 1)lower the discount rate and sell bonds.
lower the discount rate and buy bonds.
raise the discount rate and sell bonds.
raise the discount rate and buy bonds.

3.Opponents of using policy to stabilize the economy generally believethat (Points : 1)neither fiscal nor monetary policy have muchimpact on aggregate demand.
attempts to stabilize the economy decrease themagnitude of economic fluctuations.
unemployment and inflation are not cause for muchconcern.
economic conditions can easily change between thestart of policy action and when it takeseffect.

4.”Leaning against the wind” is exemplified by a (Points : 1)tax increase when there is arecession.
decrease in the money supply when there is anexpansion.
decrease in government expenditures when there isa recession.
All of the above arecorrect.

5.Suppose that the country of Aquilonia has an inflation rate of about 2percent per year and a real growth rate of about 1 percent per year. Supposealso that it has nominal GDP of about 200 billion units of currency and currentnominal national debt of 150 billion units of domestic currency. Which of thefollowing government spending and taxation figures will not raise thedebt-to-income ratio? (Points : 1)government spending equal to 20 billion units andtax collections equal to 16 billion units
government spending equal to 20 billion units andtax collections equal to 14 billion units
government spending equal to 20 billion units andtax collections equal to 10 billion units
government spending equal to 20 billion units andtax collections equal to 8 billion units

6. Ifaggregate demand shifts because of a wave irrational exuberance, those who favora policy that “leans against the wind” would advocate the (Points : 1)Federal Reserve increase the money supply or thegovernment increase taxes.
Federal Reserve increase the money supply or thegovernment decrease taxes.
Federal Reserve decrease the money supply or thegovernment increase taxes.
Federal Reserve decrease the money supply or thegovernment decrease taxes.

7.Proponents of zero inflation argue that a successful program to reduceinflation (Points : 1)eventually reduces inflationexpectations.
eventually raises real interestrates.
permanently decreasesoutput.
permanently raisesunemployment.

8.Suppose that the central bank must follow a rule that requires it toincrease the money supply when the price level falls and decrease the moneysupply when the price level rises. If the economy starts from long-runequilibrium and aggregate supply shifts left, the central bank must(Points : 1)decrease the money supply, which will move outputback towards its long-run level.
decrease the money supply, which will move outputfarther from its long-run level.
increase the money supply, which will move outputback towards its long-run level.
increase the money supply, which will move outputfarther from its long-run level.

9. If acentral bank had to give up its discretion and follow a rule that required it tokeep inflation low, (Points : 1)the short-run Phillips curve would shiftup.
the short-run Phillips curve wouldshift down.
the long-run Phillips curve would shiftright.
the long-run Phillips curve would shiftleft.

10.IRA, 401(k), 403(b), and Keogh plans (Points : 1)impose added taxes on those whosave.
place no limits on the amount people can depositinto these programs.
impose penalties for withdrawals except undercertain circumstances.
None of the above iscorrect.

11.Part of the lag in monetary policy effects is due to (Points :1)the long political process of monetary policydecisions.
precise economicforecasts.
the time required for firms and households toalter their spending plans.
changes in the unemploymentrate.

12.Which of the following statements is not true? (Points :1)All budget deficits can be justified as beingdue to war or recession.
The U.S. federal debt in 2008 was $5.2trillion.
Government debt represents about 1 percent of atypical worker’s lifetime resources.
Forward looking parents can reverse adverseeffects of government debt.

13.Accumulated over a long span of time, the tax rate on interestincome (Points : 1)removes all benefits fromsaving.
reduces the benefits from saving by a smallamount.
reduces the benefits from saving by a largeamount.
does nor reduce any of the benefits fromsaving.

14.Time inconsistency will cause the (Points : 1)short-run Phillips curve to be higher thanotherwise.
short-run Phillips curve to be lower theotherwise.
long-run Phillips curve to be farther to theright than otherwise.
long-run Phillips curve to be farther left thanotherwise.

15.Suppose the budget deficit is rising 3 percent per year and nominal GDPis rising 5 percent per year. The debt created by these continuing deficitsis (Points : 1)sustainable, but the future burden on yourchildren cannot be offset.
sustainable, and the future burden on yourchildren can be offset if you save for them.
not sustainable, and the future burden on yourchildren cannot be offset.
not sustainable, but the future burden on yourchildren can be offset if you save forthem.

16.Some economists believe that there are positives from a littleinflation and that it may “grease the wheels” (Points : 1)in the stock market.
in the foreign exchangemarket.
in the bond market.
in the labormarket.

17.Which of the following is not correct? (Points : 1)Deficits give people the opportunity to consumeat the expense of their children, but deficits do not require them to doso.
Deficits and surpluses could be used to avoidfluctuations in the tax rate.
The only times deficits have increased have beenduring times of war or economic downturns.
Reducing the budget deficit rather than fundingmore education spending could, all things considered, make future generationsworse off.

18. TheFederal Open Market Committee meets about (Points : 1)every six days.
every six weeks.
every six months.
every sixteenmonths.

19. Allof the following are arguments against stabilization policy except(Points : 1)Economic forecasting is highlyimprecise.
Long lags may cause stabilization policies to infact destabilize the economy.
Monetary policy affects aggregate demand bychanging interest rates.
Fiscal policy must go through a longpolitical process.

20. Thepolitical business cycle refers to (Points : 1)the fact that about every four years somepolitician advocates greater government control of theFed.
the potential for a central bank to increase themoney supply and therefore real GDP to help the incumbent getre-elected.
the part of the business cycle caused by thereluctance of politicians to smooth the business cycle.
changes in output created by the monetary rulethe Fed must follow.