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Week 5 1. The major driver of future federal spending is (Points : 5) interest on the federal debt. Social Security obligations.

rising health care costs. energy prices.

2. If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank (Points : 5) would have to increase the money supply. This would move unemployment closer to the natural rate. would have to increase the money supply. This would move unemployment further from the natural rate. would have to decrease the money supply. This would move unemployment closer to the natural rate. would have to decrease the money supply. This would move unemployment further from the natural rate.

3. The Federal Open Market Committee (Points : 5) operates with almost complete discretion over monetary policy. is required to increase the money supply by a given growth rate each year. is required to keep the interest rate within a range set by Congress. is required by its charter to change the money supply using a complex formula that concerns the tradeoff between inflation and unemployment.

4. Suppose that the country of Aquilonia has an inflation rate of about 5 percent per year and a real growth rate of about 5 percent per year. Suppose also that it has nominal GDP of about 200 billion units of currency and current nominal national debt of 150 billion units of domestic currency. Which of the following government spending and taxation figures will not raise the debt-to-income ratio? (Points : 5) government spending equal to 50 billion units and tax collections equal to 76 billion units government spending equal to 50 billion units and tax collections equal to 14 billion units government spending equal to 50 billion units and tax collections equal to 10 billion units government spending equal to 50 billion units and tax collections equal to 8 billion units

5. Policymakers following a "lean against the wind" policy would (Points : 5) increase government expenditures when output is low and decrease them when output is high. increase government expenditures when output is low and do nothing when output is high. decrease government expenditures when output is low and increase them when output is high. decrease government expenditures when output is high and do nothing when output is low.

6. 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 supply shifts left, the central bank must (Points : 5) decrease the money supply, which will move output back towards its long-run level. decrease the money supply, which will move output farther from its long-run level. increase the money supply, which will move output back towards its long-run level. increase the money supply, which will move output farther from its long-run level.

7. Inflation (Points : 5)

causes people to spend more time reducing money balances. When inflation is unexpectedly high it redistributes wealth from lenders to borrowers. causes people to spend more time reducing money balances. When inflation is unexpectedly high it redistributes wealth from borrowers to lenders. causes people to spend less time reducing money balances. When inflation is unexpectedly high it redistributes wealth from lenders to borrowers. causes people to spend less time reducing money balances. When inflation is unexpectedly high it redistributes wealth from borrowers to lenders.

8. Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is (Points : 5) sustainable, but the future burden on your children cannot be offset. sustainable, and the future burden on your children can be offset if you save for them. not sustainable, and the future burden on your children cannot be offset. not sustainable, but the future burden on your children can be offset if you save for them.

9. "Leaning against the wind" is exemplified by a (Points : 5) tax cut when there is a recession. decrease in the money supply when there is a recession. decrease in government expenditures when there is a recession. increasing money supply when there is a boom.

10. Which of the following statements is not true? (Points : 5) All budget deficits can be justified as being due to war or recession.

The U.S. federal debt in 2008 was $5.2 trillion. Government debt represents about 1 percent of a typical workers lifetime resources. Forward looking parents can reverse adverse effects of government debt.

11. The economy goes into recession. Which of the following lists contains things policymakers could do to try to end the recession? (Points : 5) increase the money supply, increase taxes, increase government spending increase the money supply, increase taxes, decrease government spending increase the money supply, decrease taxes, increase government spending decrease the money supply, increase taxes, decrease government spending

12. Which of the following is correct? (Points : 5) Economic forecasts are precise and aggregate spending responds almost immediately to interest rate changes. Economic forecast are precise and aggregate spending responds to interest rate changes with a lag. Economic forecasts are imprecise and aggregate spending responds almost immediately to interest rate changes. Economic forecast are imprecise and aggregate spending responds to interest rate changes with a lag.

13. Social Security and government health-insurance programs account for (Points : 5) less than 2% of the federal spending. 5.2% of federal spending. 42% of federal spending.

52% of federal spending.

14. The Fed lowered interest rates in 2001 and 2002. This implies, other things the same, that the Fed (Points : 5) increased the money supply because it was concerned about unemployment. increased the money supply because it was concerned about inflation. decreased the money supply because it was concerned about unemployment. decreased the money supply because it was concerned about inflation.

15. If the budget deficit were reduced (Points : 5) interest rates and investment would increase. interest rates would increase and investment would decrease. interest rates and investment would decrease. interest rates would decrease and investment would increase.

16. Zero inflation (Points : 5) might be dangerous because it could lead to rapidly increasing prices. would limit the flexibility of the labor market and so could at times raise unemployment. would make it easy for the Central bank to create negative real interest rates. is impossible to achieve in the real world.

17. The average person's share of the U.S. government debt as a percentage of lifetime income is (Points : 5) less than 2 percent. about 5 percent. about 10 percent. over 12 percent.

18. IRA, 401(k), 403(b), and Keogh plans (Points : 5) impose added taxes on those who save. place no limits on the amount people can deposit into these programs. impose penalties for withdrawals except under certain circumstances. None of the above is correct.

19. The political business cycle refers to (Points : 5) the fact that about every four years some politician advocates greater government control of the Fed. the potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected. the part of the business cycle caused by the reluctance of politicians to smooth the business cycle. changes in output created by the monetary rule the Fed must follow.

20. Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as (Points : 5)

inflation targeting. the monetary policy reaction lag. the time inconsistency of policy. the sacrifice ratio dilemma.

21. The principal lag for monetary policy (Points : 5) and fiscal policy is the time it takes to implement policy. and fiscal policy is the time it takes for policy to change spending. is the time it takes to implement policy. The principal lag for fiscal policy is the time it takes for policy to change spending. is the time it takes for policy to change spending. The principal lag for fiscal policy is the time it takes to implement it.

22. An economist would be more likely to argue against reducing inflation if she thought that (Points : 5) the central bank lacked credibility and if bonds were usually not indexed for inflation. the central bank lacked credibility and if bonds were usually indexed for inflation. the central bank had credibility and if bonds were usually not indexed for inflation. the central bank had credibility and if bonds were usually indexed for inflation.

23. An opponent of monetary policy decisions by rule would point to which of the following as support of his case? (Points : 5) time inconsistency of policy flexibility to confront unforeseen circumstances political business cycle

the ability to craft rules that account for all possible contingencies in advance

24. Which of the following is an argument against trying to use policy to stabilize the economy? (Points : 5) Recessions represent a waste of resources. Pessimism on the part of households and firms may become a self-fulfilling prophecy. "Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms. Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time.

25. If a reduction in taxes on savings reduced the amount of saving, then the (Points : 5) income effect equaled the substitution effect. income effect outweighed the substitution effect. the substitution effect outweighed the income effect. None of the above.

26. Reforming tax laws to encourage saving is motivated by which of the Ten Principles of Economics from Chapter 1? (Points : 5) The cost of something is what you give up to get it (Principle 2). Trade can make everyone better off (Principle 5). Markets are usually a good way to organize economic activity (Principle 6). A countrys standard of living depends on its ability to produce goods and services (Principle 8).

27. A reduction in the tax rate on income from saving would (Points : 5) most directly benefit the poor in the short run. increase real wages over time. decrease the capital stock over time. decrease productivity over time.

28. Which of the following is not an argument in favor of requiring the government to balance its budget? (Points : 5) Government debt imposes higher taxes or more borrowing on future generations. A balanced budget will smooth the business cycle. Deficits lower national saving. Recent history shows that Congress will run deficits even when deficits are not justified by war or recession.

29. Proponents of zero inflation argue that a successful program to reduce inflation (Points : 5) eventually reduces inflation expectations. eventually raises real interest rates. permanently decreases output. permanently raises unemployment.

30. Over time continued budget deficits lead to (Points : 5) a higher capital stock and higher real wages.

a higher capital stock and lower real wages. a lower capital stock and higher real wages. a lower capital stock and lower real wages.

31. The Federal Reserve will tend to tighten monetary policy when (Points : 5) interest rates are rising too rapidly. it thinks the unemployment rate is too high. the growth rate of real GDP is quite sluggish. it thinks inflation is too high today, or will become too high in the future.

32. Those who desire that policymakers stabilize the economy would advocate which of the following when aggregate demand is insufficient to ensure full employment? (Points : 5) Decrease the money supply. Decrease taxes. Decrease government expenditures. Do nothing and let markets correct themselves.

33. Suppose aggregate demand fell. In order to stabilize the economy, the government might (Points : 5) increase the money supply. decrease government expenditures. increase taxes. do nothing.

34. Which of the following is not correct? (Points : 5) A potential cost of deficits is that they reduce national saving, thereby reducing growth of the capital stock and output growth. Deficits give people the opportunity to consume at the expense of their children, but they do not require them to do so. The U.S. debt per-person is large compared with average lifetime income. In 2005, the U.S. government ran a deficit.

35. Which of the following is not an argument against reforming the tax laws to encourage saving? (Points : 5) A public budget surplus can raise national saving. The substitution effect of a higher return to saving may be about equal to the income effect of a higher return to saving. Low-income households save a larger fraction of their income than high-income households. Tax cuts might cause a budget deficit.

36. Some economists believe that there are positives from a little inflation and that it may grease the wheels (Points : 5) in the stock market. in the foreign exchange market. in the bond market. in the labor market.

37. Double taxation means that both (Points : 5) wage income and interest income are taxed, which is currently the case in the United States. wage income and interest income are taxed, which is not currently the case in the United States. the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in the United States. the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the United States.

38. Proponents of zero inflation argue that reducing inflation has (Points : 5) permanent costs and temporary benefits. temporary costs and permanent benefits. permanent costs and benefits. temporary costs and benefits.

39. An individual would suffer higher losses by an unexpectedly higher inflation rate if (Points : 5) she held much currency and owned few bonds. she held much currency and owned many bonds. she held little currency and owned few bonds. she held little currency and owned many bonds.

40. A permanent reduction in inflation would (Points : 5) permanently reduce menu costs and permanently lower unemployment. permanently reduce menu costs and temporarily raise unemployment.

temporarily reduce menu costs and temporarily lower unemployment. temporarily reduce menu costs and temporarily raise unemployment.

41. From the end of 2003 to the end of 2004, the United States ran a deficit of about $121 billion. The debt at the start of this period was about $3,924 billion. Which of the following combinations of inflation and real GDP would have allowed the government to run a deficit and kept the ratio of real GDP to the deficit about the same? (Points : 5) about 1% inflation and about 1% real GDP growth about 1% inflation and about 3% real GDP growth about 2% inflation and about 1% real GDP growth about 2% inflation and about 2% real GDP growth

42. If people in countries that have had persistently high inflation are skeptical about efforts to reduce inflation, the short-run Phillips curve will remain far to the (Points : 5) left, and the sacrifice ratio will be low. left, and the sacrifice ratio will be high. right, and the sacrifice ratio will be low. right, and the sacrifice ratio will be high.

43. Alan Blinder believes (Points : 5) we must attain zero percent inflation. the sacrifice for zero inflation is small. the costs from low inflation are modest. balanced budgets are essential to inflation targeting.

44. Paul Volcker's inflation reduction efforts (Points : 5) failed to reduce inflation. failed to reduce expected inflation. resulted in the highest unemployment rate since the Great Depression. make him reviled by central bankers.

45. Tax policy changes that favor people who save will (Points : 5) favor low-income households. favor people with high income. create a more egalitarian society. unambiguously increase national saving.

46. Which of the following is correct? (Points : 5) Deficits always require people to consume at the expense of their children. If the government uses funds to pay for investment programs, on net the debt need not burden future generations. If the government is indebt it must be running a deficit currently. The current government debt is a large share of lifetime income.

47. Opponents of using policy to stabilize the economy generally believe that (Points : 5) neither fiscal nor monetary policy have much impact on aggregate demand.

attempts to stabilize the economy decrease the magnitude of economic fluctuations. unemployment and inflation are not cause for much concern. economic conditions can easily change between the start of policy action and when it takes effect.

48. Studies have shown significant spending changes arise from interest rate changes only after (Points : 5) a few days. a few weeks. a few months. a few years.

49. Consider the following rule for monetary policy: r = 2 percent + p + 1/2(y - y*)/y* + 1/2(p - p*), where r is the nominal interest rate, y is real GDP, y* is an estimate of the natural rate of output, p is the inflation rate, and p* is the inflation target. Which of the following statements is not correct? (Points : 5) If aggregate demand shifts right from long-run equilibrium, this rule unambiguously implies that the Fed increases the nominal interest rate. If aggregate supply shifts right from long-run equilibrium at the inflation target, we cannot tell without more information whether the Fed should increase or decrease the nominal interest rate. If output is at its natural level, but inflation is above its target, the Fed must increase the nominal interest rate. If inflation is at its targeted level, but output is above its natural rate, the Fed must decrease the federal funds rate.

50. Suppose that the country of Aquilonia has an inflation rate of about 2 percent per year and a real growth rate of about 1 percent per year. Suppose also that it has nominal GDP of about 200 billion units

of currency and current nominal national debt of 150 billion units of domestic currency. Which of the following government spending and taxation figures will not raise the debt-to-income ratio? (Points : 5) government spending equal to 20 billion units and tax collections equal to 16 billion units government spending equal to 20 billion units and tax collections equal to 14 billion units government spending equal to 20 billion units and tax collections equal to 10 billion units government spending equal to 20 billion units and tax collections equal to 8 billion units