The major driver of future federal spending is

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 worker’s 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 country’s
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