Econ 202 Final

Which of the following are both correct?

Data show a positive correlation between saving and measures of economic well-being. A reduction in tax rates may reduce saving because of the income effect.

Which of the following is correct?

If the government uses funds to pay for investment programs, on net the debt need not burden future generations.

Which of the following is not correct?

The only times deficits have increased have been during times of war or economic downturns.

In which cases were tax cuts followed by robust growth?

the ones of the Kennedy administration in 1964 and the ones of the Reagan administration in 1981

If inflation were high in some country and lawmakers in that country passed a law requiring the central bank to maintain a low level of inflation, it is likely that

the short-run Phillips curve would shift left and the cost of disinflation would fall.

Suppose the central bank increases the growth rate of the money supply. In the long run, which of the following is unaffected by this change in policy?

the unemployment rate but not the inflation rate

Other things the same, if there is an increase in the money supply growth rate that is larger than expected, then in the short run

the unemployment rate will be below its natural rate.

The idea that the long-run Phillips curve is

vertical stems from the analysis of Friedman and Phelps.

If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate supply the central bank

would have to increase the money supply. This would move unemployment further from the natural rate.

Zero inflation

would limit the flexibility of the labor market and so could at times raise unemployment.

If the long-run Phillips curve shifts to the right, then for any given rate of money growth and inflation the economy has

higher unemployment and lower output.

Some economists believe that there are positives from a little inflation and that it may grease the wheels

in the labor market.

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, the central bank would have to

increase the money supply, which causes output to move farther from long-run equilibrium.

There is an adverse supply shock. In response the Federal Reserve pursues an expansionary monetary policy. Taking into account both the shock and the Federal Reserve s policy, which of the following are we sure of?

inflation will be higher

In the long run, if the Fed increases the growth rate of the money supply,

inflation will be higher.

Suppose that the money supply decreases. In the short run, this increases prices according to

neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.

In the long run, an increase in the money supply

raises prices and leaves unemployment unchanged.

If tax rates are raised to avoid a deficit during a recession, then

real GDP will fall and deadweight loss from taxes will rise.

If a government redesigned its unemployment insurance programs so that the unemployed had greater incentives to quickly find appropriate jobs, then which of the following curves would shift right?

the long-run aggregate supply curve but not the long-run Phillips curve

If a central bank decreases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result?

the price level but not output

Other things the same, if the central bank decreases the rate at which it increases the money supply, then in the long run

the short-run Phillips curve shifts left.

If a central bank had to give up its discretion and follow a rule that required it to keep inflation low,

the short-run Phillips curve would shift down.

Which of the following would shift the long-run Phillips curve to the right?

increases in unemployment compensation

Closely watched indicators such as the inflation rate and unemployment are released each month by the

Bureau of Labor Statistics.

Which of the following is not an argument made by those who oppose reforming the tax laws to encourage saving?

Low-income households save a larger fraction of their income than high-income households.

In the long run, an increase in the money supply growth rate

None of the above is correct.

As it is usually practiced, inflation targeting sets

a specific inflation rate for the central bank to target but allows it to deviate from the target when some shock pushes inflation away from that number.

If the natural rate of unemployment falls,

both the short-run Phillips curve and the long-run Phillips curve shift.

According to the political business cycle theory, if the Fed wanted to see a President re-elected, prior to the election it might

buy bonds to reduce interest rates.

Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to stabilize output it should

buy bonds. However these purchases move the price level farther from its original level.

Tax cuts

can easily target investment spending, which falls by a large percentage during recessions.

Suppose aggregate demand fell. In order to stabilize the economy, the government might

decrease taxes.

According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they

decreased the money supply.

If the central bank decreases the money supply, then output

falls and unemployment rises.

If the Fed announced a policy to reduce inflation and people found it credible, the short-run Phillips curve would shift

left and the sacrifice ratio would fall.

When the Federal Open Market Committee meets it

looks at the state of the economy and economic forecasts to determine the target it will set for the federal funds rate.

A policymaker against stabilizing the economy would be likely to believe

policymakers should do no harm .

Disinflation is a

reduction in the rate of inflation, whereas deflation is a reduction in the price level.

The Federal Reserve

requires little time to change policy but aggregate demand responds slowly.

An adverse supply shock causes inflation to

rise and the short-run Phillips curve to shift right.

An increase in expected inflation shifts the

short-run Phillips curve right.

A favorable supply shock will cause the price level

to fall and output to rise.

If a central bank increases the money supply growth rate, then in the short run

unemployment falls. In the long run the short-run Phillips curve shifts right.

If there is an increase in the price of oil, then

unemployment rises. If the central bank tries to counter this increase, inflation rises.

Which costs of inflation could the government take action to reduce without reducing inflation?

unintended changes in tax liabilities

Suppose the tax rate on interest income from saving were reduced.

The income effect, but not the substitution effect, would tend to reduce private saving.

Means-tested college aid, base college aid primarily on

a student s abilities but create a disincentive to save.

Which of the following are currently provisions of the U.S. tax system and discourage saving?

both a and b

Other things the same, a country that decides to reduce inflation will

have a higher unemployment rate only in the short run.

Proponents of zero inflation argue that reducing inflation has

temporary costs and permanent benefits.