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Six Debates over Macroeconomic Policy
Multiple Choice – Section 01: Should Monetary and Fiscal Policymakers Try to Stabilize the
Economy?
1. Fluctuations in employment and output result from changes in
a. aggregate demand only.
b. aggregate supply only.
c. aggregate demand and aggregate supply.
d. neither aggregate demand nor aggregate supply.
2. In the summer of 2008, consumers indicated that they were less optimistic about the future of the
economy. Such a change in sentiment is likely to
a. shift aggregate demand to the left.
b. increase output.
c. decrease unemployment.
d. increase prices.
8704 Six Debates over Macroeconomic Policy
3. Which of the following likely occurs when households and firms become more pessimistic?
a. increased spending
b. increased aggregate demand
c. increased real GDP
d. an increase in the unemployment rate
4. Which of the following likely occurs when households and firms become more pessimistic?
a. increased spending, increased aggregate demand, rising real GDP, and a rising unemployment
rate
b. decreased spending, increased aggregate demand, rising real GDP, and a falling unemployment
rate
c. decreased spending, decreased aggregate demand, falling real GDP, and a rising unemployment
rate
d. decreased spending, decreased aggregate demand, falling real GDP, and a falling unemployment
rate
Six Debates over Macroeconomic Policy 8705
5. "Leaning against the wind" is exemplified by a
a. tax cut when there is a recession.
b. decrease in the money supply when there is a recession.
c. decrease in government expenditures when there is a recession.
d. All of the above are correct.
6. "Leaning against the wind" is exemplified by a(n)
a. tax increase when there is a recession.
b. increase in the money supply when there is a recession.
c. decrease in government expenditures when there is a recession.
d. All of the above are correct.
7. "Leaning against the wind" is exemplified by a(n)
a. tax increase when there is a recession.
b. decrease in the money supply when there is a recession.
c. increase in government expenditures when there is a recession.
d. All of the above are correct.
8706 Six Debates over Macroeconomic Policy
8. When aggregate demand is too low to ensure full employment, those in favor of using monetary and
fiscal policy to stabilize the economy might recommend
a. cutting government spending.
b. raising taxes.
c. having the Fed purchase government bonds.
d. reducing the money supply.
9. Suppose aggregate demand fell. In order to stabilize the economy, the government might
a. decrease the money supply.
b. decrease government expenditures.
c. decrease taxes.
d. do nothing.
10. Policymakers following a "lean against the wind" policy would
a. increase government expenditures when output is low and decrease them when output is high.
b. increase government expenditures when output is low and do nothing when output is high.
c. decrease government expenditures when output is low and increase them when output is high.
d. decrease government expenditures when output is high and do nothing when output is low.
Six Debates over Macroeconomic Policy 8707
11. Those who desire that policymakers stabilize the economy would advocate which of the following
when aggregate demand is insufficient to ensure full employment?
a. decrease the money supply
b. increase taxes
c. increase government expenditures
d. Do nothing and let markets correct themselves.
12. The economy goes into recession. Which of the following lists contains things policymakers could
do to try to end the recession?
a. increase the money supply, increase taxes, increase government spending
b. increase the money supply, increase taxes, decrease government spending
c. increase the money supply, decrease taxes, increase government spending
d. decrease the money supply, increase taxes, decrease government spending
13. If the unemployment rate rises, which policies would be appropriate to reduce it?
a. increase the money supply, increase taxes
b. increase the money supply, cut taxes
c. decrease the money supply, increase taxes
d. decrease the money supply, cut taxes
8708 Six Debates over Macroeconomic Policy
14. If the unemployment rate rises, which policies would both be appropriate to reduce it?
a. increase taxes, increase government spending
b. increase taxes, decrease government spending
c. decrease taxes, increase government spending
d. decrease taxes, decrease government spending
15. If the unemployment rate falls below its long-run level, which policies would be appropriate to
stabilize output?
a. increase the money supply, increase taxes
b. increase the money supply, cut taxes
c. decrease the money supply, increase taxes
d. decrease the money supply, cut taxes
16. When aggregate demand is high, risking higher inflation, those in favor of using monetary and
fiscal policy to stabilize the economy might recommend
a. increasing government spending.
b. expanding the money supply.
c. lowering taxes.
d. the Fed sell government bonds.
Six Debates over Macroeconomic Policy 8709
17. Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could
a. buy bonds. These purchases also move the price level closer to its original level.
b. buy bonds. However these purchases move the price level farther from its original level.
c. sell bonds. These sales also move the price level closer to its original level.
d. sell bonds. However these sales move the price level farther from its original level.
18. Suppose there is a decrease in short-run aggregate supply. If the Federal Reserve wants to
stabilize output it should
a. buy bonds. These purchases also move the price level closer to its original level.
b. buy bonds. However these purchases move the price level farther from its original level.
c. sell bonds. These purchases also move the price level closer to its original level.
d. sell bonds. However these purchase move the price level farther from its original level.
19. If aggregate demand shifts because of a wave of pessimism about stock prices, those who favor a
policy that “leans against the wind” would advocate the
a. Federal Reserve increase the money supply or the government increase taxes.
b. Federal Reserve increase the money supply or the government decrease taxes.
c. Federal Reserve decrease the money supply or the government increase taxes.
d. Federal Reserve decrease the money supply or the government decrease taxes.
8710 Six Debates over Macroeconomic Policy
20. If firms were faced with greater uncertainty because of concern that oil prices might rise, they
might decrease expenditures on capital. In response to this change, someone who advocated "lean
against the wind" policies might advocate
a. decreasing the money supply.
b. increasing taxes.
c. increasing government expenditures.
d. All of the above
21. If financial turmoil overseas reduces U.S. net exports, then those in favor of “lean against the
wind policies” would advocate
a. decreasing the money supply and cutting taxes.
b. decreasing the money supply and raising taxes.
c. increasing the money supply and cutting taxes.
d. increasing the money supply and raising taxes.
22. The effects of a decline in the value of financial assets, such as stocks, on consumption and the
economy might be offset by
a. increasing government spending.
b. decreasing the money supply.
c. increasing taxes.
d. undertaking no policy action.
Six Debates over Macroeconomic Policy 8711
23. President George W. Bush and congress cut taxes and raised government expenditures in 2003.
According to the aggregate supply and aggregate demand model
a. both the tax cut and the increase in government expenditures would tend to increase output.
b. only the tax cut would tend to increase output.
c. only the increase in government expenditures would tend to increase output.
d. neither the tax cut nor the increase in government expenditures would tend to increase output.
24. President Barrack Obama and Congress cut taxes and raised government expenditures during the
2008 financial crisis. According to the aggregate supply and aggregate demand, model which of
these policies would tend to reduce unemployment?
a. both the tax cut and the increase in government expenditures
b. the tax cut but not the increase in government expenditures
c. the increase in government expenditures but not the tax cut
d. neither the increase in government expenditures nor the tax cut
25. The Federal Reserve will tend to tighten monetary policy when
a. interest rates are rising too rapidly.
b. it thinks the unemployment rate is too high.
c. the growth rate of real GDP is quite sluggish.
d. it thinks inflation is too high today, or will become too high in the future.
8712 Six Debates over Macroeconomic Policy
26. The Fed lowered interest rates in 2001 and 2002. This implies, other things the same, that the Fed
a. increased the money supply because it was concerned about unemployment.
b. increased the money supply because it was concerned about inflation.
c. decreased the money supply because it was concerned about unemployment.
d. decreased the money supply because it was concerned about inflation.
27. The Fed raised interest rates in 2004 and 2005. This implies, other things the same, that the Fed
a. increased the money supply because it was concerned about unemployment.
b. increased the money supply because it was concerned about inflation.
c. decreased the money supply because it was concerned about unemployment.
d. decreased the money supply because it was concerned about inflation.
28. The Fed lowered interest rates in 2007 and 2008. This implies, other things the same, that the Fed
a. increased the money supply because it was concerned about unemployment.
b. increased the money supply because it was concerned about inflation.
c. decreased the money supply because it was concerned about unemployment.
d. decreased the money supply because it was concerned about inflation.
Six Debates over Macroeconomic Policy 8713
29. If the natural rate of unemployment is 6%, but the Fed thinks it is 5% and attempts to use
monetary policy to move unemployment from 6% to 5%, then in the short run which of the
following variables will the Fed’s policy raise?
a. the price level and real GDP
b. the price level but not real GDP
c. real GDP but not the price level
d. neither real GDP nor the price level
30. If the Fed announced its intention to sell bonds, then it would be signaling that it was going to
a. raise the money supply. It could do this to counter high unemployment.
b. raise the money supply. It could do this to counter high inflation.
c. reduce the money supply. It could do this to counter high unemployment.
d. reduce the money supply. It could do this to counter high inflation.
8714 Six Debates over Macroeconomic Policy
31. Studies have shown significant spending changes arise from interest rate changes after
a. a few days.
b. a few weeks.
c. a few months.
d. about a year and a half..
32. If there is an increase in the money supply, in the short run
a. the interest rises. It takes several weeks for spending to fully respond to this change.
b. the interest rises. It takes several months for spending to fully respond to this change.
c. the interest falls. It takes several weeks for spending to fully respond to this change.
d. the interest falls. It takes several months for spending to fully respond to this change.
33. In general, the longest lag for
a. both fiscal and monetary policy is the time it takes to change policy.
b. both fiscal and monetary policy is the time it takes for policy to affect aggregate demand.
c. monetary policy is the time it takes to change policy, while for fiscal policy the longest lag is the
time it takes for policy to affect aggregate demand.
d. fiscal policy is the time it takes to change policy, while for monetary policy the longest lag is the
time it takes for policy to affect aggregate demand.
34. The Federal Reserve
a. requires little time to change policy and aggregate demand responds quickly.
b. requires little time to change policy but aggregate demand responds slowly.
c. usually requires a substantial time to change policy but aggregate demand responds quickly.
d. usually requires a substantial time to change policy and aggregate demand responds slowly.
35. The principal lag for monetary policy
a. and fiscal policy is the time it takes to implement policy.
b. and fiscal policy is the time it takes for policy to change spending.
c. is the time it takes to implement policy. The principal lag for fiscal policy is the time it takes for
policy to change spending.
d. is the time it takes for policy to change spending. The principal lag for fiscal policy is the time it
takes to implement it.
36. For which of the following policies is there a significant implementation lag?
a. fiscal policy and monetary policy
b. fiscal policy but not monetary policy
c. monetary policy but not fiscal policy
d. neither monetary policy nor fiscal policy
8716 Six Debates over Macroeconomic Policy
37. Part of the lag in monetary policy effects is due to
a. the long political process of monetary policy decisions.
b. precise economic forecasts.
c. the time required for firms and households to alter their spending plans.
d. changes in the unemployment rate.
38. The principal reason that monetary policy has lags is that it takes a long time for
a. changes in the interest rate to change aggregate demand.
b. changes in the money supply to change interest rates.
c. the Fed to make changes in policy.
d. Congress and the President to approve Fed policy.
39. Which of the following is correct?
a. Economic forecasts are precise and aggregate spending responds almost immediately to
interest rate changes.
b. Economic forecast are precise and aggregate spending responds to interest rate changes with a
lag.
c. Economic forecasts are imprecise and aggregate spending responds almost immediately to
interest rate changes.
d. Economic forecast are imprecise and aggregate spending responds to interest rate changes
with a lag.
40. Which of the following should be kept in mind when policymakers consider efforts to stabilize the
economy?
a. The economy responds very quickly to changes in the interest rate and changes in economic
conditions are easy to predict.
b. The economy responds very quickly to changes in the interest rate and changes in economic
conditions are nearly impossible to predict.
c. The economy responds to changes in the interest rate with a lag and changes in economic
conditions are easy to predict.
d. The economy responds to changes in the interest rate with a lag and changes in economic
conditions are nearly impossible to predict.
41. Opponents of using policy to stabilize the economy generally believe that
a. neither fiscal nor monetary policy have much impact on aggregate demand.
b. attempts to stabilize the economy decrease the magnitude of economic fluctuations.
c. unemployment and inflation are not cause for much concern.
d. economic conditions can easily change between the start of policy action and when it takes
effect.
42. Which of the following is an argument against trying to use policy to stabilize the economy?
a. Recessions represent a waste of resources.
b. Pessimism on the part of households and firms may become a self-fulfilling prophecy.
c. "Leaning against the wind" requires policymakers to increase aggregate demand in recessions
and reduce aggregate demand in booms.
d. Macroeconomic forecasting is not developed sufficiently to allow policymakers to change
aggregate demand at the proper time.
43. All of the following are arguments against stabilization policy except
a. Economic forecasting is highly imprecise.
b. Long lags may cause stabilization policies to in fact destabilize the economy.
c. Monetary policy affects aggregate demand by changing interest rates.
d. Fiscal policy must go through a long political process.
Six Debates over Macroeconomic Policy 8719
44. A policymaker against stabilizing the economy would be likely to believe
a. policymakers should “do no harm”.
b. there are no obstacles to the practical application of policy in real life.
c. policy lags are short enough that implementing policy changes in response to recession is not too
risky.
d. policy mitigates the magnitude of economic fluctuations.
45. A policymaker against stabilizing the economy would be likely to believe
a. policymakers should “do no harm”.
b. there are no obstacles to the practical application of policy in real life.
c. policy lags are short enough that implementing policy changes in response to recession is not too
risky.
d. policy mitigates the magnitude of economic fluctuations.
46. Critics of active monetary and fiscal policy emphasize
a. that policy affects the economy with a lag and our ability to forecast future economic conditions
is poor.
b. “leaning against the wind” of economic change to stabilize the economy.
c. cutting government spending, raising taxes, and reducing the money supply when aggregate
demand is excessive.
d. boosting government spending, lowering taxes, and increasing the money supply when
aggregate demand is low.
8720 Six Debates over Macroeconomic Policy
47. A policymaker in favor of stabilizing the economy would be likely to believe
a. recessions are a waste of resources.
b. economies must suffer through the booms and busts of the business cycle.
c. the long policy lags make implementing policy changes in response to recession too risky.
d. policy increases the magnitude of economic fluctuations.
48. In theory the severity of recessions can be diminished with
a. an increase in government spending, which the political process cannot delay.
b. an increase in government spending, which the length of the political process can delay.
c. a decrease in government expenditures, which the political process cannot delay.
d. a decrease in government spending, which the length of the political process can delay.
Six Debates over Macroeconomic Policy 8721
49. If aggregate demand shifts right and the President and Congress want to use fiscal policy to
reverse the change in output, they could
a. increase government expenditures. If by the time policy has been implemented the economy
has moved back to long-run equilibrium, then this policy will raise output above its long-run level.
b. increase government expenditures. If by the time policy has been implemented the economy
has moved back to long-run equilibrium, then this policy will reduce output to below its long-run
level.
c. decrease government expenditures. If by the time policy has been implemented the economy
has moved back to long-run equilibrium, then this policy will raise output above its long-run level.
d. decrease government expenditures. If by the time policy has been implemented the economy
has moved back to long-run equilibrium, then this policy will reduce output to below its long-run
level.
Multiple Choice – Section 02: Should the Government Fight Recessions with Spending Hikes
Rather Than Tax Cuts?
1. In 2009 President Barack Obama responded to recession
a. only by cutting taxes.
b. by cutting taxes and reducing government expenditures.
c. only by raising government expenditures.
d. by cutting taxes and by raising government expenditures.
8722 Six Debates over Macroeconomic Policy
2. In response to recession, who primarily cut taxes rather than raised expenditures?
a. President George W. Bush and President Barack Obama
b. President George W. Bush but not President Barack Obama
c. President Barack Obama but not President George W. Bush
d. neither President George W. Bush nor President Barack Obama
3. In response to recession, who primarily raised expenditures rather than cut taxes?
a. President George W. Bush and President Barack Obama
b. President George W. Bush but not President Barack Obama
c. President Barack Obama but not President George W. Bush
d. Neither President George W. Bush nor President Barack Obama
4. An increase in the money supply
a. reduces interest rates and shifts aggregate demand to the right.
b. reduces interest rates and shifts aggregate supply to the right
c. raises interest rates and shifts aggregate demand to the right.
d. raises interest rates and shifts aggregate supply to the right.
