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23. Inflation reduction has the highest cost when the efforts are
a. credible so that the sacrifice ratio is low.
b. credible so that the sacrifice ratio is high.
c. unexpected so that the sacrifice ratio is high.
d. unexpected so that the sacrifice ratio is low.
24. Inflation reduction has the lowest cost when the efforts are
a. credible so that the sacrifice ratio is low.
b. credible so that the sacrifice ratio is high.
c. unexpected so that the sacrifice ratio is high.
d. unexpected so that the sacrifice ratio is low.
25. A program to reduce inflation is likely to have higher costs if the sacrifice ratio is
a. high and the reduction is unexpected.
b. high and the reduction is expected.
c. low and the reduction is unexpected.
d. low and the reduction is expected.
8764 Six Debates over Macroeconomic Policy
26. A program to reduce inflation is likely to have lower costs if the sacrifice ratio is
a. high and the reduction is unexpected.
b. high and the reduction is expected.
c. low and the reduction is unexpected.
d. low and the reduction is expected.
27. 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
a. the short-run Phillips curve would shift right and the cost of disinflation would rise.
b. the short-run Phillips curve would shift right and the cost of disinflation would fall.
c. the short-run Phillips curve would shift left and the cost of disinflation would rise.
d. the short-run Phillips curve would shift left and the cost of disinflation would fall.
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28. An economist would be more likely to argue for reducing inflation if she thought that
a. the central bank lacked credibility and if bonds were usually not indexed for inflation.
b. the central bank lacked credibility and if bonds were usually indexed for inflation.
c. the central bank had credibility and if bonds were usually not indexed for inflation.
d. the central bank had credibility and if bonds were usually indexed for inflation.
29. If the public correctly perceives that the central bank will reduce inflation, then
a. the short-run Phillips curve shifts right, and the sacrifice ratio will be higher.
b. the short–run Phillips curve shifts right, and the sacrifice ratio will be lower.
c. the short-run Phillips curve shifts left, and the sacrifice ratio will be higher.
d. the short-run Phillips curve shifts left, and the sacrifice ratio will be lower.
8766 Six Debates over Macroeconomic Policy
30. If the public correctly perceives that the central bank will reduce inflation, then
a. the short-run Phillips curve shifts right, and unemployment will rise by more than otherwise.
b. the short–run Phillips curve shifts right, and unemployment will rise by less than otherwise.
c. the short-run Phillips curve shifts left, and unemployment will rise by more than otherwise.
d. the short–run Phillips curve shifts left, and unemployment will rise by less than otherwise.
31. Inflation
a. leads people to use more resources to reduce money holdings. There is no way it can make
labor markets work more efficiently.
b. leads people to use more resources to reduce money holdings. However, it can make labor
markets work more efficiently.
c. leads people to use fewer resources to reduce money holdings. There is no way it can make
labor markets work more efficiently
d. leads people to use fewer resources to reduce money holdings. However, it can make labor
markets work more efficiently.
Six Debates over Macroeconomic Policy 8767
32. An economist would be more likely to argue against reducing inflation if she thought that
a. the central bank lacked credibility and if bonds were usually not indexed for inflation.
b. the central bank lacked credibility and if bonds were usually indexed for inflation.
c. the central bank had credibility and if bonds were usually not indexed for inflation.
d. the central bank had credibility and if bonds were usually indexed for inflation.
33. An economist advising a central bank intending to reduce the inflation rate would likely point out
that
a. the costs of reducing inflation persist and the costs of reducing it do not depend on the public’s
inflation expectations.
b. the costs of reducing inflation persist, but they are smaller if the public reduces its inflation
expectations.
c. the costs of reducing inflation are temporary and the costs of reducing it do not depend on the
public’s inflation expectations.
d. the costs of reducing inflation are temporary and the costs are smaller if the public reduces its
inflation expectations.
8768 Six Debates over Macroeconomic Policy
34. If inflation were reduced, then it is
a. likely that real incomes would rise more rapidly and labor markets would be more flexible.
b. likely that real incomes would rise more rapidly but unlikely that labor markets would be more
flexible.
c. likely that labor markets would be more flexible but unlikely that real incomes would rise more
rapidly.
d. unlikely that real incomes would rise more rapidly and unlikely that labor markets would be
more flexible.
35. Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing
inflation from 3% to 1%?
a. 5%
b. 10%
c. 15%
d. 20%
Six Debates over Macroeconomic Policy 8769
36. Which costs of inflation could the government take action to reduce without reducing inflation?
a. shoeleather costs
b. unintended changes in tax liabilities
c. menu costs
d. none of the above is correct.
37. Which costs of inflation could the government reduce without reducing inflation?
a. arbitrary redistributions of wealth
b. shoeleather costs
c. menu costs
d. none of the above is correct.
8770 Six Debates over Macroeconomic Policy
38. Which costs of inflation could the government reduce without reducing inflation?
a. shoeleather and menu costs
b. menu costs and relative price variability
c. unintended changes in tax liabilities and arbitrary redistributions of wealth
d. none of the above is correct.
39. Which of the following things can a government do to lower the costs of inflation?
a. sell inflation-indexed bonds and rewrite tax laws so that real rather than nominal gains are
taxed
b. sell inflation-indexed bonds but not rewrite tax laws so that real rather than nominal gains are
taxed
c. rewrite tax laws so that real rather than nominal gains are taxed, but not sell inflation-indexed
bonds
d. neither sell inflation-indexed bonds nor rewrite tax laws so that real rather than nominal gains
are taxed
Six Debates over Macroeconomic Policy 8771
40. Which of the following could the government do to decrease the costs of inflation without
lowering the inflation rate?
a. Avoid unexpected changes in the inflation rate.
b. Rewrite the tax laws so that nominal gains were taxed instead of real gains.
c. Make policy that would discourage firms from issuing indexed bonds.
d. All of the above are correct.
41. When wages are fixed by contract, inflation reduces
a. nominal wages; this likely makes labor markets more flexible.
b. nominal wages; this likely makes labor markets less flexible.
c. real wages; this likely makes labor markets more flexible.
d. real wages; this likely makes labor markets less flexible.
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42. When wages are set by contract, inflation
a. reduces real wages; this likely makes labor markets more flexible.
b. reduces real wages; this likely makes labor markets less flexible.
c. raises real wages; this likely makes labor markets more flexible.
d. raises real wages; this likely makes labor markets less flexible.
43. Some economists argue that since inflation
a. raises the real value of fixed nominal wages, a little inflation may make it easier for labor
markets to adjust.
b. raises the real value of fixed nominal wages, a little inflation may make it harder for labor
markets to adjust.
c. reduces the real value of fixed nominal wages, a little inflation may make it easier for labor
markets to adjust.
d. reduces the real value of fixed nominal wages, a little inflation may make it harder for labor
markets to adjust.
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44. Some economists believe that there are positives from a little inflation and that it may “grease the
wheels”
a. in the stock market.
b. in the foreign exchange market.
c. in the bond market.
d. in the labor market.
45. Demand for workers in some industry declines. These workers are reluctant to have a cut in their
nominal wage. However,
a. inflation will raise their real wage and so increase the number of available workers.
b. inflation will raise their real wage and so decrease the number of available workers
c. inflation will reduce their real wage and so increase the number of available workers.
d. inflation will reduce their real wage and so decrease the number of available workers.
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46. Economists
a. agree that the costs of moderate inflation are low and that the cost of reducing inflation is small.
b. agree that the costs of moderate inflation are low, but disagree about the cost of reducing
inflation.
c. disagree about the costs of moderate inflation, but agree that the cost of reducing inflation is
small.
d. disagree about the costs of moderate inflation and disagree about the cost of reducing inflation.
47. Economists
a. agree that the costs of moderate inflation are small. The increase in unemployment from
reducing inflation will be smaller if inflation expectations remain high.
b. agree that the costs of moderate inflation are small. The increase in unemployment from
reducing inflation will be larger if inflation expectations remain high.
c. disagree about the costs of moderate inflation. The increase in unemployment from reducing
inflation will be smaller if inflation expectations remain high.
d. disagree about the costs of moderate inflation. The increase in unemployment from reducing
inflation will be larger if inflation expectations remain high.
Six Debates over Macroeconomic Policy 8775
48. Economists
a. agree that the costs of reducing inflation to zero are worth the benefits. The increase in
unemployment from reducing inflation will be smaller if inflation expectations remain high.
b. agree that the costs of reducing inflation to zero are worth the benefits. The increase in
unemployment from reducing inflation will be larger if inflation expectations remain high.
c. disagree about whether the costs of reducing inflation to zero are worth the benefits. The
increase in unemployment from reducing inflation will be smaller if inflation expectations remain
high.
d. disagree about whether the costs of reducing inflation to zero are worth the benefits. The
increase in unemployment from reducing inflation will be larger if inflation expectations remain
high.
49. Economists agree that at least in the short run disinflation
a. leads to a period of higher unemployment. They also agree that the costs of even moderate
inflation is high.
b. leads to a period of higher unemployment. They disagree about the cost of moderate inflation.
c. leads to a period of lower unemployment. They also agree that the cost of even moderate
inflation is high.
d. leads to a period of lower unemployment. They disagree about the cost of moderate inflation.
8776 Six Debates over Macroeconomic Policy
50. Real interest rates
a. cannot be negative.
b. can be negative only if inflation is negative.
c. can be negative only if inflation is zero.
d. can be negative only if inflation is greater than zero.
51. An added benefit of inflation is that it allows for the possibility of
a. menu costs.
b. aggregate supply shocks.
c. negative real interest rates.
d. recessions.
52. Zero inflation
a. might be dangerous because it could lead to rapidly increasing prices.
b. would limit the flexibility of the labor market and so could at times raise unemployment.
c. would make it easy for the Central bank to create negative real interest rates.
d. is impossible to achieve in the real world.
Six Debates over Macroeconomic Policy 8777
Multiple Choice – Section 05: Should the Government Balance Its Budget?
1. Government deficits mean that
a. national saving is negative so public saving is negative.
b. national saving is negative so public saving is lower than otherwise.
c. public saving is negative so national saving is negative.
d. public saving is negative so national saving is lower than otherwise.
2. The national debt
a. exists because of past government budget deficits.
b. is the difference between the government’s spending and revenue in a given year.
c. is the amount households owe on credit cards, mortgages and other loans.
d. is the amount household and firms have borrowed minus the amount they have saved.
8778 Six Debates over Macroeconomic Policy
3. Part of the argument against deficits is that they
a. increase interest rates and investment.
b. increase interest rates and decrease investment.
c. decrease interest rates and investment.
d. decrease interest rates and increase investment.
4. If the budget deficit were reduced
a. interest rates and investment would increase.
b. interest rates would increase and investment would decrease.
c. interest rates and investment would decrease.
d. interest rates would decrease and investment would increase.
5. The effect of budget deficits on interest rates
a. increases private investment, so eventually the capital stock rises.
b. increases private investment, so eventually the capital stock falls.
c. decreases private investment, so eventually the capital stock rises.
d. decreases private investment, so eventually the capital stock falls.
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6. Over time, continued budget deficits lead to
a. a higher capital stock and higher productivity.
b. a higher capital stock and lower productivity.
c. a lower capital stock and higher productivity.
d. a lower capital stock and lower productivity.
7. In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002,
the government ran a deficit of $159 billion. Other things the same, this change would be expected
to have
a. decreased interest rates and investment.
b. decreased interest rates and increased investment.
c. increased interest rates and investment.
d. increased interest rates and decreased investment.
8780 Six Debates over Macroeconomic Policy
8. In fiscal year 2008, the U.S. government ran a deficit of about $459 billion. In fiscal year 2009, the
government ran a deficit of about $1,413 billion. Other things the same, this change would be
expected to have
a. decreased interest rates and investment.
b. decreased interest rates and increased investment.
c. increased interest rates and investment.
d. increased interest rates and decreased investment.
9. In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998,
the government ran a surplus of about $69.3 billion. Other things the same, we would expect this
change
a. decreased interest rates and investment.
b. decreased interest rates and increased investment.
c. increased interest rates and investment.
d. increased interest rates and decreased investment.
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10. From fiscal year 2012 to fiscal year 2013 China’s budget deficit rose 50%. Other things the same,
we would expect this to have
a. decreased interest rates and investment.
b. decreased interest rates and increased investment.
c. increased interest rates and investment.
d. increased interest rates and decreased investment.
11. In fiscal year 2011, the U.S. government ran a deficit of about $1,300 billion. In fiscal year 2012,
the government ran a deficit of about $1,087 billion. Other things the same, this change would be
expected to have
a. decreased interest rates and investment.
b. decreased interest rates and increased investment.
c. increased interest rates and investment.
d. increased interest rates and decreased investment.
8782 Six Debates over Macroeconomic Policy
12. Which of the following is not correct?
a. A potential cost of deficits is that they reduce national saving, thereby reducing growth of the
capital stock and output growth.
b. Deficits give people the opportunity to consume at the expense of their children, but they do not
require them to do so.
c. The U.S. debt per-person is large compared with average lifetime income.
d. Current spending may benefit future generations.
13. Which of the following is correct?
a. Deficits always require people to consume at the expense of their children.
b. If the government uses funds to pay for investment programs, on net the debt need not burden
future generations.
c. If the government is in debt it must be running a deficit currently.
d. The current government debt is a large share of lifetime income.