Six Debates over Macroeconomic Policy 8803
13. Double taxation means that both
a. wage income and interest income are taxed, which is currently the case in the United States.
b. wage income and interest income are taxed, which is not currently the case in the United
States.
c. the profits of corporations and the dividends shareholders receive are taxed, which is currently
the case in the United States.
d. the profits of corporations and the dividends shareholders receive are taxed, which is not
currently the case in the United States.
14. Double taxation means that both
a. the profits of corporations and the dividends shareholders receive are taxed, which is not
currently the case in the United States.
b. the profits of corporations and the dividends shareholders receive are taxed, which is currently
the case in the U.S.
c. wage income and employee benefits are taxed, which is not currently the case in the United
States.
d. wage income and employee benefits are taxed, which is currently the case in the United States.
8804 Six Debates over Macroeconomic Policy
15. U.S. public policy discourages saving because
a. other things the same, taxes increase the return from savings.
b. means tested programs such as Medicaid provide lower benefits to those who did not save.
c. none of parents’ bequest to their children is taxed.
d. some forms of capital income are taxed twice.
16. Means-tested programs tend to favor
a. those with high income as would a consumption tax.
b. those with high income while a consumption tax would favor those with low income.
c. those with low income as would a consumption tax.
d. those with low income while a consumption tax would favor those with high income.
17. Which of the following are currently provisions of the U.S. tax system and discourage saving?
a. some forms of capital income are taxed twice
b. if they are large enough, bequests are taxed
c. both a and b
d. neither a nor b
Six Debates over Macroeconomic Policy 8805
18. Proponents of tax-law changes to encourage saving would
a. argue that corporate tax rates should be decreased.
b. increase the number of government benefits which are means-tested.
c. argue that state sales tax should be replaced with state income tax.
d. favor none of the above programs.
19. Which of the following does the U.S. currently have?
a. means-tested government benefits and tax laws that tax capital income only once
b. means-tested government benefits and tax laws that tax some capital income twice
c. tax laws that tax capital income only once, but not means-tested government benefits
d. tax laws that tax some capital income twice, but not means-tested government benefits
20. Of means tested programs and IRA’s, which lower the rate of return on saving?
a. Both means-tested programs and IRA’s.
b. Means-tested programs, but not IRA‘s.
c. IRA’s but not means-tested programs.
d. Neither means-tested program, or IRA’s.
8806 Six Debates over Macroeconomic Policy
21. Which of the following would likely increase private saving?
a. Both expansion of IRA type accounts and a consumption tax.
b. Expansion of IRA type accounts, but not a consumption tax.
c. A consumption tax, but not expansion of IRA type accounts.
d. Neither expansion of IRA type accounts nor a consumption tax.
22. Which of the following would likely increase private saving?
a. both expansion of means testing and a consumption tax
b. expansion of means testing, but not a consumption tax
c. a consumption tax, but not expansion of means testing
d. neither expansion of means testing nor a consumption tax
23. IRAs, and 401(k) and 403(b) plans
a. impose added taxes on those who save.
b. place no limits on the amount people can deposit into these programs.
c. impose penalties for withdrawals except under certain circumstances.
d. None of the above is correct.
Six Debates over Macroeconomic Policy 8807
24. Which of the following is true concerning IRA’s, 401(k) and 403(b) plans?
a. There are no limits on the amount of funds people can hold in them.
b. Some people are not eligible to hold them.
c. There are never penalties for withdrawals.
d. All of the above are correct.
25. Which of the following is true concerning IRA’s, 401(k) and 403(b) plans?
a. Not everyone is eligible to put funds into them.
b. There are restrictions on the amount of funds that can be put into them.
c. Except under unusual circumstances, there are penalties for withdrawals before retirement.
d. All of the above are correct.
26. Which of the following two effects of a decrease in the tax rate on saving would raise savings?
a. the income effect and the substitution effect
b. the income effect but not the substitution effect
c. the substitution effect but not the income effect
d. neither the substitution effect nor the income effect
8808 Six Debates over Macroeconomic Policy
27. A higher rate of return on saving has
a. an income effect that discourages saving and a substitution effect that encourages saving.
b. an income effect that encourages saving and a substitution effect that discourages saving.
c. income and substitution effects that both decrease saving.
d. income and substitution effects that both increase saving.
28. Suppose the tax rate on interest income from saving were reduced.
a. The income effect, but not the substitution effect, would tend to reduce private saving.
b. The substitution effect, but not the income effect, would tend to reduce private saving.
c. Both the income and substitution effect would tend to reduce private saving.
d. Neither the income nor the substitution effect would tend to reduce private saving.
29. If a reduction in taxes on savings reduced the amount of private saving, then the
a. income effect equaled the substitution effect.
b. income effect outweighed the substitution effect.
c. the substitution effect outweighed the income effect.
d. None of the above.
Six Debates over Macroeconomic Policy 8809
30. Suppose tax laws were reformed to encourage saving by increasing the rate of return on savings.
Which of the following would be true?
a. Both the income effect and the substitution effect would tend to increase the amount of money
a household saved.
b. The income effect would tend to increase household savings while the substitution effect would
tend to decrease household savings.
c. The income effect would tend to decrease household savings while the substitution effect
would tend to increase household savings.
d. Both the income effect and the substitution effect would tend to decrease the amount of money
a household saved.
31. Which of the following might explain a decrease in national saving when the tax rate on savings is
reduced?
a. its substitution effect on saving and its effect on the government budget
b. its substitution effect on saving but not its effect on the government budget
c. its effect on the government budget but not its substitution effect on saving
d. neither its substitution effect on saving nor its effect on the government budget
8810 Six Debates over Macroeconomic Policy
32. An increase in the tax rate on interest income
a. raises the amount earned on savings. Saving will rise if the income effect of the increase in the
tax rate is larger than the substitution effect.
b. raises the amount earned on savings. Saving will rise if the income effect of the increase in the
tax rate is smaller than the substitution effect.
c. reduces the amount earned on savings. Saving will fall if the income effect of the increase in
the tax rate is larger than the substitution effect.
d. reduces the amount earned on savings. Saving will fall if the income effect of the increase in
the tax rate is smaller than the substitution effect.
33. Which of the following might explain a decrease in national saving when the tax rate on savings is
reduced?
a. its income effect on saving and its effect on the government budget
b. its income effect on saving but not its effect on the government budget
c. its effect on the government budget but not its income effect on saving
d. neither its income effect on saving nor its effect on the government budget
34. A year ago a country reduced the tax rate on all interest income from 20% to 10%. During the
year private saving was $500 billion as compared to $400 billion the year before the tax reform.
Taxes on interest income fell by $10 billion. Assuming no other changes in income, or government
revenues or spending, which of the following is correct?
a. the substitution effect was larger than the income effect; national saving rose
b. the substitution effect was larger than the income effect; national saving fell
c. the income effect was larger than the substitution effect; national saving rose
d. the income effect was larger than the substitution effect; national saving fell
Six Debates over Macroeconomic Policy 8811
35. A year ago a country reduced the tax rate on all interest income from 40% to 10%. During the
year private saving was $600 billion as compared to $500 billion the year before the tax reform.
Taxes collected on interest income fell by $150 billion. Assuming no other changes in government
revenues or spending which of the following is correct?
a. the substitution effect was larger than the income effect; national saving rose
b. the substitution effect was larger than the income effect; national saving fell
c. the income effect was larger than the substitution effect; national saving rose
d. the income effect was larger than the substitution effect; national saving fell
36. Which of the following are both correct?
a. Data show no correlation between saving and measures of economic well-being. A reduction in
tax rates may reduce saving because of the income effect.
b. Data show no correlation between saving and measures of economic well-being. A reduction in
tax rates may reduce saving because of the substitution effect.
c. 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.
d. Data show a positive correlation between saving and measures of economic well-being. A
reduction in tax rates may reduce saving because of the substitution effect.
8812 Six Debates over Macroeconomic Policy
37. Assuming that the substitution effect is large relative to the income effect, tax reform designed to
increase saving
a. increases the interest rate and decreases spending on capital goods.
b. increases the interest rate and increases spending on capital goods.
c. decreases the interest rate and increases spending on capital goods.
d. decreases the interest rate and decreases spending on capital goods.
38. A decrease in the tax rate is more likely to increase the standard of living if the income effect of a
change in the interest rate is
a. small and an increase in private saving tends to have a small impact on the capital stock.
b. small and an increase in private saving tends to have a large impact on the capital stock.
c. large and an increase in private saving tends to have a small impact on the capital stock.
d. large and an increase in private saving tends to have a large impact on the capital stock.
39. Which of the following is not an argument by those who oppose tax–law changes to encourage
saving?
a. Saving is not very responsive to changes in the tax rate.
b. Saving is not an important determinant of a nation‘s ability to produce output.
c. Reducing the budget deficit instead of changing the tax laws could raise saving.
d. Changes in the tax laws to induce saving would distribute the tax burden less fairly.
Six Debates over Macroeconomic Policy 8813
40. Eliminating means requirements for government benefits would
a. raise saving and primarily benefit people with lower incomes.
b. raise saving but primarily benefit people with higher incomes.
c. reduce saving but primarily benefit people with lower incomes.
d. reduce saving and primarily benefit people with higher income.
41. Eliminating double-taxation would likely
a. raise saving and primarily benefit people with lower incomes.
b. raise saving but primarily benefit people with higher incomes.
c. reduce saving but primarily benefit people with lower incomes.
d. reduce saving and primarily benefit people with higher income.
42. A reduction in the tax rate on interest income
a. would necessarily raise national saving.
b. would primarily benefit the wealthy.
c. both a and b are correct.
d. None of the above are correct.
8814 Six Debates over Macroeconomic Policy
43. Which of the following is not an argument in favor of reforming the tax laws to encourage
saving?
a. Saving is a key determinant of long–run prosperity.
b. Current tax laws discourage saving for the purpose of leaving a large bequest.
c. The substitution effect of a higher return to saving may be about equal to the income effect of a
higher return to saving.
d. The tax code currently taxes some forms of capital income twice.
44. Which of the following is not an argument made by those who oppose reforming the tax laws to
encourage saving?
a. A public budget surplus can raise national saving.
b. The substitution effect of a higher return to saving may be about equal to the income effect of a
higher return to saving.
c. Low-income households save a larger fraction of their income than high-income households.
d. Tax cuts might cause a budget deficit.
45. Changes in tax laws that reduce taxes more for those who save a lot will
a. favor low-income households.
b. favor people with high income.
c. create a more egalitarian society.
d. unambiguously increase national saving.
Six Debates over Macroeconomic Policy 8815
46. Opponents of tax reforms intended to raise saving argue that such reforms
a. favor those with high income, and that saving may not rise because of the substitution effect.
b. favor those with high income, and that saving may not rise because of the income effect.
c. favor those with low income, and that saving may not rise because of the substitution effect.
d. favor those with low income, and that saving may not rise because of the income effect.
47. A consumption tax that replaces an income tax
a. only taxes a household on the money it spends.
b. discourages saving.
c. would likely result in a lower level of saving than an income tax.
d. ultimately taxes income twice – once when the household pays income tax and once when the
household makes a purchase.
8816 Six Debates over Macroeconomic Policy
Multiple Choice – Section 07: Conclusion
1. The six debates over macroeconomic policy exist mostly because
a. economists disagree over basic issues such as the importance of saving for economic growth.
b. there are tradeoffs and people disagree about the best way to deal with them.
c. politicians offer misleading information.
d. people fail to clearly see the benefits or the costs of most changes.
True/False and Short Answer
1. One prominent debate over macroeconomic policy centers on the question of whether monetary
and fiscal policy should be used to try to stabilize the economy.
a. True
b. False
Six Debates over Macroeconomic Policy 8817
2. A recession has no benefit to society-it represents a sheer waste of resources.
a. True
b. False
3. A “lean against the wind” policy says the government should not use stabilization policy and simply
let the economy “weather the storm.”
a. True
b. False
4. Advocates of stabilization policy argue that when there is a recession, the government should
increase the money supply and increase government expenditures.
a. True
b. False
8818 Six Debates over Macroeconomic Policy
5. Many studies indicate changes in monetary policy have most of their effect on aggregate demand
about six months after the change is made.
a. True
b. False
6. Economists predict the business cycle well enough that stabilization policy is likely to work despite
lags in the effects of policy.
a. True
b. False
7. To counter the recession of 2008–2009 President Obama and congress created a large increase in
government expenditures.
a. True
b. False
Six Debates over Macroeconomic Policy 8819
8. According to traditional Keynesian analysis, a tax cut has a larger effect on aggregate demand
than an increase in government expenditures of the same size.
a. True
b. False
9. The Obama administration believed that transfer payments to the unemployed would have a larger
impact on aggregate demand than tax cuts.
a. True
b. False
10. Tax cuts proposed by the Kennedy and Reagan administrations were followed by robust
economic growth.
a. True
b. False
8820 Six Debates over Macroeconomic Policy
11. Tax cuts affect only aggregate demand not aggregate supply.
a. True
b. False
12. The laws that created the Fed give it only vague recommendations about what goals it should
pursue, and they do not tell the Fed how to pursue whatever goals it might choose.
a. True
b. False
13. The laws that created the Fed give it some specific recommendations about what goals it should
pursue so it has little discretion in making policy.
a. True
b. False
Six Debates over Macroeconomic Policy 8821
14. The Federal Reserve operates under a rule that requires money supply growth to increase by one
percentage point for every percentage point that unemployment rises above its natural rate.
a. True
b. False
15. If the central bank has discretion to make policy, it may create economic fluctuations that reflect
the electoral calendar. This is called the political business cycle.
a. True
b. False
16. People’s skepticism about central bankers’ announcements of their intentions stems from the fact
that policymakers may act in a fashion that is time inconsistent.
a. True
b. False
8822 Six Debates over Macroeconomic Policy
17. If the Fed followed a rule for monetary policy, the time inconsistency problem would be
eliminated.
a. True
b. False
18. In practice, the problems created by time inconsistency and the political business cycle appear to
be quite serious.
a. True
b. False
19. Economists agree that if a monetary policy rule is to be used, the best one makes the growth rate
of the money supply constant.
a. True
b. False