1.2 Macroeconomic Policy
1) The percentage of income that Americans save each year ________.
A) is much higher than the percentage the Chinese citizens save
B) is higher than the saving rate of most industrialized countries
C) is lower than the saving rate of most industrialized countries
D) increased by a factor of five every year since the 1970s
E) none of the above
2) Which of these is among the principal determinants of economic growth?
A) inflation
B) the financial system
C) the central bank
D) the government budget deficit
E) stabilization policy
3) Which of these is not among the principal determinants of economic growth?
A) institutions
B) education
C) research and development
D) balanced trade
E) saving and investment
4) A good example of a policy to increase an economy’s saving rate is ________.
A) to reduce poverty
B) to increase the economic growth rate
C) to increase government spending
D) to reduce interest rates
E) to increase sales taxes
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5) The U.S. personal saving rate ________.
A) is much higher than the percentage the Chinese citizens save
B) is higher than the saving rate of most countries
C) cannot fall below zero
D) increased by a factor of five every year since the 1970s
E) none of the above
6) Looking at the U.S. personal saving rate over the last sixty years, we can say that ________.
A) it has always been low
B) Americans used to spend a lot more than they have in recent years
C) Americans used to save a lot more than they have in recent years
D) it has always been fairly high
E) Americans spend more when concerned about their future earnings
7) Which of these economies has the highest saving rate?
A) Greece
B) China
C) United States
D) Brazil
E) Japan
8) When households have very low savings ________.
A) investment decreases
B) they are less able to cope with severe economic downturns
C) bankruptcies increase
D) all of the above
E) none of the above
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9) When households increase their personal savings ________.
A) investment decreases
B) they are better able to cope with severe economic downturns
C) interest rates are likely to rise, as well
D) all of the above
E) none of the above
10) Raising household savings could be beneficial because ________.
A) it translates into higher investment
B) severe economic downturns can be “better-weathered”
C) it provides a cushion to avoid bankruptcies
D) all of the above
E) none of the above
11) Policies to encourage higher personal saving rates include ________.
A) raising income taxes
B) raising sales taxes
C) lowering taxes on pension plans
D) A and B but not C
E) B and C but not A
12) Policies to encourage higher personal saving rates include ________.
A) lowering income taxes
B) lowering sales taxes
C) increasing the quantity of money
D) raising asset prices
E) reducing interest rates
13) Policies to encourage higher personal saving rates include ________.
A) raising income taxes
B) lowering sales taxes
C) raising taxes on pension plans
D) all of the above
E) none of the above
14) Raising taxes and cutting spending are examples of ________.
A) fiscal policy tightening
B) fiscal policy expansion
C) monetary policy tightening
D) monetary policy expansion
E) none of the above
15) An increase in government spending might be an example of a ________ policy for the
purpose of ________.
A) monetary; lowering unemployment
B) monetary; reducing inflation
C) monetary; increasing saving
D) fiscal; reducing inflation
E) fiscal; lowering unemployment
16) An increase in interest rates might be an example of a ________ policy for the purpose of
________.
A) monetary; reducing inflation
B) monetary; lowering unemployment
C) monetary; increasing the quantity of money
D) fiscal; reducing inflation
E) fiscal; lowering unemployment
17) Policies to keep inflation in check ________.
A) are, typically, fiscal policies
B) are a potential cause of high unemployment
C) are unlikely to be needed, so long as government spending remains high
D) include increasing the quantities of money and saving
E) are desirable in the short run, but may produce bad long-run outcomes
18) Fiscal policy involves ________.
A) taxes and government spending
B) setting interest rates
C) controlling the amount of money in the economy
D) all of the above
E) none of the above
19) Since 1930 the period of highest government budget deficits for the U.S. took place in
________.
A) the 1930s
B) the 1940s
C) the 1950s
D) the 1980s
E) the 1990s
20) Historically, the U.S. government seems to have ________.
A) run budget surpluses as often as budget deficits
B) generally spent less than what it collected in taxes each year
C) had difficulty running budget surpluses
D) not needed to borrow to finance wars
E) none of the above
21) Policies to reduce the likelihood of financial crises might include ________.
A) enlarging government budget deficits
B) reducing imbalances in global trade and capital flows
C) keeping the inflation rate near or below zero
D) more aggressive use of stabilization policy
E) all of the above
22) The Federal Reserve ________.
A) is the U.S. central bank
B) controls the amount of money in the economy
C) sets interest rates
D) all of the above
E) none of the above
23) The U.S. central bank ________.
A) usually raises taxes to stabilize a slowing economy
B) encourages higher savings rates by raising the national sales tax
C) is known as the Federal Reserve
D) all of the above
E) none of the above
24) The Federal Reserve ________.
A) engages in stabilization policy by setting interest rates
B) engages in fiscal policy by setting interest rates
C) addresses financial crises by raising taxes
D) all of the above
E) none of the above
25) Financial crises are typically ________.
A) characterized by sharp declines in asset prices
B) associated with increases in business failures
C) accompanied by sharp economic downturns
D) all of the above
E) none of the above
26) Nonactivists propose doing nothing in the face of economic hardship because ________.
A) activist policies can kick in at the wrong time and be counterproductive
B) “markets self-correct pretty rapidly anyway”
C) in the face of high unemployment, activist policies would likely lead to surges in inflation
D) all of the above
E) none of the above
27) Nonactivists propose doing nothing in the face of economic hardship because ________.
A) activist policies can kick in at the wrong time and be counterproductive
B) markets can take quite a bit of time to self-correct
C) while households feel the hardship, firms typically benefit
D) all of the above
E) none of the above
28) Nonactivists propose doing nothing in the face of economic hardship because ________.
A) markets can take quite a bit of time to self-correct
B) excessive unemployment tends to disappear on its own accord
C) while households feel the hardship, firms typically benefit
D) all of the above
E) none of the above
29) Activists believe ________.
A) the self-correcting mechanism in the economy is very slow
B) in the adoption of policies to eliminate excessive unemployment
C) doing nothing will leave too many people out of work for too long
D) all of the above
E) none of the above
30) The long-standing debate over rules versus discretion in macroeconomics centers on the
following statement ________.
A) “discretionary policy can lead to bad long-run outcomes but rules lack flexibility in the short-
run”
B) “the speed with which the self-correcting mechanism in the economy acts is in question”
C) “the speed with which unemployment tends to disappear is debatable”
D) all of the above
E) none of the above
31) The old adage “rules are made to be broken” would typically be associated with economists
who might advocate ________.
A) stabilization policy
B) monetary policy
C) rule-determined policy
D) discretionary policy
E) fiscal policy
32) Consider an economic policy regime in which rules are well-known but frequently ignored.
Which of these statements is true?
A) This regime might work in the long-run, but is unlikely to produce good outcomes in the short
run.
B) Policymakers in this regime might find that rules are being broken with increasing frequency.
C) This regime is more likely to be supported by nonactivist, than by activist policymakers.
D) This regime is more likely to result in high unemployment than in high inflation.
E) This regime is unlikely to produce large government budget deficits.
33) Opponents of rule-determined policies might point out that ________.
A) markets self-correct quickly so rules become obsolete
B) unforeseen changes in the structure of the economy may make a rule obsolete
C) policies that kick in at the wrong time may lead to undesirable results
D) all of the above
E) none of the above
34) An advantage of discretionary policy might be that ________.
A) it has been shown to be more efficient than rules
B) it is more flexible than rules
C) it requires a binding plan in advance to deal with economic problems
D) all of the above
E) none of the above
35) An advantage of macroeconomic policy based on pre-specified rules might be that
________.
A) it is easier to stick to long-run considerations and avoid bad long-run outcomes
B) it is more flexible than discretionary policy
C) it is easier to adapt to short-run changes and avoid a bad short-run outcome
D) all of the above
E) none of the above
36) Activist policymakers, compared to nonactivists, are more likely to emphasize ________
considerations and to prefer ________.
A) short-run; rule-determined
B) long-run; discretionary policy
C) short-run; discretionary policy
D) long-run; rule determined
E) business; flexible plans
37) In the 2000s, the U.S. economy had both a ________ and a ________.
A) large trade deficit; large capital inflow
B) large trade surplus; large capital inflow
C) large trade deficit; high saving rate
D) large capital inflow; high saving rate
E) large capital inflow; small government budget deficit
38) The low saving rate in the United States is no cause for concern, so long as people in other
countries are saving and are willing to send their savings into the U.S. economy by buying our
assets. Comment.
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39) All governments face a budget constraint: none can spend more than the sum of current
government revenues plus the amount that creditors are willing to lend. Why, then, do
government budget deficits matter?
40) Why might most people, as in the United States, save less than is good for themselves and
for the economy as a whole? How might policymakers encourage more saving?
41) The necessary ingredients for economic growth and poverty reduction are no mystery, really:
education, favorable and efficient institutions, research and development, etc. Macroeconomists
are unlikely to have anything useful to say. Comment.
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1.3 How We Will Study Macroeconomics
1) There are no questions for this section.