CHAPTER 16
Quick Check
1. a. False. Changes in the current real policy rate have limited impact on spending, c.p.
2. a. Both quotes are clearly trying to influence the expected future policy interest rate. One
b. A reasonable conjecture is that the unemployment rate was getting close enough to 6.5%
c. Here the Federal Reserve was trying to ensure that even at zero nominal rates, expected
3. a. The IS curve shifts right.
c. There are three effects. First, an increase in expected future taxes tends to reduce
The net effect on the IS curve is ambiguous. Note that the model of the text has lump
d. The IS curve shifts to the left.
4. Rational expectations may be unrealistic, but it does not imply that every consumer has perfect
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5. The answers below ignore any effect on capital accumulation and output in the long run.
a. The effect on current output is fairly clear. The tax cut in the future leads to higher
b. This means that the Fed will increase the interest rate in the future (shift the LM curve up)
c. The contrast here is to part (a). If the Fed explicitly commits to no change in current and
6. a A deficit reduction in the medium to long run implies that, if output is to return to
b. The discussion in the text states that the first consolidation focused on tax increases
c. The evidence presented was that in the deficit reduction program that focused on
d. It is worrisome that the latter years of the consolidation continue to show very high
Dig Deeper
7. a. Future interest rates will tend to rise. Future output will tend to fall. Both effects shift
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b. No.
c. Compared to original expectations, the nominee is expected to follow a more
d. Financial market participants had known Yellen was a potential replacement and seemed
Explore Further
8. a. The role of tax reductions and outlay reductions seems to be about equal.
b. Certainly from the viewpoint of 2009, this was back loaded. Most of the deficit reduction
c. There would be a belief in low future interest rate. This would mitigate any decline in
d. One clear advantage is that even though the nominal policy rate was at the zero lower
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