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Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, the central bank must


A) increase the money supply so interest rates rise.
B) increase the money supply so interest rates fall.
C) decrease the money supply so interest rates rise.
D) decrease the moneys supply so interest rates fall

E) B) and C)
F) A) and B)

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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.

E) B) and D)
F) B) and C)

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If inflation falls,


A) people choose to put in more effort to keep money balances low. When inflation is unexpectedly low it redistributes wealth from lenders to borrowers.
B) people choose to put in more effort to keep money balances low. When inflation is unexpectedly low it redistributes wealth from borrowers to lenders.
C) people choose to put in less effort to keep money balances low. When inflation is unexpectedly low it redistributes wealth from lenders to borrowers.
D) people choose to put in less effort to keep money balances low. When inflation is unexpectedly low it redistributes wealth from borrowers to lenders.

E) A) and B)
F) A) and C)

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Suppose that the country of Aquilonia has an inflation rate of about 2 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 400 billion units of currency and current nominal national debt of 200 billion units of domestic currency. Which of the following government spending and taxation figures will keep the debt to-income ratio constant?


A) government spending equal to 30 billion units and tax collections equal to 25 billion units
B) government spending equal to 30 billion units and tax collections equal to 20 billion units
C) government spending equal to 30 billion units and tax collections equal to 10 billion units
D) government spending equal to 30 billion units and tax collections equal to 5 billion units

E) B) and D)
F) All of the above

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A permanent reduction in inflation would


A) permanently reduce the frequency of price changes and permanently lower unemployment.
B) permanently reduce the frequency of price changes and temporarily raise unemployment.
C) temporarily reduce the frequency of price changes and temporarily lower unemployment.
D) temporarily reduce the frequency of price changes and temporarily raise unemployment.

E) B) and D)
F) All of the above

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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.

E) A) and B)
F) None of the above

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Using typical estimates of the sacrifice ratio, how much output would likely be sacrificed to reduce inflation from 4 percent to 2 percent?

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The typical estimate of the sacrifice ra...

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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.

E) A) and C)
F) A) and D)

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Which of the following is a cost of inflation?


A) shoeleather costs
B) menu costs
C) relative price variability
D) All of the above are correct.

E) A) and B)
F) All of the above

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Provide an example of how current expenditures might benefit future generations.

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Expenditures on education rais...

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Which of the following is not correct?


A) Deficits give people the opportunity to consume at the expense of their children, but deficits do not require them to do so.
B) Deficits and surpluses could be used to avoid fluctuations in the tax rate.
C) The only times deficits have increased have been during times of war or economic downturns.
D) Reducing the budget deficit rather than funding more education spending could, all things considered, make future generations worse off.

E) None of the above
F) B) and C)

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Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 2.5 percent per year. Then the government can have a deficit of about


A) 5 percent of GDP without raising the debt-to-income ratio.
B) 4.5 percent of GDP without raising the debt-to-income ratio.
C) 1.25 percent of GDP without raising the debt-to-income ratio.
D) .5 percent of GDP without raising the debt-to-income ratio.

E) C) and D)
F) B) and D)

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Paul Volcker, former chair of the Fed, implemented


A) contractionary policy which increased the popularity of the U.S. president who had appointed him.
B) contractionary policy which decreased the popularity of the U.S. president who had appointed him.
C) expansionary policy which increased the popularity of the U.S. president who had appointed him.
D) expansionary policy which decreased the popularity of the U.S. president who had appointed him.

E) B) and C)
F) A) and D)

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In practice, the problems created by time inconsistency and the political business cycle appear to be quite serious.

A) True
B) False

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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.

E) A) and D)
F) All of the above

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Some economists argue that policymakers can use monetary and fiscal policy to reduce the severity of economic fluctuations. What are some things policymakers can do when higher inflation becomes a concern?

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Policymakers can cut governmen...

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In addition to the tax code, other policies reduce the incentives for people to save Provide an example.

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Some government benefits are m...

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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

E) B) and C)
F) All of the above

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Between 1980 and 1995 government debt as a percentage of GDP


A) increased from about 25% to 50%.
B) decreased from about 50% to 25%.
C) decreased from about 25% to almost zero.
D) increased from about 10% to 20%.

E) All of the above
F) C) and D)

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List two of the three types of fiscal programs that the President and Congress emphasized in response to the 2008- 2009 recession.

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"Shovel ready" public works pr...

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