Multiple Choice Questions
1. Approximately how long does it take a change in monetary policy to influence aggregate demand?
a. One month
b. Six months
c. Two years
d. Five years
2. According to traditional Keynesian analysis, which of the following will increase aggregate demand the most?
a. $100 billion increase in taxation
b. $100 billion decrease in taxation
c. $100 billion increase in government spending
d. $100 billion decrease in government spending
3. Advocates for setting monetary policy by rule rather than discretion often argue that
a. Central bankers with discretion are tempted to renege on their announced commitments to low inflation.
b. Central bankers following a rule will be more responsive to the needs of the political process.
c. Fiscal policy is a much better tool for economic stabilization than is monetary policy.
d. It is sometimes useful to give the economy a burst of surprise inflation.
4. Which of the following is NOT an argument for maintaining a positive rate of inflation?
a. It permits real interest rates to be negative.
b. It allows real wages to fall without cuts in nominal wages.
c. It increases the variability of relative prices.
d. It would be costly to reduce inflation to zero.
5. Throughout U.S. history, what has been the most common cause of substantial increases in government debt?
a. Recessions
b. Wars
c. Financial crises
d. Tax cuts
6. Advocates of taxing consumption rather than income argue that
a. A consumption tax is a better automatic stabilizer.
b. Taxing consumption does not cause any deadweight losses.
c. The rich consume a higher fraction of income than the poor.
d. The current tax code discourages people from saving.