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 better than monetary policy as a tool for economic stabilization.

d. it is sometimes useful to give the economy a burst of surprise inflation.

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

Fiscal policy has a long lag mainly because

a. policymakers at the Federal Reserve do not meet frequently.

b. firms making investments are slow to respond to changes in interest rates.

c. the political process is slow to enact changes in government spending or taxes.

d. consumers are slow to respond to changes in their after-tax incomes .

Stagflation is caused by a. a leftward shift in the aggregate-demand curve. b. a rightward shift in the aggregate-demand curve. c. a leftward shift in the aggregate-supply curve. d. a rightward shift in the aggregate-supply curve.

The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories.

Explain why this situation is similar to the time-inconsistency problem faced by monetary policymakers.

The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories.

Given your answer to part (b), would investors believe the government's announcement? What can the government do to increase the credibility of announced policy changes?

(part b) After investors have responded to the announced tax reduction, does the government have an incentive to renege on its policy?

The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories.

The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories.

If investors believed that capital taxes would remain low, how would the government's action affect the level of investment?

A cut in income tax rates tends to$\underline{\phantom{\text{justtextjosvisetekst}}}$ aggregate demand and$\underline{\phantom{\text{justtextjosvisetekst}}}$ aggregate supply.

a. increase; increase

b. increase; decrease

c. decrease; increase

d. decrease; decrease

According to the theory of liquidity preference, an economy's interest rate adjusts

a. to balance the supply and demand for loanable funds.

b. to balance the supply and demand for money.

c. one-for-one to changes in expected inflation.

d. to equal the interest rate prevailing in world financial markets .

What might motivate a central banker to cause a political business cycle? What does the political business cycle imply for the debate over policy rules ?

Unlike eutherians, both monotremes and marsupials ( A ) lack nipples. ( B ) have some embryonic development outside the uterus. ( C ) lay eggs. ( D ) are found in Australia and Africa.

The water vascular system of echinoderms ( A ) functions as a circulatory system that distributes nutrients to body cells. ( B ) functions in locomotion and feeding. ( C ) is bilateral in the organization, even though the adult animal is not bilaterally symmetrical. ( D ) moves water through the animal’s body during filter feeding.

Over the past ten years, new computer technology has enabled firms to reduce substantially the amount of inventories they hold for each dollar of sales. Illustrate the effect of this change on the market for loanable funds. (Hint: Expenditure on inventories is a type of investment.) What do you think has been the effect on investment in factories and equipment?