Question

If there is a threat of inflation, but an election is coming up soon, time inconsistency is likely to tempt policy makers to do which of the following?

		Raise taxes and cut spending immediately to show they are "tough guys"
		Quickly balance the government budget to cut unemployment
		Put off needed but painful actions to slow the economy until after the election
		Cut interest rates because that is an easy way to slow inflation in the short run

When expansionary monetary policy is used to increase aggregate demand, starting from equilibrium, which of the following is true of the beneficial effects of growth and the painful effects of inflation?

		At first the pain is greater, and the benefits come later.
		At first the benefits are strong and the pain is mild.
		There is not much of any effect at first; then comes the pain, and only last come the benefits.
		There is no predictable pattern.

Answer 1

a) At the time of an election the policy makers will not take the hard decisions like increasing the taxes or increasing the interest rate. A decrease in the interest rate will also increase the employment. The answer is "C", Put off needed but painful actions to slow the economy until after the election.

b) Answer is "A" At first the pain is greater, and the benefit comes later. At the beginning the government might expenditure, increase taxes or Fed might increase the interest rate, it will lead to job loss decrease in the GDP etc. later the price will be down and things will get at a normal equilibrium.