Question

Which of the following is not correct?

	a.	Deficits give people the opportunity to consume at the expense of their children, but they do not require them to do so.
	b.	A potential cost of deficits is that they reduce national saving, thereby reducing growth of the capital stock and output growth.
	c.	The U.S. debt per-person is large compared with average lifetime income.
	d.	Current spending may benefit future generations.

A favorable supply shock causes the price level to

	a.	rise. To counter this a central bank would increase the money supply.
	b.	fall. To counter this a central bank would increase the money supply.
	c.	fall. To counter this a central bank would decrease the money supply.
	d.	rise. To counter this a central bank would decrease the money supply.

if the unemployment rate is below the natural rate, then

	a.	inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift left.
	b.	inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift left.
	c.	inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.
	d.	inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

The time inconsistency of policy implies that

	a.	when people expect that inflation will be low, it is easier for the Fed to increase output by increasing the money supply.
	b.	what policymakers say they will do is generally what they will do, but people don't believe them because of current policy.
	c.	what policymakers say they will do is usually not what they do, but people believe them anyway.
	d.	people will believe Fed policy will be less inflationary than the Fed claims.

Answer 1

a) "D"

Current spending may benefit future generations., this will increase the taxes on the future genereation and not benefit them.

b) "C"

Favourable supply shock cost the price to fall and that will increase the output, it can be managed by increasg the money supply.

c) "C"

inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

d) "A"

when people expect that inflation will be low, it is easier for the Fed to increase output by increasing the money supply.