Question

The _____________ lag is the time between when a shock hits the economy and when a policy responds to it. It is particularly long for _____________ policy.

	a.	outside; monetary
	b.	outside; fiscal
	c.	inside; monetary
	d.	inside;fiscal

Ricardian equivalence is the view that

	a.	deficits are intergenerational redistribution from future generations.
	b.	consumers are forward looking, and therefore recognize that a deficit increases their expected future tax burden. Tax cuts that lead to deficits therefore do not induce more consumption.
	c.	deficits cannot be accurately measured.
	d.	when the government cuts taxes and runs a budget deficit, consumers respond to their higher after tax income by spending more.

The _____________ lag is the time between when a policy action is taken and when it influences the economy. It is particularly long for _____________ policy.

	a.	outside;monetary
	b.	outside;fiscal
	c.	inside;fiscal
	d.	inside;monetary

The time inconsistency problem of discretionary policy arises because policy-makers

	a.	fail to fully anticipate all shocks to the economy.
	b.	want to renege on announced plans after people have acted on their expectations.
	c.	think that people form expectations adaptively rather than rationally.
	d.	believe they are better at forecasting economic conditions than they really are.

Answer 1

1 D)inside , fiscal

The inside lag is the time between when a shock hits the economy and when a policy responds to it.it is particularly long for fiscal policy.

2) B) Consumers are forward looking and therefore recognize that a deficit increases their expected future tax burden .tax cuts that lead to deficits therefore do not induce more consumption.

Ricardian equivalence is the theory based on argue that attempts to stimulate an economy by increasing debt financed government spending are doomed to faliure because demand remain unchanged.

3) A) Outside , monetary

The outside lag is the time between when a policy action is taken and when it influence the economy .It is particularly long for monetary policy.

4. D) believe they are better at forecasting economic conditions than they really are

the time inconsistency problems of discretionary policy arises because policy maker believe they are better at forecasting economic conditions than they really are.