Question 1

If a central bank had to give up its discretion and had to follow a rule that required it to keep inflation low, how would the Phillips curve shift?

Accepted Answer

A)   The short-run Phillips curve would shift up.
B)   The short-run Phillips curve would shift down.
C)   The long-run Phillips curve would shift right.
D)   The long-run Phillips curve would shift left.E) All of the above
F) A) and C)

Question 2

Suppose that the government goes into deficit in order to help local school districts build better schools. Does this action burden future generations?

Accepted Answer

The benefits of the project ac...

Question 3

What is the main reason that monetary policy has lags?

Accepted Answer

A)   It takes a long time for changes in the interest rate to change aggregate demand.
B)   It takes a long time for changes in the money supply to change interest rates.
C)   It takes a long time for the Bank of Canada to make changes in policy.
D)   It takes a long time for the government to pass the necessary laws.E) A) and C)
F) A) and D)

Question 4

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which statement, at least in theory, could explain why some countries would continue to have high inflation?

Accepted Answer

A)   High-inflation countries have relatively small sacrifice ratios and so see no need to reduce inflation.
B)   Inflation reduction works best when it is unexpected, and people in high-inflation countries would quickly anticipate any change in monetary policy.
C)   In a country where inflation has been high for a long time, people are likely to have found ways to limit the costs.
D)   Persistently low inflation has costs in terms of high unemployment.E) A) and B)
F) B) and D)

Question 5

Why should policymakers NOT try to stabilize the economy?

Accepted Answer

A)   Recessions represent a waste of resources.
B)   Pessimism on the part of households and firms may become a self-fulfilling prophecy.
C)   "Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms.
D)   Economic conditions can easily change between the time when a policy action begins and when it takes effect.E) None of the above
F) C) and D)

Question 6

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Accepted Answer

A) True 
 B)False

Question 7

What could the government do to decrease the costs of inflation without lowering the inflation rate?

Accepted Answer

A)   avoid unexpected changes in the inflation rate
B)   rewrite the tax laws so that nominal gains were taxed instead of real gains
C)   make policy that would discourage firms from issuing indexed bonds
D)   pass legislation to discourage inflation-adjusted work contractsE) B) and C)
F) A) and B)

Question 8

Suppose that in fiscal year 2015 the government ran a deficit of about $249 billion. The debt at the start of this period was about $5971 billion. Which of the following combinations of inflation and real GDP would have allowed the government to run a deficit this large without raising the debt-to-income ratio?

Accepted Answer

A)   inflation = 2 percent; real GDP growth = 3 percent
B)   inflation = 3 percent; real GDP growth = -1.5 percent
C)   inflation = 3 percent; real GDP growth = 1 percent
D)   inflation = 1.5 percent; real GDP growth = 1 percentE) A) and B)
F) A) and C)

Question 9

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt, real GDP, and the price level. Why would one say that inflation is similar to a tax when the government runs a positive public debt?

Accepted Answer

The higher the inflation rate, the lower...

Question 10

Economists agree that if a monetary policy rule is to be used, the best one is one that makes the growth rate of the money supply constant.

Accepted Answer

A) True 
 B)False

Question 11

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. What response might someone who advocated for "lean against the wind" policies support

Accepted Answer

A)   decrease the money supply
B)   decrease taxes
C)   decrease government expenditures
D)   increase interest ratesE) C) and D)
F) A) and D)

Question 12

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

Accepted Answer

A)   It increases the interest rate and decreases spending on capital goods.
B)   It increases the interest rate and increases spending on capital goods.
C)   It decreases the interest rate and increases spending on capital goods.
D)   It decreases the interest rate and decreases spending on capital goods.E) B) and C)
F) None of the above

Question 13

Why should monetary policy be made by rule rather than discretion?

Accepted Answer

A)   There is a clear consensus among economists about what a good monetary policy rule would be.
B)   Rules would eliminate the political business cycle.
C)   Rules respond to any random shock in the economy.
D)   Rules create time inconsistency.E) None of the above
F) A) and B)

Question 14

If the Canadian government went from a budget deficit to a budget surplus, what would we expect to happen to interest rates and investment?

Accepted Answer

A)   an increase in interest rates and an increase in investment
B)   an increase in interest rates and a decrease in investment
C)   a decrease in interest rates and a decrease in investment
D)   a decrease in interest rates and an increase in investmentE) A) and B)
F) A) and C)

Question 15

What does the time inconsistency of policy imply?

Accepted Answer

A)   It implies that what policymakers say they will do is generally what they will do, but people don't believe them because of current policy.
B)   It implies that when people expect that inflation will be low, it is harder for the Bank of Canada to increase output by increasing the money supply.
C)   It implies people always expect more inflation than policymakers claim they are trying to achieve.
D)   It implies that the Bank of Canada coordinates its actions with elected officials.E) C) and D)
F) A) and D)

Question 16

Which of the following is a part of the argument against deficits?

Accepted Answer

A)   They increase interest rates and investment.
B)   They increase interest rates and decrease investment.
C)   They decrease interest rates and investment.
D)   They decrease interest rates and increase investment.E) C) and D)
F) B) and C)

Question 17

Which statement is an argument against a tax system that encourages savings?

Accepted Answer

A)   that individuals know better that the government how much to save
B)   that saving is not an important determinant of a nation's ability to produce output
C)   that rich people would bear the burden of such a tax system
D)   that such a tax system would increase inequalityE) A) and D)
F) None of the above

Question 18

Which of the following best defines the political business cycle?

Accepted Answer

A)   the fact that about every four years some politician advocates greater government control of the Bank of Canada
B)   the potential for a central bank to use monetary policy to stimulate the economy and help the incumbent get re-elected
C)   the part of the business cycle that reflects reluctance by politicians to smooth out the business cycle
D)   the changes in output created by the monetary rule the Bank of Canada must followE) A) and D)
F) None of the above

Question 19

Why should the government balance its budget?

Accepted Answer

A)   because government debt imposes higher taxes or more borrowing on current generations
B)   because a balanced budget will smooth the business cycle
C)   because moderate budget deficits are unsustainable
D)   because recent history shows that the government will not run deficits unless they are justified by war or recessionE) A) and C)
F) All of the above

Question 20

If the central bank has discretion to make policy, it may create economic fluctuations that reflect the electoral calendar. This is called the political business cycle.

Accepted Answer

A) True 
 B)False

Exam 17: Five Debates Over Macroeconomic Policy

Why should monetary policy be made by rule rather than discretion?

Correct Answer
verified

What is the main reason that monetary policy has lags?

Correct Answer
verified

Which statement is an argument against a tax system that encourages savings?

Correct Answer
verified

Economists agree that if a monetary policy rule is to be used, the best one is one that makes the growth rate of the money supply constant.

Correct Answer
verified

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

Correct Answer
verified

Which of the following is a part of the argument against deficits?

Correct Answer
verified

Why should policymakers NOT try to stabilize the economy?

Correct Answer
verified

Suppose that the government goes into deficit in order to help local school districts build better schools. Does this action burden future generations?

Correct Answer
verified
The benefits of the project ac...
View Answer

What could the government do to decrease the costs of inflation without lowering the inflation rate?

Correct Answer
verified

Correct Answer
verified

If a central bank had to give up its discretion and had to follow a rule that required it to keep inflation low, how would the Phillips curve shift?

Correct Answer
verified

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. What response might someone who advocated for "lean against the wind" policies support

Correct Answer
verified

Why should the government balance its budget?

Correct Answer
verified

Which of the following best defines the political business cycle?

Correct Answer
verified

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which statement, at least in theory, could explain why some countries would continue to have high inflation?

Correct Answer
verified

What does the time inconsistency of policy imply?

Correct Answer
verified

If the Canadian government went from a budget deficit to a budget surplus, what would we expect to happen to interest rates and investment?

Correct Answer
verified

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt, real GDP, and the price level. Why would one say that inflation is similar to a tax when the government runs a positive public debt?

Correct Answer
verified
The higher the inflation rate, the lower...
View Answer

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Correct Answer
verified

If the central bank has discretion to make policy, it may create economic fluctuations that reflect the electoral calendar. This is called the political business cycle.

Correct Answer
verified

Exam 17: Five Debates Over Macroeconomic Policy

Why should monetary policy be made by rule rather than discretion?

Correct AnswerverifiedShow Answer

What is the main reason that monetary policy has lags?

Correct AnswerverifiedShow Answer

Which statement is an argument against a tax system that encourages savings?

Correct AnswerverifiedShow Answer

Economists agree that if a monetary policy rule is to be used, the best one is one that makes the growth rate of the money supply constant.

Correct AnswerverifiedShow Answer

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

Correct AnswerverifiedShow Answer

Which of the following is a part of the argument against deficits?

Correct AnswerverifiedShow Answer

Why should policymakers NOT try to stabilize the economy?

Correct AnswerverifiedShow Answer

Suppose that the government goes into deficit in order to help local school districts build better schools. Does this action burden future generations?

Correct AnswerverifiedThe benefits of the project ac...View AnswerShow Answer

What could the government do to decrease the costs of inflation without lowering the inflation rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a central bank had to give up its discretion and had to follow a rule that required it to keep inflation low, how would the Phillips curve shift?

Correct AnswerverifiedShow Answer

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. What response might someone who advocated for "lean against the wind" policies support

Correct AnswerverifiedShow Answer

Why should the government balance its budget?

Correct AnswerverifiedShow Answer

Which of the following best defines the political business cycle?

Correct AnswerverifiedShow Answer

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which statement, at least in theory, could explain why some countries would continue to have high inflation?

Correct AnswerverifiedShow Answer

What does the time inconsistency of policy imply?

Correct AnswerverifiedShow Answer

If the Canadian government went from a budget deficit to a budget surplus, what would we expect to happen to interest rates and investment?

Correct AnswerverifiedShow Answer

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt, real GDP, and the price level. Why would one say that inflation is similar to a tax when the government runs a positive public debt?

Correct AnswerverifiedThe higher the inflation rate, the lower...View AnswerShow Answer

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Correct AnswerverifiedShow Answer

If the central bank has discretion to make policy, it may create economic fluctuations that reflect the electoral calendar. This is called the political business cycle.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The benefits of the project ac...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The higher the inflation rate, the lower...
View Answer

Correct Answer
verified

Correct Answer
verified