Question 1

How would a permanent reduction in inflation impact menu costs and unemployment?

Accepted Answer

A)   It would permanently reduce menu costs and permanently lower unemployment.
B)   It would permanently reduce menu costs and temporarily raise unemployment.
C)   It would temporarily reduce menu costs and temporarily lower unemployment.
D)   It would temporarily reduce menu costs and temporarily raise unemployment.E) B) and D)
F) B) and C)

Question 2

In what year did the Bank of Canada first announce an inflation target policy of 2 percent?

Accepted Answer

A)   1988
B)   1991
C)   2001
D)   2008E) B) and C)
F) A) and D)

Question 3

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) None of the above
F) A) and B)

Question 4

How is "leaning against the wind" exemplified?

Accepted Answer

A)   by a tax cut when there is economic expansion
B)   by a decrease in the money supply when there is a recession
C)   by an increase in government expenditures when there is a recession
D)   by an increase in government spending when there is economic expansionE) A) and B)
F) A) and C)

Question 5

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Accepted Answer

A) True 
 B)False

Question 6

Explain the main argument in favour of economic stabilization.

Accepted Answer

Fluctuations in the economy-recessions a...

Question 7

Suppose that at the start of fiscal year 2019 the government had a debt of $6060 billion. Suppose that during the same fiscal year, real GDP grew by about 3 percent and inflation was about 2 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)   about $122 billion
B)   about $184 billion
C)   about $243 billion
D)   about $303 billionE) B) and C)
F) B) and D)

Question 8

Which of the following would transfer wealth from the young to the old?

Accepted Answer

A)   Taxes are raised to provide better education.
B)   Taxes are raised to improve government infrastructure such as roads and bridges.
C)   Taxes are raised to provide more generous pensions.
D)   Taxes are raised to pay back part of the government debt.E) None of the above
F) All of the above

Question 9

Why should the tax laws be reformed to encourage saving?

Accepted Answer

A)   because saving is a key determinant of long-run prosperity
B)   because taxes on capital gains are too low
C)   because higher-income households are taxed too much
D)   because economic theory clearly predicts that a higher rate of return encourages savingE) A) and D)
F) All of the above

Question 10

Why should the central bank aim for a moderate rate, instead of a zero rate, of inflation?

Accepted Answer

A)   to keep the natural rate of unemployment low
B)   because the social costs of moderate inflation are high
C)   because it is very difficult to maintain a zero rate of inflation in the long run
D)   the benefits of zero inflation are small but the costs of reaching zero inflation are large.E) B) and D)
F) None of the above

Question 11

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) None of the above
F) C) and D)

Question 12

When the government has a deficit, it necessarily imposes a burden on future generations of taxpayers.

Accepted Answer

A) True 
 B)False

Question 13

If a central bank followed a rule for monetary policy, the time-inconsistency problem would still exist.

Accepted Answer

A) True 
 B)False

Question 14

Explain how a higher rate of return on saving could, at least in theory, lead to lower saving.

Accepted Answer

A higher rate of return on saving means ...

Question 15

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

Accepted Answer

A) True 
 B)False

Question 16

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) A) and C)
F) None of the above

Question 17

What is a significant cost of inflation?

Accepted Answer

A)   printing more money
B)   lower nominal interest rates
C)   unintended changes in tax liabilities
D)   higher unemploymentE) A) and C)
F) C) and D)

Question 18

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Accepted Answer

A) True 
 B)False

Question 19

Suppose that a country has an inflation rate of about 4 percent per year and a real GDP growth rate of about 2 percent per year. What is the highest deficit the government can afford without raising the debt-to-income ratio?

Accepted Answer

A)   about 2 percent of GDP
B)   about 6 percent of GDP
C)   about 8 percent of GDP
D)   about 12 percent of GDPE) None of the above
F) A) and D)

Question 20

The cost of inflation reduction is less if people believe that the central bank will really reduce inflation.

Accepted Answer

A) True 
 B)False

Exam 18: Five Debates Over Macroeconomic Policy

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

Correct AnswerverifiedShow Answer

Why should the central bank aim for a moderate rate, instead of a zero rate, of inflation?

Correct AnswerverifiedShow Answer

How is "leaning against the wind" exemplified?

Correct AnswerverifiedShow Answer

Explain how a higher rate of return on saving could, at least in theory, lead to lower saving.

Correct AnswerverifiedA higher rate of return on saving means ...View AnswerShow Answer

Suppose that at the start of fiscal year 2019 the government had a debt of $6060 billion. Suppose that during the same fiscal year, real GDP grew by about 3 percent and inflation was about 2 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct AnswerverifiedShow Answer

Which of the following would transfer wealth from the young to the old?

Correct AnswerverifiedShow Answer

In what year did the Bank of Canada first announce an inflation target policy of 2 percent?

Correct AnswerverifiedShow Answer

When the government has a deficit, it necessarily imposes a burden on future generations of taxpayers.

Correct AnswerverifiedShow Answer

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

Correct AnswerverifiedShow Answer

What does the time inconsistency of policy imply?

Correct AnswerverifiedShow Answer

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Correct AnswerverifiedShow Answer

The cost of inflation reduction is less if people believe that the central bank will really reduce inflation.

Correct AnswerverifiedShow Answer

If a central bank followed a rule for monetary policy, the time-inconsistency problem would still exist.

Correct AnswerverifiedShow Answer

What is a significant cost of inflation?

Correct AnswerverifiedShow Answer

How would a permanent reduction in inflation impact menu costs and unemployment?

Correct AnswerverifiedShow Answer

Suppose that a country has an inflation rate of about 4 percent per year and a real GDP growth rate of about 2 percent per year. What is the highest deficit the government can afford without raising the debt-to-income ratio?

Correct AnswerverifiedShow Answer

Explain the main argument in favour of economic stabilization.

Correct AnswerverifiedFluctuations in the economy-recessions a...View AnswerShow Answer

Why should the government balance its budget?

Correct AnswerverifiedShow Answer

Why should the tax laws be reformed to encourage saving?

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

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A higher rate of return on saving means ...
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Fluctuations in the economy-recessions a...
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