Question 1

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. 
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.

Question 2

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. 
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.

Question 3

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 GDP 
A)  about 2 percent of GDP 
B)  about 6 percent of GDP 
C)  about 8 percent of GDP 
D)  about 12 percent of GDP

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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)  2008 
A)  1988 
B)  1991 
C)  2001 
D)  2008

Question 6

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

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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. 
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.

Question 10

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. 
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.

Question 11

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 saving 
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 saving

Question 12

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 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

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

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

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 recession 
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 recession

Question 18

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 expansion 
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 expansion

Question 19

Explain the main argument in favour of economic stabilization.

Accepted Answer

Fluctuations in the economy-recessions a

Question 20

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 rates 
A)  decrease the money supply 
B)  decrease taxes 
C)  decrease government expenditures 
D)  increase interest rates

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

What does the time inconsistency of policy imply?

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?

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

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

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?

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

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

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

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

Why should the tax laws be reformed to encourage saving?

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

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

What is a significant cost of inflation?

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

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

Why should the government balance its budget?

How is "leaning against the wind" exemplified?

Explain the main argument in favour of economic stabilization.

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?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary Policy on Aggregate Demand

The Influence of Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

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Exam 18: Five Debates Over Macroeconomic Policy

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

What does the time inconsistency of policy imply?

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?

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

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

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?

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

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

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

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

Why should the tax laws be reformed to encourage saving?

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

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

What is a significant cost of inflation?

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

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

Why should the government balance its budget?

How is "leaning against the wind" exemplified?

Explain the main argument in favour of economic stabilization.

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?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary Policy on Aggregate Demand

The Influence of Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Filters