Exam 18: Five Debates Over Macroeconomic Policy

If firms were faced with greater uncertainty because of concerns that the U.S. will place tariffs on Canadian-made goods, they may start to decrease their purchases of new machinery. What response might someone who advocated for "lean against the wind" policies support?

The laws governing the activity of the Bank of Canada give some specific recommendations about what goals it should pursue, so it has little discretion in making policy.

Suppose that in fiscal year 2019 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?

Suppose a country has had a high and relatively stable inflation rate for a long time. How might this affect the costs and benefits of inflation reduction?

During the financial year 2017-2018, the government of Canada ran a deficit of $19 billion, increasing the government's public debt to $671.3 billion. (The debt-to-GDP ratio was 31.3 percent, which was down from the preceding year. Source: Government of Canada, Annual Financial report, HYPERLINK "https://www.fin.gc.ca/afr-rfa/2018/report-rapport-eng.asp" https://www.fin.gc.ca/afr-rfa/2018/report-rapport-eng.asp). Assuming an inflation rate of 2 percent, what real GDP growth rate would have allowed the government to run a deficit this large without raising the debt-to-income ratio?

The theory of a flat short-run aggregate-supply curve implies that an increase in money supply should increase output and employment, while the price level should increase at a slow pace. a. Why does output increase sometimes much slowly than this theory might predict? b. How would low inflation hinder economic growth?

Why should the tax laws to encourage saving remain as they are?

In general, what is the longest lag for fiscal and monetary policy?

Tax laws do not give preferential treatment to some kinds of retirement saving.

In which of the following situations does the government NOT need to balance its budget?

Why is accountability for monetary policy choices (as opposed to giving policymakers undisciplined discretion) important?

The Bank of Canada decreased interest rates in 2008 and again in 2009. By doing this, what did the Bank of Canada do to the money supply and why?

In which situation is a program to reduce inflation likely to have the highest costs?

Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

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

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

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.

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, what must the central bank do, and what will happen to output?

Proponents of zero inflation argue that reducing inflation involves which of the following?

What is the political business cycle and how does it relate to whether the central bank should have discretion or use a rule?