Exam 37: Five Debates Over Macroeconomic Policy

It is reasonable to allow a budget deficit during a temporary downturn in economic activity.

Inflation is often deemed as the necessary economic evil because it is associated with _____.

Inflation confers benefit to society, and it imposes very few real costs.

The charter of the RBA gives the institution specific recommendations about what goals it should pursue; and the Act tells the RBA how to pursue whatever goals it might choose.

Discuss why policymakers should not try to stabilise the economy.

A nation's saving rate is a key determinant of its long-run economic prosperity.

Although price stability may be desirable, the benefits of zero inflation compared with moderate inflation are small, whereas the costs of reaching zero inflation are large.

Explain the benefits of having the two to three per cent inflation rate target over a typical business cycle, clearly stated in the RBA's charter.

When a military conflict raises government spending temporarily, it is reasonable to finance this extra spending by borrowing.

What are the problems of discretionary monetary policy? How can we avoid these problems?

If the economy goes into a recession, then automatic stabilisers are likely to lead to an increase in the budget deficit.Why might such a deficit be beneficial?

Discuss some of the problems associated with following monetary policy rule.

Evaluate the following statement: 'Fiscal policy is a very precise tool for controlling aggregate demand.If the government wants to increase aggregate demand by $5 billion, all it has to do is to carry out exactly $5 billion worth of government spending.'

Which of the following is the main advantage for following monetary policy rule?

Fiscal policy works with a lag because of the long political process that governs changes in spending and tax.

A budget deficit can be justifiable:

The main advantage of making monetary policy according to rules is that it allows a more favourable short-run trade-off between inflation and unemployment.

A disinflationary recession can potentially leave permanent scars on the economy.

The budget deficit is a major piece of how the government chooses to raise and spend money.

Many studies indicate that changes in monetary policy have little effect on aggregate demand until about six months after the change is made.As a result, it often leads to excessive adjustments.