Question 1

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 2

Which of the following will time inconsistency cause?

Accepted Answer

A) It will cause the short-run Phillips curve to be higher than it otherwise would. 
B) It will cause the short-run Phillips curve to be lower than it otherwise would. 
C) It will cause the long-run Phillips curve to be farther to the right than it otherwise would. 
D) It will cause the long-run Phillips curve to be farther to the left than it otherwise would. 
A) It will cause the short-run Phillips curve to be higher than it otherwise would. 
B) It will cause the short-run Phillips curve to be lower than it otherwise would. 
C) It will cause the long-run Phillips curve to be farther to the right than it otherwise would. 
D) It will cause the long-run Phillips curve to be farther to the left than it otherwise would.

Question 3

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

Accepted Answer

A) permanent costs and temporary benefits 
B) temporary costs and permanent benefits 
C) permanent costs and benefits 
D) temporary costs and benefits 
A) permanent costs and temporary benefits 
B) temporary costs and permanent benefits 
C) permanent costs and benefits 
D) temporary costs and benefits

Question 4

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. 
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.

Question 5

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 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 investment 
A) an increase in interest rates and 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 investment

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

Suppose that a country has an inflation rate of about 2 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest deficit it can have without raising the debt-to-income ratio?

Accepted Answer

A) just under 2 billion units 
B) just under 3 billion units 
C) just under 5 billion units 
D) just under 6 billion units 
A) just under 2 billion units 
B) just under 3 billion units 
C) just under 5 billion units 
D) just under 6 billion units

Question 8

Which of the following is one reason for the existence of policy lags?

Accepted Answer

A) Government experts are slow in figuring out what is going on. 
B) Households and firms plan their spending in advance and therefore are slow in responding to changes in interest rates. 
C) It is impossible to build an accurate model of the economy. 
D) It is difficult for the Bank of Canada to change the bank rate. 
A) Government experts are slow in figuring out what is going on. 
B) Households and firms plan their spending in advance and therefore are slow in responding to changes in interest rates. 
C) It is impossible to build an accurate model of the economy. 
D) It is difficult for the Bank of Canada to change the bank rate.

Question 9

A recession has no benefit to society-it represents a sheer waste of resources.

Accepted Answer

A) True 
 B)False

Question 10

Why do the five debates over macroeconomic policy exist?

Accepted Answer

A) mostly because economists disagree over basic issues such as the importance of saving for economic growth 
B) mostly because there are tradeoffs and people disagree about the best way to deal with them 
C) mostly because economic policies have conflicting effects on various groups of people 
D) mostly because people fail to clearly see the benefits or the costs of most changes 
A) mostly because economists disagree over basic issues such as the importance of saving for economic growth 
B) mostly because there are tradeoffs and people disagree about the best way to deal with them 
C) mostly because economic policies have conflicting effects on various groups of people 
D) mostly because people fail to clearly see the benefits or the costs of most changes

Question 11

Suppose that at the start of fiscal year 2010 the government had a debt of $6126.5 billion. Suppose that during the same fiscal year real GDP grew by about 3 percent and inflation was about 1 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 $245 billion 
D) about $375 billion 
A) about $122 billion 
B) about $184 billion 
C) about $245 billion 
D) about $375 billion

Question 12

Explain the main argument in favour of economic stabilization.

Accepted Answer

Fluctuations in the economy-recessions a

Question 13

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

Accepted Answer

A) if nominal GDP grows faster than the growth in debt 
B) if nominal GDP grows slower than the growth in debt 
C) if inflation is zero 
D) if inflation is higher than the growth in debt 
A) if nominal GDP grows faster than the growth in debt 
B) if nominal GDP grows slower than the growth in debt 
C) if inflation is zero 
D) if inflation is higher than the growth in debt

Question 14

In which of the following situations is a program to reduce inflation likely to have the lowest costs?

Accepted Answer

A) if the sacrifice ratio high and the reduction is unexpected 
B) if the sacrifice ratio high and the reduction is expected 
C) if the sacrifice ratio low and the reduction is unexpected 
D) if the sacrifice ratio low and the reduction is expected 
A) if the sacrifice ratio high and the reduction is unexpected 
B) if the sacrifice ratio high and the reduction is expected 
C) if the sacrifice ratio low and the reduction is unexpected 
D) if the sacrifice ratio low and the reduction is expected

Question 15

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

Accepted Answer

A) because there is a clear consensus among economists about what a good monetary policy rule would be 
B) because rules would eliminate the political business cycle 
C) because rules respond to any random shocks in the economy 
D) because rules create time inconsistency 
A) because there is a clear consensus among economists about what a good monetary policy rule would be 
B) because rules would eliminate the political business cycle 
C) because rules respond to any random shocks in the economy 
D) because rules create time inconsistency

Question 16

Let d be the percentage change in government debt, g the rate of growth in real GDP, RGDP the real GDP, NGDP the nominal GDP, P the price level, and $\pi$ the inflation rate. Let G[X] denote the growth rate in variable X, which is the same thing as the percentage change in X; thus, G[X] = (X2 - X1)/X1 *100% for small changes in X. Here are two properties of the growth rate operator G: (i) G[X*Y] = G[X] + G[Y], and (ii) G[X/Y] = G[X] - G[Y].
a.Show that the growth rate in NGDP is equal to g + $\pi$.
b.Show that d is equal to (Deficit/Debt) * 100%.
c.Show that the percentage change in the Debt/NGDP ratio is equal to d - (g + $\pi$).
d.Show that the condition for the Debt to NGDP ratio not to increase is d = g + $\pi$.

Accepted Answer

a.Using the growth rate operator G, the

Question 17

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which of the following, 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. 
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.

Question 18

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 19

Suppose that at the start of fiscal year 2010 the government had a debt of $6250 billion. Suppose that during the same fiscal year real GDP grew by about 4 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 $245 billion 
D) about $375 billion 
A) about $122 billion 
B) about $184 billion 
C) about $245 billion 
D) about $375 billion

Question 20

What does double taxation mean?

Accepted Answer

A) Both wage income and interest income are taxed, which is currently the case in Canada. 
B) Both wage income and interest income are taxed, which is not currently the case in Canada. 
C) Both the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in Canada. 
D) Both the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in Canada. 
A) Both wage income and interest income are taxed, which is currently the case in Canada. 
B) Both wage income and interest income are taxed, which is not currently the case in Canada. 
C) Both the profits of corporations and the dividends shareholders receive are taxed, which is not currently the case in Canada. 
D) Both the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in Canada.

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

Which of the following will time inconsistency cause?

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

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?

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

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 a country has an inflation rate of about 2 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest deficit it can have without raising the debt-to-income ratio?

Which of the following is one reason for the existence of policy lags?

A recession has no benefit to society-it represents a sheer waste of resources.

Why do the five debates over macroeconomic policy exist?

Suppose that at the start of fiscal year 2010 the government had a debt of $6126.5 billion. Suppose that during the same fiscal year real GDP grew by about 3 percent and inflation was about 1 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Explain the main argument in favour of economic stabilization.

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

In which of the following situations is a program to reduce inflation likely to have the lowest costs?

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

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

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

Suppose that at the start of fiscal year 2010 the government had a debt of $6250 billion. Suppose that during the same fiscal year real GDP grew by about 4 percent and inflation was about 2 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

What does double taxation mean?

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 Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Filters

Exam 17: Five Debates Over Macroeconomic Policy

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

Which of the following will time inconsistency cause?

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

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?

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

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 a country has an inflation rate of about 2 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest deficit it can have without raising the debt-to-income ratio?

Which of the following is one reason for the existence of policy lags?

A recession has no benefit to society-it represents a sheer waste of resources.

Why do the five debates over macroeconomic policy exist?

Suppose that at the start of fiscal year 2010 the government had a debt of $6126.5 billion. Suppose that during the same fiscal year real GDP grew by about 3 percent and inflation was about 1 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Explain the main argument in favour of economic stabilization.

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

In which of the following situations is a program to reduce inflation likely to have the lowest costs?

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

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

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

Suppose that at the start of fiscal year 2010 the government had a debt of $6250 billion. Suppose that during the same fiscal year real GDP grew by about 4 percent and inflation was about 2 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

What does double taxation mean?

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 Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Filters