Question 1

A reduction in the tax rate on income from saving would do which of the following?

Accepted Answer

A)   It would most directly benefit the poor in the short run.
B)   It would increase labour productivity over time.
C)   It would decrease the capital stock over time.
D)   It would decrease real wages over time.E) None of the above
F) B) and C) B

Question 2

What does the time inconsistency of monetary policy mean?

Accepted Answer

A)   It means that once people have formed expectations of low inflation, based on a promise by the central bank, policymakers are tempted to raise inflation in order to lower unemployment and gain favour with voters.
B)   It means that sometimes central banks think it is more important to keep unemployment low; at other times, they think it is more important to keep inflation low.
C)   It means that monetary policy is not consistent across time because it is influenced by politics.
D)   It means that monetary policy cannot be consistent across time because the rate of inflation is fluctuating.E) None of the above
F) C) and D)

Question 3

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

Accepted Answer

A)   because a decrease in taxes would primarily benefit the wealthy
B)   because tax rates on savings are relatively low
C)   because people would probably save more than if taxes were lowered
D)   because tax cuts might cause a budget deficitE) C) and D)
F) A) and C)

Question 4

Why should policymakers try to stabilize the economy?

Accepted Answer

A)   because shocks that cause economic fluctuations are unpredictable
B)   because long lags may cause stabilization policies to have an opposite effect
C)   because monetary policy affects aggregate demand by changing interest rates
D)   because fiscal policy must go through a long political processE) A) and D)
F) B) and D)

Question 5

There are ways that policymakers could reduce the costs of inflation without reducing inflation.

Accepted Answer

A) True 
 B)False  True

Question 6

Suppose that a central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate demand shifts right, what should the central bank do, and what will happen to output?

Accepted Answer

A)   The central bank should increase the money supply, which causes output to move closer to its long-run equilibrium.
B)   The central bank should increase the money supply, which causes output to move farther from its long-run equilibrium.
C)   The central bank should decrease the money supply, which causes output to move closer to its long-run equilibrium.
D)   The central bank should decrease the money supply, which causes output to move farther from its long-run equilibrium.E) B) and C)
F) C) and D)

Question 7

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 C)
F) None of the above

Question 8

Suppose that at the start of fiscal year 2013 the government had a debt of $6300 billion. Suppose that during fiscal year 2015, real GDP grew by about 4 percent and inflation was about 3 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)   about $184 billion
B)   about $375 billion
C)   about $441 billion
D)   about $632 billionE) All of the above
F) B) and C)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

What 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 in a timely manner.E) A) and D)
F) A) and B)

Question 11

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 ð 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 + ð, where g is the real GDP growth rate and ð is the inflation rate.
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 + ð).
d. Show that the condition for the Debt to NGDP ratio not to increase is d = g + ð.

Accepted Answer

a. Using the growth rate operator G, the...

Question 12

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

Accepted Answer

A)   It would permanently reduce shoe leather costs and permanently lower unemployment.
B)   It would permanently reduce shoe leather costs and temporarily raise unemployment.
C)   It would temporarily reduce shoe leather costs and temporarily lower unemployment.
D)   It would temporarily reduce shoe leather costs and permanently raise unemployment.E) None of the above
F) A) and B)

Question 13

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?

Accepted Answer

If inflation is usually about what peopl...

Question 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

Why should the central bank aim for zero inflation?

Accepted Answer

A)   Reducing inflation imposes temporary costs but provides permanent benefits.
B)   Reducing inflation from 2 percent to 0 percent is virtually costless.
C)   The government has indexed tax brackets to prevent the adverse effects of inflation.
D)   The costs of inflation are very high.E) C) and D)
F) B) and C)

Question 17

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  False

Question 18

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

Question 19

Identify three government policies that discourage saving.

Accepted Answer

First, the returns to saving are heavily...

Question 20

Suppose that a country has an inflation rate of about 5 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 7 percent of GDP
C)   about 9 percent of GDP
D)   about 12 percent of GDPE) C) and D)
F) A) and B)

Exam 17: Five Debates Over Macroeconomic Policy

A reduction in the tax rate on income from saving would do which of the following?

Correct Answer
verified
B

What does the time inconsistency of monetary policy mean?

Correct Answer
verified

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

Correct Answer
verified

Why should policymakers try to stabilize the economy?

Correct Answer
verified

There are ways that policymakers could reduce the costs of inflation without reducing inflation.

Correct Answer
verified
True

Suppose that a central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate demand shifts right, what should the central bank do, and what will happen to output?

Correct Answer
verified

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

Correct Answer
verified

Suppose that at the start of fiscal year 2013 the government had a debt of $6300 billion. Suppose that during fiscal year 2015, real GDP grew by about 4 percent and inflation was about 3 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct Answer
verified

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

Correct Answer
verified

What is one reason for the existence of policy lags?

Correct Answer
verified

Correct Answer
verified
a. Using the growth rate operator G, the...
View Answer

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

Correct Answer
verified

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?

Correct Answer
verified
If inflation is usually about what peopl...
View Answer

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

Correct Answer
verified

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

Correct Answer
verified

Why should the central bank aim for zero inflation?

Correct Answer
verified

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.

Correct Answer
verified
False

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

Correct Answer
verified

Identify three government policies that discourage saving.

Correct Answer
verified
First, the returns to saving are heavily...
View Answer

Suppose that a country has an inflation rate of about 5 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 Answer
verified

Exam 17: Five Debates Over Macroeconomic Policy

A reduction in the tax rate on income from saving would do which of the following?

Correct AnswerverifiedB

What does the time inconsistency of monetary policy mean?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Why should policymakers try to stabilize the economy?

Correct AnswerverifiedShow Answer

There are ways that policymakers could reduce the costs of inflation without reducing inflation.

Correct AnswerverifiedTrue

Suppose that a central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate demand shifts right, what should the central bank do, and what will happen to output?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose that at the start of fiscal year 2013 the government had a debt of $6300 billion. Suppose that during fiscal year 2015, real GDP grew by about 4 percent and inflation was about 3 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What is one reason for the existence of policy lags?

Correct AnswerverifiedShow Answer

Correct Answerverifieda. Using the growth rate operator G, the...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedIf inflation is usually about what peopl...View AnswerShow 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

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

Correct AnswerverifiedShow Answer

Why should the central bank aim for zero inflation?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedFalse

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

Correct AnswerverifiedShow Answer

Identify three government policies that discourage saving.

Correct AnswerverifiedFirst, the returns to saving are heavily...View AnswerShow Answer

Suppose that a country has an inflation rate of about 5 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

Correct Answer
verified
B

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Correct Answer
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True

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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
a. Using the growth rate operator G, the...
View Answer

Correct Answer
verified

Correct Answer
verified
If inflation is usually about what peopl...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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False

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Correct Answer
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First, the returns to saving are heavily...
View Answer

Correct Answer
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