Question 1

What would those who desire that policymakers stabilize the economy advocate when aggregate demand is insufficient to ensure full employment?

Accepted Answer

A)   decreasing the money supply
B)   decreasing taxes
C)   decreasing government expenditures
D)   decreasing government deficitE) C) and D)
F) A) and B)

Question 2

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) C) and D)
F) All of the above

Question 3

Suppose that a country has an inflation rate of about 3 percent per year and a real growth rate of about 5 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest possible deficit it can have without raising the debt-to-income ratio?

Accepted Answer

A)   just under 3 billion units
B)   just under 5 billion units
C)   just under 8 billion units
D)   just under 15 billion unitsE) B) and D)
F) A) and D)

Question 4

Explain how it is possible for the government debt to grow forever.

Accepted Answer

The debt can grow because the economy gr...

Question 5

Some studies have found that saving is not very sensitive to the rate of return on saving.

Accepted Answer

A) True 
 B)False

Question 6

Why does Canadian public policy discourage saving?

Accepted Answer

A)   because, other things the same, taxes increase the return from savings
B)   because means-tested programs such as Old Age Security provide greater benefits to those who saved
C)   because some forms of capital income are taxed twice
D)   because capital gains are not taxedE) B) and D)
F) None of the above

Question 7

Suppose the economy goes into recession. Which of the following is a list of things policymakers could do to try to end the recession?

Accepted Answer

A)   increase the money supply, increase taxes, and increase government spending
B)   increase the money supply, increase taxes, and decrease government spending
C)   increase the money supply, decrease taxes, and increase government spending
D)   decrease the money supply, increase taxes, and decrease government spendingE) None of the above
F) All of the above C

Question 8

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) B) and C)
F) All of the above

Question 9

Suppose the budget deficit is rising 4 percent per year and nominal GDP is rising 7 percent per year. How are the debt and the burden on future generations created by these continuing deficits?

Accepted Answer

A)   The debt is sustainable, but the future burden on your children cannot be offset.
B)   The debt is not sustainable, and the future burden on your children cannot be offset.
C)   The debt is sustainable, and the future burden on your children can be offset if you save for them.
D)   The debt is not sustainable, but the future burden on your children can be offset if you save for them.E) All of the above
F) C) and D) C

Question 10

Consider a 25-year-old worker who saves $1000 for retirement. She plans to retire at the age of 70. The interest rate is 10 percent. To stimulate savings in retirement plans, suppose the interest income is not taxed until it is realized (the money is effectively withdrawn from the account.) To simplify, suppose that, when she is 70, our worker withdraws the entire amount in her account. How much will she receive if the tax on interest is 40 percent?

Accepted Answer

If interest is not taxed until realized,...

Question 11

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) A) and C)
F) B) and C)

Question 12

Which statement best describes RRSP plans?

Accepted Answer

A)   They impose added taxes on those who save.
B)   They are taxed twice.
C)   They postpone income taxes.
D)   They are never taxed.E) All of the above
F) A) and D)

Question 13

What effects does a higher rate of return have on saving?

Accepted Answer

A)   A higher rate of return has an income effect that discourages saving and a substitution effect that encourages saving.
B)   A higher rate of return has an income effect that encourages saving and a substitution effect that discourages saving.
C)   A higher rate of return has income and substitution effects that both decrease saving.
D)   A higher rate of return has income and substitution effects that both increase saving.E) A) and D)
F) B) and C)

Question 14

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

Accepted Answer

A)   The economy is subject to a variety of random shocks.
B)   Monetary policymakers are now allowed undisciplined discretion.
C)   It is not clear how important political business cycles have been in the past.
D)   Central banks can achieve credibility over time by backing up their words with deeds.E) A) and D)
F) A) and C)

Question 15

Why are deficits undesirable?

Accepted Answer

A)   They reduce future output.
B)   They reduce future consumption.
C)   They increase inflation.
D)   They increase unemployment.E) A) and B)
F) B) and C)

Question 16

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt, real GDP, and the price level. Why would one say that inflation is similar to a tax when the government runs a positive public debt?

Accepted Answer

The higher the inflation rate, the lower the debt to nominal GDP ratio. Inflation effectively lowers the government's debt burden. Like always, the debtor is favoured by high inflation, while the creditor is hurt. If the debtor is the government and the creditor is the public, then inflation is similar to a tax.

Question 17

What was the total amount of Canadian federal government debt in 2018?

Accepted Answer

A)   $72 million
B)   $720 million
C)   $72 billion
D)   $720 billionE) None of the above
F) A) and D)

Question 18

Which of the following represents the average inflation rate since 1990 and whether the Bank of Canada has been successful in its monetary policy?

Accepted Answer

A)   the rate has been 2 percent and the Bank of Canada has not been successful because the target is 0 percent
B)   the rate has been 2 percent and the Bank of Canada has been successful because the target is between 1 percent and 3 percent
C)   the rate has been 0 percent and the Bank of Canada has been successful because the target is 0 percent
D)   the rate has been 0 percent and the Bank of Canada has not been successful because the target is between 1 percent and 3 percentE) None of the above
F) All of the above

Question 19

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 changesE) A) and B)
F) A) and C)

Question 20

Consider a 25-year-old worker who saves $1000 for retirement. She plans to retire at the age of 70. If the interest rate is 10 percent and there is a tax of 40 percent on interest income, how much will her savings be worth at the age of 70?

Accepted Answer

With a tax rate of 40 percent,...

Exam 18: Five Debates Over Macroeconomic Policy

What would those who desire that policymakers stabilize the economy advocate when aggregate demand is insufficient to ensure full employment?

Correct Answer
verified

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

Correct Answer
verified

Suppose that a country has an inflation rate of about 3 percent per year and a real growth rate of about 5 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest possible deficit it can have without raising the debt-to-income ratio?

Correct Answer
verified

Explain how it is possible for the government debt to grow forever.

Correct Answer
verified
The debt can grow because the economy gr...
View Answer

Some studies have found that saving is not very sensitive to the rate of return on saving.

Correct Answer
verified

Why does Canadian public policy discourage saving?

Correct Answer
verified

Suppose the economy goes into recession. Which of the following is a list of things policymakers could do to try to end the recession?

Correct Answer
verified
C

Why should the central bank aim for zero inflation?

Correct Answer
verified

Suppose the budget deficit is rising 4 percent per year and nominal GDP is rising 7 percent per year. How are the debt and the burden on future generations created by these continuing deficits?

Correct Answer
verified
C

Correct Answer
verified
If interest is not taxed until realized,...
View Answer

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

Which statement best describes RRSP plans?

Correct Answer
verified

What effects does a higher rate of return have on saving?

Correct Answer
verified

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

Correct Answer
verified

Why are deficits undesirable?

Correct Answer
verified

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt, real GDP, and the price level. Why would one say that inflation is similar to a tax when the government runs a positive public debt?

What was the total amount of Canadian federal government debt in 2018?

Correct Answer
verified

Which of the following represents the average inflation rate since 1990 and whether the Bank of Canada has been successful in its monetary policy?

Correct Answer
verified

Why do the five debates over macroeconomic policy exist?

Correct Answer
verified

Consider a 25-year-old worker who saves $1000 for retirement. She plans to retire at the age of 70. If the interest rate is 10 percent and there is a tax of 40 percent on interest income, how much will her savings be worth at the age of 70?

Correct Answer
verified
With a tax rate of 40 percent,...
View Answer

Exam 18: Five Debates Over Macroeconomic Policy

What would those who desire that policymakers stabilize the economy advocate when aggregate demand is insufficient to ensure full employment?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose that a country has an inflation rate of about 3 percent per year and a real growth rate of about 5 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest possible deficit it can have without raising the debt-to-income ratio?

Correct AnswerverifiedShow Answer

Explain how it is possible for the government debt to grow forever.

Correct AnswerverifiedThe debt can grow because the economy gr...View AnswerShow Answer

Some studies have found that saving is not very sensitive to the rate of return on saving.

Correct AnswerverifiedShow Answer

Why does Canadian public policy discourage saving?

Correct AnswerverifiedShow Answer

Suppose the economy goes into recession. Which of the following is a list of things policymakers could do to try to end the recession?

Correct AnswerverifiedC

Why should the central bank aim for zero inflation?

Correct AnswerverifiedShow Answer

Suppose the budget deficit is rising 4 percent per year and nominal GDP is rising 7 percent per year. How are the debt and the burden on future generations created by these continuing deficits?

Correct AnswerverifiedC

Correct AnswerverifiedIf interest is not taxed until realized,...View AnswerShow Answer

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

Which statement best describes RRSP plans?

Correct AnswerverifiedShow Answer

What effects does a higher rate of return have on saving?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Why are deficits undesirable?

Correct AnswerverifiedShow Answer

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt, real GDP, and the price level. Why would one say that inflation is similar to a tax when the government runs a positive public debt?

What was the total amount of Canadian federal government debt in 2018?

Correct AnswerverifiedShow Answer

Which of the following represents the average inflation rate since 1990 and whether the Bank of Canada has been successful in its monetary policy?

Correct AnswerverifiedShow Answer

Why do the five debates over macroeconomic policy exist?

Correct AnswerverifiedShow Answer

Consider a 25-year-old worker who saves $1000 for retirement. She plans to retire at the age of 70. If the interest rate is 10 percent and there is a tax of 40 percent on interest income, how much will her savings be worth at the age of 70?

Correct AnswerverifiedWith a tax rate of 40 percent,...View AnswerShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The debt can grow because the economy gr...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified
If interest is not taxed until realized,...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
With a tax rate of 40 percent,...
View Answer