Question 1

Which of the following best defines the political business cycle?

Accepted Answer

A)   the fact that about every four years some politician advocates greater government control of the Bank of Canada
B)   the potential for a central bank to use monetary policy to stimulate the economy and help the incumbent get re-elected
C)   the part of the business cycle that reflects reluctance by politicians to smooth out the business cycle
D)   the changes in output created by the monetary rule the Bank of Canada must followE) All of the above
F) A) and C)

Question 2

Which statement is an argument against a tax system that encourages savings?

Accepted Answer

A)   that individuals know better that the government how much to save
B)   that saving is not an important determinant of a nation's ability to produce output
C)   that rich people would bear the burden of such a tax system
D)   that such a tax system would increase inequalityE) None of the above
F) A) and B)

Question 3

If a person makes $40,000 per year, approximately how much is their share of the Canadian debt as a percentage of lifetime earnings?

Accepted Answer

A)   2.3 percent
B)   4.6 percent
C)   8.9 percent
D)   11.2 percentE) All of the above
F) A) and B)

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 supply shifts left, what must the central bank do, and what will happen to output?

Accepted Answer

A)   The central bank must decrease the money supply, which will move output back toward its long-run level.
B)   The central bank must decrease the money supply, which will move output farther from its long-run level.
C)   The central bank must increase the money supply, which will move output back toward its long-run level.
D)   The central bank must increase the money supply, which will move output farther from its long-run level.E) B) and C)
F) B) and D)

Question 6

What would proponents of tax-law changes to encourage saving most likely do?

Accepted Answer

A)   They would argue that corporate tax rates should be increased.
B)   They would argue in favour of eliminating or reducing the means tests for government benefits.
C)   They would argue that provincial sales tax should be replaced with provincial income tax.
D)   They would argue in favour of raising taxes for the wealthy.E) A) and B)
F) A) and D)

Question 7

Suppose that a country has an inflation rate of about 3 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 unitsE) A) and B)
F) A) and C)

Question 8

Why should economists "do no harm" when it comes to stabilizing the economy?

Accepted Answer

A)   It takes a lot of mental effort to fix the economy and it is taxing on politicians.
B)   The economy already has built in stabilizers and sometimes trying to fix the economy only makes it worse.
C)   Money used to help fix the economy can be better used for other priorities.
D)   People are generally optimistic and the effects of a recession are not felt by the average Canadian.E) C) and D)
F) A) and B)

Question 9

The cost of inflation reduction is a small but permanent increase in unemployment.

Accepted Answer

A) True 
 B)False

Question 10

What is the main reason why monetary policy has lags?

Accepted Answer

A)   It takes a long time for changes in the interest rate to change aggregate demand.
B)   It takes a long time for changes in the money supply to change interest rates.
C)   It takes a long time for the Bank of Canada to make changes in policy.
D)   It takes a long time for the government to pass the necessary laws.E) A) and D)
F) All of the above

Question 11

Which of the following are both policies that are consistent with trying to stabilize output when prices and output rise?

Accepted Answer

A)   decrease the money supply and decrease taxes
B)   increase the money supply and decrease taxes
C)   decrease the money supply and increase taxes
D)   increase the money supply and increase taxesE) A) and C)
F) C) and D)

Question 12

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

Accepted Answer

A)   that reducing inflation eventually reduces inflation expectations
B)   that reducing inflation eventually raises real interest rates
C)   that reducing inflation permanently decreases output
D)   that reducing inflation permanently raises unemploymentE) A) and B)
F) A) and C)

Question 13

The Bank of Canada raised interest rates in 2018. By doing this, what did the Bank of Canada do to the money supply and why?

Accepted Answer

A)   It increased the money supply because it was concerned about unemployment.
B)   It increased the money supply because it was concerned about inflation.
C)   It decreased the money supply because it was concerned about unemployment.
D)   It decreased the money supply because it was concerned about inflation.E) A) and B)
F) B) and D)

Question 14

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, how much will she accumulate by the retirement age?

Accepted Answer

In this case, n = 70 - 25 = 45...

Question 15

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

Accepted Answer

A)   It increases the interest rate and decreases spending on capital goods.
B)   It increases the interest rate and increases spending on capital goods.
C)   It decreases the interest rate and increases spending on capital goods.
D)   It decreases the interest rate and decreases spending on capital goods.E) B) and C)
F) A) and C)

Question 16

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which statement, 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.E) A) and C)
F) None of the above

Question 17

If you deposit $100 now with interest rate of 3 percent, after the first period you will have an amount equal to (100 + 100× 0.03) = 100(1 + 0.03); after the second period the amount will be 100(1 + 0.03) + [100(1 + 0.03)]×0.03 = 100(1 + 0.03)(1 + 0.03) = 100(1 + 0.03)2. If we continue this reasoning, we find out that the amount in the account after n periods is equal to $100(1 + 0.03)n. In general, if the interest rate is i percent, the formula for compound interest rate becomes (1 + i%/100)n. Suppose there is a tax rate of t percent on interest income. How does our formula change?

Accepted Answer

Typically, if the ta...

Question 18

What might offset the effects of a decline in the value of financial assets, such as stocks, on consumption and the economy?

Accepted Answer

A)   increasing government spending
B)   decreasing the money supply
C)   increasing taxes
D)   decreasing the government debtE) All of the above
F) A) and D)

Question 19

Suppose that at the start of fiscal year 2019 the government had a debt of $6220 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 $249 billion
D)   about $375 billionE) B) and D)
F) All of the above

Question 20

Which of the following is NOT a significant cost of inflation?

Accepted Answer

A)   shoeleather costs associated with reduced money holdings
B)   menu costs associated with more frequent adjustment of prices
C)   increased stability of relative prices
D)   unintended changes in tax liabilitiesE) B) and D)
F) None of the above

Exam 18: Five Debates Over Macroeconomic Policy

The Bank of Canada raised interest rates in 2018. By doing this, what did the Bank of Canada do to the money supply and why?

Correct Answer
verified

Why should economists "do no harm" when it comes to stabilizing the economy?

Correct Answer
verified

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

Correct Answer
verified

Which of the following are both policies that are consistent with trying to stabilize output when prices and output rise?

Correct Answer
verified

Correct Answer
verified
Typically, if the ta...
View Answer

Suppose that at the start of fiscal year 2019 the government had a debt of $6220 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?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Which of the following is NOT a significant cost of inflation?

Correct Answer
verified

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

Correct Answer
verified

Suppose that a country has an inflation rate of about 3 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?

Correct Answer
verified

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

Correct Answer
verified

The cost of inflation reduction is a small but permanent increase in unemployment.

Correct Answer
verified

What would proponents of tax-law changes to encourage saving most likely do?

Correct Answer
verified

Which of the following best defines the political business cycle?

Correct Answer
verified

What might offset the effects of a decline in the value of financial assets, such as stocks, on consumption and the economy?

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, how much will she accumulate by the retirement age?

Correct Answer
verified
In this case, n = 70 - 25 = 45...
View Answer

If a person makes $40,000 per year, approximately how much is their share of the Canadian debt as a percentage of lifetime earnings?

Correct Answer
verified

What is the main reason why monetary policy has lags?

Correct Answer
verified

Which statement is an argument against a tax system that encourages savings?

Correct Answer
verified

Exam 18: Five Debates Over Macroeconomic Policy

The Bank of Canada raised interest rates in 2018. By doing this, what did the Bank of Canada do to the money supply and why?

Correct AnswerverifiedShow Answer

Why should economists "do no harm" when it comes to stabilizing the economy?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following are both policies that are consistent with trying to stabilize output when prices and output rise?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedTypically, if the ta...View AnswerShow Answer

Suppose that at the start of fiscal year 2019 the government had a debt of $6220 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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is NOT a significant cost of inflation?

Correct AnswerverifiedShow Answer

Assume that the substitution effect is large relative to the income effect. If a tax reform is designed to increase saving, what does it do to the interest rate and spending on capital goods?

Correct AnswerverifiedShow Answer

Suppose that a country has an inflation rate of about 3 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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The cost of inflation reduction is a small but permanent increase in unemployment.

Correct AnswerverifiedShow Answer

What would proponents of tax-law changes to encourage saving most likely do?

Correct AnswerverifiedShow Answer

Which of the following best defines the political business cycle?

Correct AnswerverifiedShow Answer

What might offset the effects of a decline in the value of financial assets, such as stocks, on consumption and the economy?

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, how much will she accumulate by the retirement age?

Correct AnswerverifiedIn this case, n = 70 - 25 = 45...View AnswerShow Answer

If a person makes $40,000 per year, approximately how much is their share of the Canadian debt as a percentage of lifetime earnings?

Correct AnswerverifiedShow Answer

What is the main reason why monetary policy has lags?

Correct AnswerverifiedShow Answer

Which statement is an argument against a tax system that encourages savings?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Typically, if the ta...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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In this case, n = 70 - 25 = 45...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified