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In which situation is a program to reduce inflation likely to have the lowest costs?


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

E) A) and C)
F) None of the above

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Why should policymakers try to stabilize the economy?


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 process

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

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


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 D)
F) A) and D)

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Which tax policy will lead to a tax system with increased equality?


A) increase the limit on retirement savings plans
B) increase the limit on tax-free savings accounts
C) increase the consumption tax
D) reduce taxation of capital income

E) All of the above
F) A) and D)

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Suppose that changes in aggregate demand tended to be infrequent and that it took a long time for the economy to return to long-run output. How would this affect the arguments of those who oppose using policy to stabilize output?

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Those who oppose stabilization policy mo...

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Suppose the budget deficit is rising 2 percent per year and nominal GDP is rising 4 percent per year. How are the debt and the burden on future generations created by these continuing deficits?


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

E) None of the above
F) A) and D)

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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.

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

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Many studies suggest that the first effects of monetary policy are felt after about how many months?


A) one
B) six
C) ten
D) twelve

E) All of the above
F) A) and C)

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Explain why policy lags could make stabilization policies counterproductive.

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As the textbook explains, it takes time ...

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Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

A) True
B) False

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A reduction in the marginal tax rate includes a substitution effect that tends to increase savings.

A) True
B) False

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Identify four of the six costs of inflation.

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There are several costs of inflation, in...

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Which of the following would transfer wealth from the old to the young?


A) increases in the budget deficit
B) decreased building of highways and bridges
C) more generous education subsidies
D) indexation of pensions to inflation

E) B) and D)
F) None of the above

Correct Answer

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Explain the time inconsistency of monetary policy.

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Time inconsistency refers to the idea th...

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In practice, the problems created by time inconsistency and the political business cycle appear to be quite serious.

A) True
B) False

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What is the main reason that monetary policy has lags?


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 C)
F) B) and C)

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Identify three government policies that discourage saving.

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First, the returns to saving are heavily...

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Explain why a government deficit is likely to lead to lower living standards in the future.

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A government deficit means that the gove...

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If we total the amount of federal and provincial/territorial debt, what was owed by each Canadian in 2018?


A) $365
B) $3,657
C) $36,557
D) $365,570

E) B) and C)
F) A) and D)

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Why should policymakers NOT try to stabilize the economy?


A) Recessions represent a waste of resources.
B) Pessimism on the part of households and firms may become a self-fulfilling prophecy.
C) "Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms.
D) Economic conditions can easily change between the time when a policy action begins and when it takes effect.

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

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