Deck 37: Five Debates Over Macroeconomic Policy

Question 1

Which of the following statements is correct?

A)the economy's capacity to pay off its debt can grow over time
B)the government cannot run a budget deficit forever, because productivity cannot increase over time
C)as long as the government debt grows faster than the economy's income, government deficits can grow forever
D)as long as the government debt grows more slowly than the economy's income, government deficits cannot grow forever

Answer 1

A

Question 2

Which of the following is not the cost of reducing inflation to zero?

A)preventing arbitrary redistributions of wealth associated with dollar-denominated debts
B)reducing the variability of relative prices
C)eliminating the confusion and inconvenience resulting from a changing unit of account
D)the high unemployment and low output needed to reduce inflation

Answer 2

D

Question 3

Inflation confers benefit to society, and it imposes very few real costs.

Answer 3

False

Question 4

Fiscal policy works with a lag because of the long political process that governs changes in spending and tax.

Question 5

Which of the following is the main advantage for following monetary policy rule?

A)it avoids economic fluctuations arising from the political business cycle.
B)it is more flexible for dealing with unexpected shocks to the economy.
C)it helps to build consensus among stakeholders in the economy.
D)it improves the international competitiveness of the economy.

Question 6

Although price stability may be desirable, the benefits of zero inflation compared with moderate inflation are small, whereas the costs of reaching zero inflation are large.

Question 7

A nation's saving rate is a key determinant of its long-run economic prosperity.

Question 8

Which of the following is the benefit of reducing inflation to zero?

A)eliminating shoe leather costs
B)eliminating menu costs
C)eliminating the confusion and inconvenience resulting from a changing unit of account
D)all of the above

Question 9

In the 1970s, the Australian government decided to charge fees for university education.

Question 10

The budget deficit is a major piece of how the government chooses to raise and spend money.

Question 11

The main advantage of making monetary policy according to rules is that it allows a more favourable short-run trade-off between inflation and unemployment.

Question 12

A budget deficit can be justifiable:

A)during a politically peaceful period
B)during a recession
C)during a temporary downturn in economic activity
D)during an economic boom

Question 13

The charter of the RBA gives the institution specific recommendations about what goals it should pursue; and the Act tells the RBA how to pursue whatever goals it might choose.

Question 14

Reducing inflation is a policy with temporary costs and permanent benefits.

Question 15

When a military conflict raises government spending temporarily, it is reasonable to finance this extra spending by borrowing.

Question 16

Many studies indicate that changes in monetary policy have little effect on aggregate demand until about six months after the change is made.As a result, it often leads to excessive adjustments.

Question 17

It is reasonable to allow a budget deficit during a temporary downturn in economic activity.

Question 18

Discretion in the conduct of monetary policy does not limit incompetence and abuse of power.

Question 19

Economies can be left to find their own solution.

Question 20

A disinflationary recession can potentially leave permanent scars on the economy.

Question 21

If the economy goes into a recession, then automatic stabilisers are likely to lead to an increase in the budget deficit.Why might such a deficit be beneficial?

Question 22

What are the problems of discretionary monetary policy? How can we avoid these problems?

Question 23

Some economists believe that policymakers should not try to stabilise the economy.What is the reason?

A)the policymakers' goal is economic boom
B)policy effects occur immediately
C)economic conditions change over time
D)none of the above

Question 24

Your economics professor has probably told you that there will be a final exam in your economics class.The main reason for this final exam is to make sure that everyone has an incentive to work hard, come to class and read the textbook.When the day of the examination comes, however, it seems as if everyone would be better off if the professor cancelled the exam.You wouldn't have to take the exam, and your professor wouldn't have to mark it.Do you think your economics professor is likely to cancel the exam? Why not? What economic idea does this illustrate?

Question 25

Any attempt to encourage saving via tax reform can actually reduce national saving because saving is _____.

A)relatively inelastic
B)relatively elastic
C)perfectly inelastic
D)perfectly elastic

Question 26

Evaluate the following statement: 'Fiscal policy is a very precise tool for controlling aggregate demand.If the government wants to increase aggregate demand by $5 billion, all it has to do is to carry out exactly $5 billion worth of government spending.'

Question 27

If the government's plan is credible, then:

A)the short-run Phillips curve will not shift
B)people will not adjust their expectations of inflation
C)the cost of disinflation will be high
D)the cost of reducing inflation will be low

Question 28

Advocates of governments' balanced budgets, believe that failure to do this will:

A)shift the burden of debt repayment to future generations
B)create possibly unsustainable levels of debt
C)potentially lower the standard of living in the future
D)all of the above

Question 29

Which of the following is not part of the cost of inflation?

A)shoeleather costs
B)menu costs
C)distortions of the tax system
D)stronger domestic currency

Question 30

Inflation is often deemed as the necessary economic evil because it is associated with _____.

A)noise in the price system
B)distortions of the tax system
C)shoe-leather costs
D)all of the given options

Question 31

Citing an example, explain why the Reserve Bank of Australia (and its Governor) is independent of the government.

Question 32

Proponents of the balanced government budget argue that:

A)future generations will be burdened by the government's debt
B)living standards of future generations will decrease by the government debt
C)budget deficits cause crowding out
D)all of the above are correct

Question 33

Which of the following statements is correct?

A)as long as the government debt grows faster than the economy's income, government deficits can grow forever
B)as long as the government debt grows more slowly than the economy's income, government deficits can grow forever
C)as long as the government debt grows more slowly than the economy's income, government deficits cannot grow forever
D)none of the above

Question 34

Discuss why policymakers should not try to stabilise the economy.

Question 35

What are the costs of inflation for society?

Question 36

Explain the benefits of having the two to three per cent inflation rate target over a typical business cycle, clearly stated in the RBA's charter.

Question 37

Discuss some of the problems associated with following monetary policy rule.

Question 38

Proponents of the monetary policy rule argue that discretionary monetary policy may lead to:

A)incompetence
B)abuse of power
C)severe inflation than is desirable
D)all of the above