Deck 13: Macroeconomic Policy

Question 1

Which of the following is NOT an objective of the Reserve Bank of Australia (RBA)?

A) full employment
B) economic prosperity
C) income tax rates between 25 and 30 percent
D) currency stability

Answer 1

C

Question 2

The economy's unemployment rate is 7% and the inflation rate is 0%. The most appropriate policy for the RBA to pursue would be to:

A) increase interest rates to try to bring the inflation rate back to a positive rate
B) raise interest rates to try to stimulate saving
C) do nothing because the inflation rate is so low
D) reduce interest rates to try to reduce the unemployment rate

Answer 2

D

Question 3

If the federal government's spending exceeded its tax receipts in 2011, the country would have a:

A) national debt
B) balanced budget
C) budget deficit
D) budget surplus

Answer 3

C

Question 4

Which of the following actions by the RBA will result in a decrease in the cash rate?

A) buying government securities in the open market
B) a decrease in government spending
C) decreasing interest rates on outstanding credit card debt
D) selling government securities in the open market

Question 5

Which of the following is NOT an important instrument of supply- side policy in Australia?

A) monetary policy
B) privatisation
C) deregulation
D) anti- competition legislation

Question 6

Fiscal policy refers to:

A) the spending and taxation policies used by the government to influence the economy
B) the behaviour of the nation's central bank, regarding the nation's money supply
C) the techniques used by a firm to reduce its tax liability
D) the government's ability to regulate a firm's behaviour in the financial markets

Question 7

Which of the following is NOT an argument in favour of a rule- based approach to economic policy?

A) time lags between the implementation and the effect of fiscal policy
B) time lags between the implementation and the effect of monetary policy
C) destabilising political behaviour
D) random shocks to the economy caused by external factors

Question 8

The RBA is likely to decrease the money supply during times of:

A) low output and high inflation
B) high output and low inflation
C) high output and high inflation
D) low output and low inflation

Question 9

One of the main requirements for long- term economic growth is:

A) low interest rates
B) a reduction in saving levels to reduce leakages from the circular flow of income
C) a fiscal deficit
D) growth in the productivity of factor inputs

Question 10

Which of the following is NOT a supply side measure to increase economic growth?

A) tax concession for firms implementing new technology
B) tax concessions for firms which undertake research and development
C) subsidies for firms with retraining programs for the long- term unemployed
D) an employment creation program

Question 11

When the RBA purchases government securities, this acts simultaneously the cash rate and the money supply.

A) increases; increases
B) decreases; decreases
C) increases; decreases
D) decreases; increases

Question 12

If the Government raises taxes by $25 million in order to finance an increase in the road building program of $25 million, the effect on aggregate demand will be that:

A) it will fall since the population resent increased taxes more than they appreciate increased government expenditure
B) it will rise since the multiplier effect from increased government expenditure is greater than the multiplied reduction in income from increased taxes
C) it will remain the same but the distribution of income will change since those who pay the increase in taxes are not necessarily the same people who will use the new roads
D) it will remain the same as all that has happened is that tax revenue has been spent on a project that costs the same amount

Question 13

Policy time lags can cause difficulties for policy makers because:

A) the size of the multiplier cannot be known with certainty
B) it is difficult for policy makers to agree which policy is best at a point in time
C) by the time the policies take effect the nature of the economic problem may have changed
D) by the time the policies take effect the economy will have self- corrected

Question 14

An open market purchase of government securities by the RBA results in in cash reserves in the banking sector and in the supply of money.

A) a decrease; a decrease
B) a decrease; an increase
C) an increase; a decrease
D) an increase; an increase

Question 15

Which of the following is an automatic stabiliser?

A) unemployment benefit payments to the unemployed
B) interest rate changes
C) increases in government spending on road works
D) reductions in nominal wages as inflation rates rise

Question 16

If the government wants to reduce unemployment, government spending should be and/or taxes should be .

A) decreased; increased
B) increased; decreased
C) decreased; decreased
D) increased; increased

Question 17

The RBA is likely to increase the money supply during times of:

A) high output and high inflation
B) high output and low inflation
C) low output and low inflation
D) low output and high inflation

Question 18

What is Goodhart's Law?

A) If you control the indicator of a problem, rather than the problem itself, the indicator will lose its indicative value.
B) Interest rates should be kept as low as possible.
C) There is no point in trying to use indicators for the formulation of monetary policy.
D) The money supply cannot be controlled.

Question 19

Which of the following represents an action by the RBA that is designed to increase the money supply?

A) an increase in the cash rate
B) an increase in the liquidity ratio
C) an increase in government spending
D) buying government securities in the open market

Question 20

Which of the following represents an action by the RBA that is designed to decrease the money supply?

A) a decrease in the liquidity ratio
B) a decrease in the cash rate
C) an increase in tax rates
D) selling government securities in the open market

Question 21

If the RBA increases the money supply at the same time the government increases government spending, the severity of the crowding- out effect:

A) will be increased
B) could either increase or decrease depending on the sensitivity of planned investment to the interest rate
C) will be reduced
D) will not be affected

Question 22

Which of the following actions is an example of fiscal policy that aims to slow down the rate of economic growth?

A) a purchase of government securities in the open market
B) an increase in welfare payments
C) the imposition of a high liquidity ratio
D) an increase in company income tax rates

Question 23

An open market sale of government securities by the RBA results in _ in cash reserves in the banking sector and in the supply of money.

A) a decrease; an increase
B) a decrease; a decrease
C) an increase; an increase
D) an increase; a decrease

Question 24

Which of the following actions is an example of fiscal policy that aims to stimulate economic activity?

A) an increase in spending on road works
B) a purchase of government securities in the open market
C) elimination of certain income tax deductions
D) a reduction in interest rates

Question 25

Between the years 2000/01 and 2009/10, the Australian federal government's budget was:

A) mainly in surplus
B) sometimes in deficit and sometimes balanced
C) mainly balanced
D) mainly in deficit

Question 26

When economists refer to 'tight' or 'contractionary' monetary policy, they mean that the RBA is taking actions that will:

A) increase the cash rate and decrease the money supply
B) increase the cash rate and increase the money supply
C) decrease the cash rate and increase the money supply
D) decrease the cash rate and decrease the money supply

Question 27

During the global recession which followed the recent financial crisis in the United States, economic policy makers used fiscal policy to aggregate demand.

A) expansionary; increase
B) expansionary; decrease
C) contractionary; decrease
D) contractionary; increase

Question 28

The effectiveness of fiscal policy as a 'pump primer' is dependent on:

A) business confidence
B) the crowding out effect
C) the marginal propensity to withdraw
D) random shocks

Question 29

Which of the following would be considered a supply- side policy?

A) investment tax credits for businesses to encourage investment
B) an increase in government spending that would lead to increased aggregate demand
C) restrictions placed on the amount that can be imported
D) an increase in the minimum wage that would cause consumer spending to increase

Question 30

Fiscal stance refers to:

A) whether a government is pursuing an expansionary or contractionary fiscal policy
B) a government that is running a budget deficit
C) a government that prefers the use of fiscal to monetary policy for demand management
D) a government that takes a tough stance when it comes to running the country's finances

Question 31

Deliberate changes in tax rates and levels of government spending to influence the level of aggregate demand are called:

A) fiscal deficits
B) discretionary fiscal policy
C) automatic stabilisers
D) fiscal surpluses

Question 32

Which of the following is an example of monetary policy aiming to increase the rate of economic growth?

A) a decrease in the cash rate
B) an increase in the liquidity ratio
C) the RBA selling government securities in the open market
D) a decrease in the tax rate

Question 33

An automatic stabiliser is:

A) a fiscal policy that aims to smooth out the business cycle
B) a monetary policy that aims to smooth out the business cycle
C) a tax or form of government expenditure that has the effect of reducing the size of the multiplier
D) the tendency for inflation to fall as unemployment rises

Question 34

Which of the following is NOT an automatic stabiliser?

A) unemployment benefits
B) a progressive income tax system
C) company taxes
D) government expenditure on road building programs

Question 35

If the RBA sells government bonds, the most likely outcome will be:

A) a fall in the money supply and a fall in interest rates
B) a rise in the money supply and a fall in interest rates
C) a fall in the money supply and a rise in interest rates
D) a rise in the money supply and a rise in interest rates

Question 36

Discretionary fiscal policy is when:

A) existing taxation policy automatically fine tunes the economy
B) the government changes the levels of expenditure or taxation
C) politicians are discrete about policy changes, and do not advise consumers or producers of new policy
D) policy is left to the discretion of the central bank

Question 37

In the management of the Australian economy:

A) both monetary and fiscal policy are implemented according to a rule- based approach
B) fiscal policy is implemented according to a rule- based approach
C) monetary policy is implemented according to a rule- based approach
D) neither monetary policy nor fiscal policy are implemented according to a rule- based approach

Question 38

Which of the following will NOT necessarily lead to long- term economic growth?

A) an increase in the quantity of the factors of production
B) more funding given to research and development
C) discretionary fiscal policy designed to move the economy out of a recession
D) an increase in factor productivity

Question 39

Which of the following is an example of fiscal policy aimed to increase economic growth?

A) the government reducing pollution standards to allow firms to produce more output
B) the government increasing the amount of money spent on public health programs
C) the government increasing the marginal tax rate on incomes above $200 000
D) the Reserve Bank of Australia selling government securities in the open market

Question 40

Which of the following is an example of expansionary monetary policy?

A) the RBA selling bonds and securities
B) the RBA reducing the money supply
C) the RBA buying bonds and securities
D) the government reducing the rate of income tax

Question 41

What are open market operations?

Question 42

If the economy were in recession, we would expect:

A) government expenditure to be high and tax revenues to be high so that the government might have a large deficit
B) government expenditure to be low and tax revenues to be low so that the government might have a large surplus
C) government expenditure to be low and tax revenues to be high so that the government might have a large surplus
D) government expenditure to be high and tax revenues to be low so that the government might have a large deficit

Question 43

Automatic stabilisers reduce the size of the multiplier.

Question 44

Explain why the greater the increase in unemployment benefits when national income falls, the larger the stabilising effect will be on the nation's income.

Question 45

How do changes in monetary policy bring about changes in aggregate demand?

Question 46

Which of the following is NOT a lag that affects the working of fiscal policy?

A) a problem being recognised and action being taken
B) action being taken and effects happening
C) a problem happening and it being noticed
D) action being taken and expectations being formed

Question 47

What fiscal stimulus measures were implemented by the the Australian Federal government in reaction to the global financial crisis of 2008- 2009?

Question 48

An example of a monetary policy aiming to reduce the rate of inflation is:

A) the RBA selling government securities in the open market
B) an increase in the tax rate
C) a decrease in the liquidity ratio
D) a decrease in the cash rate

Question 49

How can the productivity of labour be increased?

Question 50

The year 2000 reduction in Australia of the marginal rates of income taxation can be seen as both a demand- side and supply- side policy.

Question 51

List at least three policies used by the government in Australia in the 1990s as a means of encouraging competition.

Question 52

What is Goodhart's law?

Question 53

Explain the difference between a government deficit and a government surplus.

Question 54

The effectiveness of fiscal policy is hindered by time lags. Describe the main timing lags.

Question 55

Some government regulations imposed on business have the impact of reducing productivity. The elimination of these regulations would be an example of:

A) a supply- side policy
B) a monetary policy
C) a fiscal policy
D) an incomes policy

Question 56

Unemployment benefits act as an automatic stabiliser in the Australian economy.

Question 57

Government policies that focus on increasing production rather than stimulating aggregate demand are known as:

A) monetary policies
B) incomes policies
C) fiscal policies
D) supply- side policies

Question 58

The tendency for increases in government spending to cause reductions in private investment spending is:

A) discretionary fiscal policy
B) fiscal drag
C) bracket creep
D) the crowding- out effect

Question 59

The multiplier effect of a decrease in income taxes is larger than that arising from a direct increase in government expenditure.

Question 60

What labour market policies would a proponent of supply- side policies recommend?

Question 61

The RBA's commitment to a target inflation rate between two and three percent over the cycle is an example of an economic policy rule.

Question 62

Endogenous growth theory argues that economic growth will naturally occur within a free market economy; therefore government demand management policies are not necessary to achieve
long- run economic growth.

Question 63

Innovation and technological development will lead to short- run economic growth, but not long- run economic growth.

Question 64

One of the burdens of a large public sector deficit is the crowding- out of investment.

Question 65

An example of discretionary fiscal policy is the increase in tax revenues which automatically arises as the economy expands.

Question 66

When the expectations of firms and consumers are very pessimistic with respect to the economy, expansionary monetary policy is likely to be ineffective.

Question 67

The tendency for increases in government spending to cause reductions in private investment spending is known as the crowding- out effect.

Question 68

Random shocks to the economy do not affect the effectiveness of fiscal policy.

Question 69

A decrease in the money supply will lead to an increase in the cash rate.

Question 70

The RBA aims to achieve the wider goals of full employment, currency stability and economic prosperity for the Australian economy by keeping inflation below 2 percent over the long term.

Question 71

The Statement of the Conduct of Monetary Policy (1996) is an agreement between the Australian government and the Reserve Bank of Australia (RBA) which guarantees the independence of the RBA.

Question 72

The growth in labour productivity depends on one main factor - technological progress.

Question 73

a. Explain how the RBA might carry out monetary policy designed to reduce the rate of inflation.
b. Explain how the RBA might carry out monetary policy designed to expand the economy.
c. How would each of the policies affect the equilibrium interest rate?

Question 74

The difference between government revenue and government spending is called the national debt.

Question 75

Discuss the sources of long- run economic growth, and evaluate their policy implications.

Question 76

Research and development is always a more effective supply- side policy than education and training.

Question 77

A sale by the RBA of government securities to the public will increase the money supply.

Question 78

If the RBA wants interest rates to increase, it will take action to reduce the money supply.

Question 79

Explain the possible negative side effects of government discretionary fiscal policy.

Question 80

An increase in the rate of saving will shift the investment curve upwards.