Deck 8: Stabilization Policy

Question 1

Which of the of the following theories claims that expectations are the main cause of economic Fluctuations?

A) Monetary theory
B) Keynesian theory
C) Rational expectations theory
D) Real business cycle theory

Answer 1

Keynesian theory

Question 2

Which of the of the following theories states that changes in the money supply are the source of Economic fluctuations?

A) Real business cycle theory
B) Keynesian theory
C) Monetary theory
D) Rational expectations theory

Answer 2

Monetary theory

Question 3

Which of the of the following theories is based on the assumption that the impulse that changes Economic conditions is the unanticipated change in total spending?

A) Monetary theory
B) Keynesian theory
C) Rational expectations theory
D) Real business cycle theory

Answer 3

Rational expectations theory

Question 4

Which of the of the following theories regards changes in productivity brought about by Technological change as the source of economic change?

A) Monetary theory
B) Rational expectations theory
C) Real business cycle theory
D) Keynesian theory

Question 5

Of the following, what economic stabilizing policy is best used to reduce unemployment?

A) the government decides to reduce spending on education and health care
B) the Bank of Canada reduces the money supply
C) the government decides to build a new transportation route
D) the government decides to increase personal income tax

Question 6

Of the following, what economic stabilizing policy is best used to reduce unemployment?

A) the government decides to reduce personal income tax
B) the government decides to reduce spending on education and health care
C) the Bank of Canada reduces the money supply
D) the government decides to postpone the building of a new transportation route

Question 7

Of the following, what economic stabilizing policy is best used to reduce inflation?

A) the government decides to build a new transportation route
B) the Bank of Canada increase the money supply
C) the government decides to reduce personal income tax
D) the government decides to reduce spending on education and health care

Question 8

Of the following, what economic stabilizing policy is best used to reduce inflation?

A) the government decides to build a new transportation route
B) the government decides to increase spending on education and health care
C) the Bank of Canada decrease the money supply
D) the government decides to reduce personal income tax

Question 9

A major shortcoming of traditional monetary and fiscal policies is:

A) their inability to deal simultaneously with unemployment and inflation.
B) their inability to forecast the location of the potential GDP.
C) the unpredictable reaction of foreigners to domestic policies.
D) the unpredictability of the impact of automatic stabilizers.

Question 10

The Phillips curve shows:

A) the relationship between unemployment and price increases.
B) the relationship between inflation and price increases.
C) the relationship between inflation and wage-rate increases.
D) the relationship between unemployment and underemployment.

Question 11

The relationship between the rate of inflation and the rate of unemployment in the Canadian economy can be depicted by a:

A) the unemployment curve.
B) Laffer curve.
C) liquidity-preference curve.
D) Phillips curve.

Question 12

Which of the following describes an increase in both unemployment rate and inflation?

A) Laffer curve
B) Phillips curve
C) NAIRU
D) stagflation

Question 13

The trade-off between the unemployment rate and inflation depicted by the Phillips curve has led to the concept of:

A) Laffer curve.
B) NAIRU.
C) stagflation.
D) Phillips curve.

Question 14

Which of the following has led to an increase in the NAIRU in Canada?

A) increasing labour force participation by women
B) increasing rate of productivity improvements among Canadian workers
C) increases in oil prices
D) a reduction in payroll taxes

Question 15

The increased participation rate of women in the labour force has resulted in:

A) a movement down along the Phillips curve.
B) a shift in the Phillips curve to the right.
C) a shift in the Phillips curve to the left.
D) a movement up along the Phillips curve.

Question 16

Which of the following has led to an increase in the NAIRU in Canada?

A) increasing rate of productivity improvements among Canadian workers
B) changes in employment insurance legislation
C) decrease in foreign trade and regulation of certain industries
D) decreasing labour force participation rates

Question 17

Which of the following has led to an increase in the NAIRU in Canada?

A) increasing rate of productivity improvements among Canadian workers
B) changes in monetary policy
C) decreasing labour force participation rates
D) increase in foreign trade and deregulation of certain industries

Question 18

Fiscal policies such as increased government spending and reduced taxes will:

A) increase both unemployment and inflation.
B) reduce both unemployment and inflation.
C) increase inflation but reduce unemployment.
D) increase unemployment but reduce inflation.

Question 19

Monetary policy that increases the amount of money in circulation:

A) will cause an increase in interest rates and an increase in aggregate demand.
B) will cause a decrease in interest rates and an increase in aggregate demand.
C) will cause an increase in interest rates and a decrease in aggregate demand.
D) will cause a decrease in interest rates and a decrease in aggregate demand.

Question 20

The difference between automatic stabilizers and discretionary fiscal policy is mainly:

A) that discretionary policies are less likely to be influenced by political consideration.
B) that automatic stabilizers are more carefully thought-out answers to problems.
C) that automatic stabilizers come into effect more quickly.
D) that discretionary policy works faster in an emergency situation.

Question 21

Which of the following is not an example of an automatic stabilizer?

A) tariff on goods imported into Canada
B) general welfare assistance
C) progressive income tax
D) employment insurance

Question 22

Which of the following is not a lag associated with discretionary fiscal policy?

A) recognition
B) decision
C) political
D) implementation

Question 23

The fact that price increases have to be monitored for several months before it is determined that inflation is a problem describes what type of a lag?

A) political
B) recognition
C) decision
D) implementation

Question 24

The fact that it takes time before the private sector responds to the changes in policy is known as:

A) an inside lag.
B) an outside lag.
C) a recognition lag.
D) a decision lag.

Question 25

Which of the following is a negative aspect of Canada's public debt?

A) it is better than raising taxes in a recession
B) the money is owed primarily to Canadians and not to individuals in other countries
C) it may cause interest rates to increase by increasing the demand for money
D) it is necessary to finance large capital projects

Question 26

Which of the following is not a problem associated with a large public debt?

A) passing a burden on to future
B) raising interest rates Generations
C) crowding out small borrowers
D) owing the money to ourselves

Question 27

The net debt of the federal government is:

A) the gross debt plus federal government liabilities.
B) the gross debt plus federal government assets.
C) the gross debt minus federal government assets.
D) the gross debt minus federal government liabilities.

Question 28

If the federal government owes money to individuals in other countries:

A) it is part of gross debt but not included in net debt.
B) it is not recorded in the official debt statement.
C) the payments on the debt are affected by changes in the foreign exchange value of the Canadian dollar.
D) it is normally at higher interest rates than money borrowed in Canada.

Question 29

How does a fiscal policy conflict with monetary policy?

A) In a recessionary period, the Bank of Canada wants low interest rates to encourage spending, but heavy government borrowing for fiscal expansion pushes up interest rates.
B) In an inflationary period, the Bank of Canada wants low interest rates to increase spending, but government wants high interest rates for its borrowing.
C) In a recessionary period, the Bank of Canada wants low interest rates to discourage spending, but heavy government borrowing for fiscal expansion pushes up interest rates.
D) In an inflationary period, the Bank of Canada wants high interest rates to encourage spending, but government wants low interest rates for its borrowing.

Question 30

The major difference between monetary and fiscal policy is that:

A) monetary policy influences only the level of GDP, while fiscal policy can only influence government spending and taxation.
B) monetary policy influences government spending, while fiscal policy influences taxation.
C) monetary policy influences only the money supply while fiscal policy influences government spending.
D) monetary policy influences government spending, while fiscal policy influences government spending and taxation.

Question 31

Monetary policy aimed at reducing the money supply will:

A) increase both unemployment and inflation.
B) increase inflation and reduce unemployment.
C) reduce both unemployment and inflation.
D) increase unemployment and reduce inflation.

Question 32

Monetary policy is less effective in influencing economic conditions if:

A) the velocity of money is constant.
B) consumers do not consider interest rates important in making decisions about spending.
C) consumer expectations about inflation do not change.
D) the foreign-exchange value of the Canadian dollar is relatively stable.

Question 33

Monetary policy is more effective in influencing economic conditions if:

A) consumers do not consider interest rates important in making decisions about spending.
B) the velocity of money is stable.
C) the foreign-exchange value of the Canadian dollar is pegged at a certain level.
D) consumers alter their expectations about inflation.

Question 34

If interest rates have been lowered substantially and increases in spending have not come about, then lowering the rate further is unlikely to encourage spending, this is know as:

A) interest rate inelasticity.
B) an automatic stabilizer.
C) the Fisher equation of exchange.
D) a liquidity trap.

Question 35

Monetary and fiscal policy are similar in that they both:

A) influence government spending and taxation.
B) have time-lags associated with the impact of the policy.
C) result in a shift of the Phillips curve to the right.
D) have policy determined by the minister of finance.

Question 36

Price stability is desirable for all the following reasons except that:

A) income and wealth are moved from those on fixed incomes to those on indexed salaries.
B) real interest rates are not increased to protect lenders against unanticipated inflation.
C) it reduces the difficulty with making decisions about resource allocation.
D) businesses engage in productive activities that emphasize long-term returns.

Question 37

Price stability is desirable because:

A) it reduces the difficulty with making decisions about resource allocation.
B) income and wealth are moved from those on fixed incomes to those on indexed salaries.
C) real interest rates can change to protect lenders against unanticipated inflation.
D) businesses engage in productive activities that emphasize short-term profits.

Question 38

Supply-side economics proposes:

A) to increase the supply of tax dollars available to government.
B) to increase spending on essential government services.
C) to raise taxes in order to increase government revenues.
D) to increase the available supply of goods and services in the economy.

Question 39

Supply-side economics proposes:

A) tax cuts and more regulations.
B) tax increases and fewer regulations.
C) tax cuts and fewer regulations.
D) tax increases and more regulations.

Question 40

Government output restrictions were put in place for all the following reasons except:

A) to allow more goods and services to be produced.
B) to reduce acid rain on Canadian farmland.
C) to act as pollution controls.
D) for occupational health and safety requirements.

Question 41

The Laffer curve depicts the relationship between:

A) tax rates and tax revenue.
B) tax rates and government spending.
C) tax rates and inflation.
D) tax rates and unemployment.

Question 42

Which of the following statements about wage and price controls is incorrect?

A) they are difficult to enforce in certain sectors of the economy
B) they are more effective as a long-term solution to inflation
C) they are difficult to apply to imported products
D) they result in shortages of goods and services

Question 43

Human resources policies are directed toward which type of unemployment?

A) frictional
B) deficient-demand
C) seasonal
D) structural

Question 44

Canada's human resources policies were initiated in 1960 in response to:

A) structural unemployment.
B) ineffective wage and price controls.
C) cost-push inflation.
D) balance of payments deficit.

Question 45

The primary objective of Canada's immigration policy is:

A) the reuniting of families.
B) the provision of skilled labour to the Canadian economy.
C) the provision of a safe haven for refugees.
D) ensuring the ethnic mix in the Canadian population.