Question 1

Fine tuning is a policy in which policy makers:
A) try to maintain a given path of the real exchange rate.
B) try to minimise the deviations of actual output from the natural level of output.
C) try to maintain a given rate of growth in the nominal money supply.
D) try to achieve zero inflation.
E) try to minimise fluctuations in interest rates.

Accepted Answer

Fine tuning is a macroeconomic policy aimed at reducing deviations of actual output from the natural level of output. It involves making small adjustments in fiscal and monetary policies to stabilize the economy and prevent it from deviating too far from its potential output level. Choice A is incorrect because maintaining a given path of the real exchange rate is a policy aimed at achieving exchange rate stability. Choice C is incorrect because maintaining a given rate of growth in the nominal money supply is a policy aimed at achieving monetary stability. Choice D is incorrect because achieving zero inflation is a policy aimed at price stability. Choice E is incorrect because minimizing fluctuations in interest rates is a policy aimed at achieving interest rate stability.

Question 2

In macroeconomics, game theory focuses on the strategic interactions between which of the following groups of agents?
A) Individuals and firms.
B) Academic economists and business economists.
C) Individuals, firms and policy makers.
D) Policy makers and economic forecasters.
E) Individuals, firms and economic forecasters.

Accepted Answer

Game theory in macroeconomics focuses on the strategic interactions between individuals, firms, and policy makers. This is because policy decisions made by governments can have a significant impact on the behavior of individuals and firms, and vice versa. Therefore, understanding how these different groups interact strategically is an important part of macroeconomic analysis.

Question 3

Discuss the time inconsistency problem and explain how it relates to monetary policy.

Accepted Answer

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Question 4

All of the macroeconometric models currently in use:
A) originate with commercial firms who sell their forecasts to other firms and governments.
B) originate with government or international agencies.
C) are different in structures and assumptions used.
D) originate in Australia.
E) incorporate rational expectations into their predictions.

Accepted Answer

Macroeconometric models differ in their structural assumptions and parameters based on the models' creators and intended use. While some models may be developed by commercial firms or government agencies, this is not a defining characteristic of all macroeconometric models. Additionally, while some models may incorporate rational expectations, this is also not a defining characteristic of all macroeconometric models.

Question 5

Who is best known for arguing about the long and variable lags of monetary policy?
A) Phillips.
B) Modigliani.
C) Lucas.
D) Friedman.
E) Keynes.

Accepted Answer

Friedman is best known for arguing about the long and variable lags of monetary policy. This is often referred to as the "long and variable lag hypothesis."

Question 6

What were some of the key features in terms of fiscal policy of the Stability and Growth Pact signed in 1997 by would- be members of the Euro?

Accepted Answer

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Question 7

The leading macroeconometric models currently in use in Australia and the U.S.:
A) predict the same duration of the effects of a policy change.
B) predict the same response of output to a monetary expansion.
C) rely on the same set of assumptions.
D) demonstrate that there is substantial uncertainty about policy effects.
E) yield identical forecasts.

Accepted Answer

The leading macroeconometric models currently in use in Australia and the U.S. do not rely on the same set of assumptions and hence do not yield identical forecasts. Also, there is usually substantial uncertainty about policy effects. Therefore, option D is the correct choice.

Question 8

The existence of the time inconsistency problem in macro policy suggests which of the following?
A) Use fiscal and monetary policy to fine tune the economy.
B) Appoint someone who is more conservative than the rest of the government to head the central bank.
C) Intervene frequently in the foreign exchange market.
D) Reduce the independence of the central bank.
E) Eliminate rational expectations from econometric models used for forecasting.

Accepted Answer

The time inconsistency problem in macro policy suggests that policymakers might have an incentive to deviate from previously announced policies if they believe such a deviation could bring about more favorable short-term outcomes, even if it might lead to less favorable long-term outcomes. Appointing someone more conservative than the rest of the government to head the central bank can help mitigate this problem by ensuring that the central bank prioritizes long-term economic stability over short-term gains, thus reducing the likelihood of time-inconsistent policy actions.

Question 9

Research suggests that the less independent the central bank:
A) the more stable the government.
B) the larger the budget deficit.
C) the higher the rate of inflation.
D) the lower the likelihood of a "war of attrition" over policy.
E) the smaller the time inconsistency problem in making policy.

Accepted Answer

Research suggests that the less independent the central bank, the higher the rate of inflation.

Question 10

To deal with the time inconsistency problem associated with monetary policy, some have suggested that:
A) the central bank implement expansionary monetary policy prior to election years.
B) the contract of the central bank governor be reviewed regularly by the parliament.
C) elected officials should have a direct influence on the implementation of monetary policy.
D) the head of the central bank be chosen by election.
E) the central bank be made more independent.

Accepted Answer

The best solution to address the time inconsistency problem associated with monetary policy is to make the central bank more independent. By doing so, the central bank can focus on achieving its primary goal of maintaining price stability without being influenced by short-term political pressures. This helps to anchor inflation expectations and provides a credible commitment to maintaining low and stable inflation, which is essential for promoting long-term economic growth and stability. Implementing expansionary monetary policy prior to election years or involving elected officials in the implementation of monetary policy could lead to a bias towards inflationary policies in the short run, which could damage the economy in the long run. Reviewing the contract of the governor by the parliament or electing the head of the central bank could lead to political interference, which could undermine the independence and credibility of the central bank. Therefore, the best choice is to make the central bank more independent.

Question 11

Which of the following is correct about Australian output growth over the past 100 years?
A) It has been dramatically lower than average during the year before an election.
B) It has been slightly higher than average during the year before an election, but not much higher.
C) It has been dramatically lower before an election than after an election.
D) It has been dramatically higher than average during the year before an election.
E) It has been slightly lower than average during the year before an election, but not much lower.

Accepted Answer

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Question 12

Suppose a government implements rules that result in a more independent central bank. What effect do you think this more independent central bank will eventually have on money growth and inflation in that country? Explain.

Accepted Answer

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Question 13

Assume a country has federal elections every three years. If a political business cycle exists in this country, explain any differences in the average annual growth rates of output for each year of a typical government.

Accepted Answer

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Question 14

Which of the following statements is true about Australia over the past one hundred years?
A) There is no strong evidence of political business cycles in Australia.
B) Under either party, output growth has been generally lower in the year preceding an election than in other years.
C) The debt- to- GDP ratio has been roughly constant.
D) Both A and B.
E) Both B and C.

Accepted Answer

Option A states that there is no strong evidence of political business cycles in Australia. This is a true statement as several studies have been done on the matter and the evidence is not strong enough to prove the existence of such cycles.
Option B is false as output growth has not been consistently lower in the year preceding an election. There have been instances where output growth has been higher in the year before an election.
Option C is also false as the debt-to-GDP ratio has not been constant over the past one hundred years. It has varied greatly based on different economic conditions and policy decisions.
Therefore, only option D is true.

Question 15

Those who are concerned about balanced budget amendments typically argue that:
A) they would make fluctuations in output around the natural level of output greater.
B) they would reduce national saving.
C) they would cause interest rates to be higher than they otherwise would be.
D) they would reduce aggregate demand.
E) they would increase spending in a recession.

Accepted Answer

Balanced budget amendments can limit the government's ability to use fiscal policy to stabilize the economy, potentially leading to greater fluctuations in output around the natural level of output.

Question 16

The idea that the economy operates like a complicated, predictable machine is an important aspect of:
A) attrition theory.
B) the theory of strategic interaction.
C) game theory.
D) time inconsistency theory.
E) optimal control theory.

Accepted Answer

The idea that the economy operates like a complicated, predictable machine is a central concept in optimal control theory, which seeks to identify the optimal policy responses to changes in economic conditions in order to achieve certain objectives.

Question 17

Econometric models of the U.S. economy generally agree:
A) that an increase in money growth will increase output in the short run.
B) on the quantitative impact of monetary policy over a horizon of several years.
C) that rational expectations is the best way to generate policy forecasts.
D) that an increase in money growth will decrease output in the long run.
E) that an increase in money growth will decrease output in the short run.

Accepted Answer

Econometric models generally agree that an increase in money growth will increase output in the short run. This is consistent with the idea of the Phillips Curve, which suggests that there is a negative relationship between unemployment and inflation in the short run. An increase in the money supply can stimulate demand and therefore output in the short run, but it may also lead to higher inflation over time.

Question 18

Analysis of U.S. budget deficits in the United States between 1990 and 2000 indicates that which of the following is primarily responsible for the reduction in the budget deficit?
A) Increase in tax revenues.
B) Decrease in spending and increase in tax revenues.
C) Increases in tax rates.
D) Decrease in spending.
E) Lower interest rates.

Accepted Answer

The reduction in budget deficits between 1990 and 2000 was primarily due to a combination of decreased spending and increased tax revenues. While lower interest rates may have played a role in reducing the costs of servicing the national debt, it was not the primary driver of deficit reduction during this period. Increases in tax rates may have contributed to higher revenues, but they were not the only factor. Therefore, option B is the best choice as it accurately reflects the most important factors that contributed to the reduction of budget deficits during this time period.

Question 19

Research for a number of OECD countries suggest that inflation will be lower:
A) where the terms of the heads of central banks coincide with the terms of elected officials.
B) if the heads of central banks are chosen by election.
C) the more independent the central bank.
D) when there are close ties between the central bank and the government.
E) the less independent the central bank.

Accepted Answer

The more independent the central bank, the lower the inflation rate tends to be, according to research for a number of OECD countries. This is because an independent central bank is better able to pursue its mandated objective of maintaining price stability without political interference or pressure to pursue short-term economic goals.

Question 20

Given the uncertainty about the effects of macro policy, economists generally propose that:
A) macro policies should be more active, the lower the level of unemployment or inflation.
B) money growth should be set at zero by constitutional amendment.
C) changes in money growth should only be used for fine tuning the economy, not for correcting large imbalances (such as high inflation).
D) policymakers should stop well short of fine tuning.
E) elected officials should have more input in the determination of monetary policy.

Accepted Answer

Economists generally propose that policymakers should stop well short of fine tuning, as there is uncertainty about the effects of macro policy. Fine-tuning may end up causing unintended consequences and potentially worsen an already unfavorable situation. Therefore, a more cautious and restrained approach to macro policy is recommended.

Quiz 22: Should Policy-Makers Be Restrained

Fine tuning is a policy in which policy makers:

In macroeconomics, game theory focuses on the strategic interactions between which of the following groups of agents?

Discuss the time inconsistency problem and explain how it relates to monetary policy.

All of the macroeconometric models currently in use:

Who is best known for arguing about the long and variable lags of monetary policy?

What were some of the key features in terms of fiscal policy of the Stability and Growth Pact signed in 1997 by would- be members of the Euro?

The leading macroeconometric models currently in use in Australia and the U.S.:

The existence of the time inconsistency problem in macro policy suggests which of the following?

Research suggests that the less independent the central bank:

To deal with the time inconsistency problem associated with monetary policy, some have suggested that:

Which of the following is correct about Australian output growth over the past 100 years?

Suppose a government implements rules that result in a more independent central bank. What effect do you think this more independent central bank will eventually have on money growth and inflation in that country? Explain.

Assume a country has federal elections every three years. If a political business cycle exists in this country, explain any differences in the average annual growth rates of output for each year of a typical government.

Which of the following statements is true about Australia over the past one hundred years?

Those who are concerned about balanced budget amendments typically argue that:

The idea that the economy operates like a complicated, predictable machine is an important aspect of:

Econometric models of the U.S. economy generally agree:

Analysis of U.S. budget deficits in the United States between 1990 and 2000 indicates that which of the following is primarily responsible for the reduction in the budget deficit?

Research for a number of OECD countries suggest that inflation will be lower:

Given the uncertainty about the effects of macro policy, economists generally propose that: