Deck 36: Five Debates Over Macroeconomic Policy

Question 1

As Japan shows, a disinflationary recession can potentially leave permanent scars on the economy.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

The experience of the 1990 and 2000s shows that low inflation:

A) none of the below
B) requires that the RBA be committed to a policy rule
C) requires that discretion be replaced with a rule
D) does not require that the RBA be committed to a policy rule

Answer 3

does not require that the RBA be committed to a policy rule

Question 4

Economies can be left to find their own solution.

Question 5

Policymakers trying to stabilise the economy may often do just the opposite.

Question 6

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

Question 7

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 8

The collapse of Lehman Brothers Investment Bank in the US and a worldwide recession showed that a policy rule could not possibly consider all the contingencies and specify in advance the correct policy response.

Question 9

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 10

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

Question 11

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

Question 12

There are some situations in which running a budget deficit is justifiable.

Question 13

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 14

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 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

Proponents of the tax reform targeted at increasing the saving rate believe that:

A) consumption-based taxes are the only way to do so
B) the current taxation rates on savings are a disincentive for saving
C) discouraging savings through tax on savings creates more transfer-dependency
D) all of the above are correct

Question 23

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 24

Which of the following is not the cost of inflation?

A) Menu costs
B) Tax distortions
C) Arbitrary redistributions of wealth
D) All of the above

Question 25

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 26

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 27

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

Question 28

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 29

Which of the following statements is correct?

A) The benefits of reducing inflation to zero are permanent, and the costs are temporary
B) The benefits of reducing inflation to zero are temporary, and the costs are temporary
C) The benefits of reducing inflation to zero are permanent, and the costs are permanent
D) The benefits of reducing inflation to zero are temporary, and the costs are permanent

Question 30

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 31

Since the GFC, the RBNZ has also been slow to raise its interest rates, even though the medium inflation in the 2010-2011 year was over 5 %. Why, in the light of this, may the Bank chosen to have avoided the automatic adjustment of the cash rate?

Question 32

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 33

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

Question 34

The Reserve Bank of New Zealand re-negotiated its inflation target band in 2003 from 0 per cent-3 per cent p.a. to 1 per cent-3 per cent p.a. Explain why this shift may have occurred.

Question 35

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 36

What are the costs of inflation for society?

Question 37

In 1997, the newly elected Labour government in England decided to grant much more independence to the English Central Bank (the bank was previously largely under the control of the government). Why do you think they did this?

Question 38

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