Deck 12: Macroeconomic Policy Revisited

Question 1

During the last two decades,Canada has experienced all of the following,except one.Which is the exception?

A)Robust economic growth
B)A steady predictable exchange rate
C)Low inflation rates
D)Low interest rates

Answer 1

A steady predictable exchange rate

Question 2

What is the crowding-out effect?

A)The idea that when a government borrows to finance a deficit,it crowds out private investment because it causes interest rates to fall
B)The idea that when a government borrows to finance a deficit,it crowds out private investment because it causes interest rates to rise
C)The idea that fiscal policy crowds out economic growth
D)The idea that balanced budgets crowd out economic growth

Answer 2

The idea that when a government borrows to finance a deficit,it crowds out private investment because it causes interest rates to rise

Question 3

Stagflation is the simultaneous occurrence of both:

A)A recession and deflation.
B)A recession and inflation.
C)Inflation and rapid growth in GDP.
D)Recession and rapid growth in GDP.

Answer 3

A recession and inflation.

Question 4

Which one of the following represents one of the basic problems illustrated by the Phillips curve?

A)That the inflation rate tends to decrease as the economy moves closer to full employment
B)That the inflation rate tends to increase as the economy moves closer to full employment
C)That the unemployment rate tends to decrease as the economy moves toward price stability
D)That high levels of unemployment tend to accompany high rates of inflation

Question 5

All of the following,except one,would cause the aggregate demand curve to shift to the right.Which is the exception?

A)An increase in taxes
B)An increase in government spending on goods and services
C)An increase in the money supply
D)A decrease in the exchange rate

Question 6

Which of the following would neutralize the crowding-out effect?

A)An increase in tax rates
B)An increase in the money supply
C)An increase in money demand
D)A decrease in the money supply

Question 7

The problem portrayed by the short-run Phillips curve is that:

A)unemployment tends to increase when prices are rising.
B)changes in the composition of the labor force tend to increase the natural rate of unemployment.
C)inflation tends to increase when unemployment falls.
D)stagflation is unavoidable.

Question 8

The Phillips Curve suggests that,if government uses an expansionary fiscal policy to stimulate output and employment:

A)unemployment may actually increase because of the crowding-out effect.
B)tax revenues may increase even though tax rates have been reduced.
C)inflation may result.
D)the natural rate of unemployment may fall.

Question 9

What is the result of contractionary fiscal and monetary policies if an economy is suffering stagflation?

A)Unemployment may be cured but at the cost of higher inflation.
B)Inflation may be cured but at the cost of higher unemployment.
C)It will increase the levels of both unemployment and inflation.
D)It will decrease the levels of both unemployment and inflation.

Question 10

The Phillips Curve suggests a tradeoff between:

A)price level stability and income equality.
B)the level of unemployment and price level stability.
C)unemployment and income equality.
D)economic growth and full employment.

Question 11

What characterized the economic conditions in Canada from 1990-2008?

A)Low inflation and steady economic growth
B)Stagflation
C)Rising levels of unemployment but low inflation
D)Low unemployment and high inflation.

Question 12

What is the result of expansionary fiscal and monetary policies if an economy is suffering stagflation?

A)Unemployment may be cured but at the cost of higher inflation.
B)Inflation may be cured but at the cost of higher unemployment.
C)It will increase the levels of both unemployment and inflation.
D)It will decrease the levels of both unemployment and inflation.

Question 13

According to supply-siders,what is one of the keys to curbing stagflation?

A)An increase in the money supply and a cut in government spending
B)A decrease in the money supply and an increase in government spending.
C)An increase in aggregate demand
D)Convincing people to buy domestic rather than foreign-produced goods
E)A cut in tax rates

Question 14

The crowding-out effect of expansionary fiscal policy suggests that:

A)government spending increases at the expense of private investment.
B)imports replace domestic production.
C)private investment increases at the expense of government spending.
D)saving increases at the expense of investment.

Question 15

Stagflation is the simultaneous occurrence of both

A)A recession and deflation
B)A recession and inflation
C)Inflation and rapid growth in GDP
D)Recession and rapid growth in GDP

Question 16

Which of the following best explains the Phillips curve relationship?

A)Inflation increases at a faster rate as the economy moves toward full employment.
B)Unemployment falls as the economy moves toward full employment.
C)Inflation decreases as the economy moves closer to full employment.
D)As unemployment decreases,so does the rate of inflation.

Question 17

Why have fiscal and monetary policies been criticized as tools to fight stagflation?

A)Because they are able to cure unemployment but not inflation.
B)Because they are able to cure inflation but not unemployment.
C)Because they are unable to cure either unemployment or inflation.
D)Because they are unable to cure both unemployment and inflation at the same time.

Question 18

Refer to the above diagram for a specific economy.Which of the following best describes the relationship shown by this curve?

A)The demand for labor is large when the rate of inflation is small.
B)When the rate of unemployment is high,the rate of inflation is high.
C)The rate of inflation and the rate of unemployment are inversely related.
D)The rate of inflation and the rate of unemployment are directly related.

Question 19

Select the answer that correctly completes this sentence: "The Phillips curve shows the relationship between:

A)the rate of change in the price level and the unemployment rate."
B)the rate of change in the price level and the level of real output produced."
C)the unemployment rate and real income."
D)the price level and the level of unemployment."

Question 20

What is the name of the curve shown in Figure 12.7 above?

A)Phillips curve
B)Aggregate supply curve
C)Laffer curve
D)Production possibilities curve

Question 21

An increase in government spending can result in crowding-out.Which of the following is a correct statement of the process?

A)It leads to a decrease in savings,which leads to a decrease in investment spending.
B)It leads to an increase in money supply,which pushes interest rates up and causes a decrease in investment spending.
C)It causes bond prices to increase,which pushes interest rates up and leads to a decrease in investment spending.
D)It increases the price level and the demand for money,which causes interest rates to increase and investment spending to decrease.
E)It leads to an increase in GDP and in savings,which increases investment spending

Question 22

All of the following,except one,were policies supported by the supply-siders.Which is the exception?

A)Privatization of Canada's crown corporations
B)Contracting out of government services
C)Government closing down labour retraining centres
D)Deregulation of government involvement in the economy
E)Reducing taxes

Question 23

Refer to the above information to answer this question.What would be the name of the curve illustrating the relationship between these two rates?

A)The Phillips Curve.
B)The aggregate supply curve.
C)The Laffer Curve.
D)The production possibilities curve.
E)The wage rate-inflation curve.

Question 24

Based on the Laffer Curve,a cut in the tax rate from 100 percent to a point before the maximum level of tax revenue will:

A)decrease real GDP.
B)increase tax revenues.
C)decrease tax revenues.
D)have no effect on tax revenues.

Question 25

What is the most serious criticism of anti-inflationary monetary policy?

A)Monetary policy is probably ineffective in fighting inflation.
B)Overemphasis on controlling inflation comes at the expense of the equally valid goals of low unemployment and economic growth.
C)Maintaining internal price stability means losing control of the exchange rate.
D)It leads to interest rates being far too low.

Question 26

Why,according to some economists,should Canada adopt the U.S.dollar as its currency?

A)Because it would maximize foreign long-term investment in Canada
B)Because it would enhance the Bank of Canada's monetary policy
C)Because it would eliminate the need for active fiscal policy
D)Because it would eliminate inflation

Question 27

What effect does expansionary monetary policy have on the interest rate and the (flexible)exchange rate?

A)The interest rate will fall,and exchange rate will rise.
B)The interest rate will fall,and exchange rate will fall.
C)The interest rate will rise,and exchange rate will rise.
D)The interest rate will rise,and exchange rate will fall.

Question 28

What does the Laffer curve relate?

A)Tax rates and tax revenue.
B)Tax rates and GDP.
C)Tax revenue and government budgets.
D)Unemployment and inflation rates.
E)Spending and income.

Question 29

What does "monetizing the debt" involve?

A)Government selling bonds to the general public
B)Government selling bonds to the Bank of Canada
C)The Bank of Canada selling bonds to government
D)The Bank of Canada selling bonds to the general public

Question 30

The Laffer Curve is a central concept in:

A)monetarism.
B)Keynesianism.
C)the expectation theory.
D)supply-side economics.

Question 31

If Canadian policy-makers wish to maintain the value of the dollar relative to the U.S.dollar,what should they do?

A)Keep the money supply constant
B)Continually adjust the money supply to keep interest rates in line with American rates
C)Increase the money supply whenever the U.S.dollar starts to appreciate against the Canadian dollar
D)Purchase American dollars

Question 32

Which of the following is an argument of Arthur Laffer,the supply-side economist?

A)That present tax rates are too high but a cut in tax rates will lead to a drop in tax revenues.
B)That present tax rates are too low and should be increased.
C)That an increase in tax rates will force people to work harder.
D)That a cut in tax rates will lead to higher tax revenues.

Question 33

Which one of the following is true about deflation?

A)It is associated with stagflation.
B)It occurs whenever an inflationary gap gets large enough.
C)It precedes periods of high investment.
D)It is a period of decreases in the general price level.

Question 34

Graphically,what is necessary for an economy to escape the grips of stagflation?

A)Shift the AD curve to the right
B)Shift the AD curve to the left
C)Shift the AS curve to the right
D)Shift the AS curve to the left

Question 35

Over the last 20 years,Canada's inflation has been,

A)more than 4%
B)less than 5%
C)less than 2%
D)less than 3%

Question 36

Suppose that government wishes to affect the level of aggregate demand in the economy.All of the following,except one,are consistent policy measures.Which is the exception?

A)A tax increase and an increase in money supply
B)A tax reduction and an increase in money supply
C)An increase in government spending and an increase in money supply
D)A decrease in government spending and a decrease in money supply.

Question 37

The curve in the figure above is known as the:

A)tax "wedge" curve.
B)Okun Curve.
C)Laffer Curve.
D)Phillips Curve.

Question 38

Stagflation in North American economies during the 1970s was triggered by what event?

A)OPEC-induced oil price increases
B)A far too rapid increase in the money supply in both of the countries
C)The Vietnam war
D)Excessive government budget deficits

Question 39

Prominent supply-side economist Arthur Laffer has argued that:

A)there is no empirically proven relationship between tax rates and incentives.
B)large reductions in personal and corporate income taxes will increase aggregate supply much more than aggregate demand.
C)the only way to eliminate stagflation is to increase taxes to induce a recession severe enough to eliminate inflationary expectations.
D)large cuts in personal and corporate income taxes will increase aggregate demand more than aggregate supply.

Question 40

The above diagram describes the notion that as tax:

A)revenues increase from zero to 100 percent,tax rates will increase from zero to some maximum level and then decline to zero.
B)rates increase from zero to 100 percent,tax revenue will increase from zero to some maximum level and decline to zero.
C)rates decrease from 100 to zero percent,tax revenue will decrease from 100 percent to a maximum level.
D)rates increase from zero to 100 percent,tax revenue will increase from zero to a maximum level.

Question 41

The financing of a government deficit increases interest rates and,as a result,reduces investment spending.This statement describes:

A)the supply-side effects of fiscal policy.
B)built-in stability.
C)the crowding-out effect.
D)the net export effect.

Question 42

The Laffer curve relates income levels with unemployment rates.

Question 43

The crowding-out effect of expansionary fiscal policy suggests that:

A)tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
B)increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
C)it is very difficult to have excessive aggregate spending in the U.S.economy.
D)consumer and investment spending always vary inversely.

Question 44

Which of the following statements regarding monetary policy is true?

A)Monetary policy is ineffective if a country has a fixed exchange rate.
B)Monetary policy is more effective if a country has a fixed exchange rate rather than a flexible exchange rate.
C)Monetary policy is equally effective whether a country has a fixed or a flexible exchange rate.
D)Monetary policy is very effective if a country has a fixed exchange rate in times of a recession but not during an inflationary boom.

Question 45

One of the major criticisms of the supply-side emphasis on tax cuts as a way to stimulate the economy is that such cuts affect aggregate demand more than they do aggregate supply.

Question 46

The Phillips curve is based on the relationship between tax rates and the amount of tax revenue.

Question 47

Deflation is:

A)a fall in overall prices.
B)the same thing as a devaluation of the Hong Kong dollar.
C)the same thing as a depreciation of the Hong Kong dollar.
D)a change in the price structure.

Question 48

All of the following statements about deflation,except one,are true.Which is the exception?

A)It is characterized by interest rates at zero or near zero.
B)Apart from one year,it has not occurred in Canada since the Great Depression.
C)It means that a return on idle money is possible.
D)It encourages consumers to postpone major purchases.
E)It encourages large-scale investment in the economy.

Question 49

When is monetary policy least effective?

A)With fixed exchange rates.
B)With a gold parity exchange rate.
C)With flexible exchange rates.
D)With a managed exchange rate.

Question 50

The most common way for government to fund expansionary fiscal policy is by borrowing from the general public.

Question 51

Deflation is a problem for all of the following reasons except it:

A)is often associated with large falls in asset prices.
B)may prevent a central bank from lowering the real interest rate as much as it would like.
C)can undermine a country's financial system.
D)can lead to excessive increases in aggregate demand.

Question 52

Expansionary fiscal policy may crowd out both private investment and export spending.

Question 53

Aggregate demand policies are effective in curing the problems of stagflation.

Question 54

Why would Canadian monetary policy be ineffective if we fixed the value of our dollar to that of the U.S.dollar?

A)Expanding the money supply in Canada would crowd out investment spending.
B)Contracting the money supply in Canada would crowd out investment spending.
C)Expanding the money supply in Canada would cause a rise in interest rates and an outflow of Canadian dollars and thereby frustrate the money expansion.
D)Expanding the money supply in Canada would cause a fall in interest rates and an outflow of Canadian dollars and thereby frustrate the money\expansion.

Question 55

Under what circumstances will monetary policy be most effective?

A)An economy closed to international trade.
B)An open economy with a fixed exchange rate.
C)An open economy with a flexible exchange rate.
D)An open economy with a managed float.

Question 56

Monetary policy cannot be used effectively when a country has a fixed exchange rate.

Question 57

Which of the following is an element of supply side policies?

A)The privatization of crown corporations.
B)The deregulation of industry.
C)The contracting-out of government services.
D)The reduction of tax rates.
E)The privatization of crown corporations,the deregulation of industry,the contracting-out of government services,and the reduction of tax rates.

Question 58

Refer to the above diagrams.Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD₁ to AD₂ and thereby to increase GDP from X to Z.In terms of graph B,which of the following might explain why GDP increases to Y rather than to Z?

A)depreciation of the dollar.
B)reduction in tariffs imposed by our trading partners.
C)decrease in the saving schedule.
D)crowding-out effect.

Question 59

Refer to the graph above to answer this question.Which statement is true of the shift from AS₂ to AS₁?

A)It could be caused by a tax cut.
B)It illustrates stagflation.
C)It would cause real GDP to rise.
D)It illustrates economic growth.
E)It could be a result of counter-cyclical monetary policy.

Question 60

If counter-cyclical fiscal policy causes crowding-out,which of the following statements is correct?

A)Crowding-out increases the effectiveness of fiscal policy by pushing up interest rates and reducing investment spending.
B)Crowding-out reduces the effectiveness of fiscal policy by pushing up interest rates and reducing investment spending.
C)Crowding-out reduces the effectiveness of fiscal policy by lowering interest rates and reducing investment spending.
D)Crowding-out enhances the effectiveness of fiscal policy by lowering interest rates and increasing investment spending.
E)Crowding-out reduces money demand and thereby reduces the effectiveness of fiscal policy.

Question 61

Deflation means that the rate of inflation is falling.

Question 62

The Canadian dollar has not fallen below $0.80 U.S.for over twenty years.

Question 63

The rise of supply-side economics is rooted in the stagflation of the 1970s.