Question

21.   Which of the following is one reason for the existence of policy lags?

a.	Government experts are slow in figuring out what is going on.
b.	Households and firms plan their spending in advance and therefore are slow in responding to changes in interest rates.
c.	It is impossible to build an accurate model of the economy.
d.	It is difficult for the Bank of Canada to change the bank rate.

22.   What does the time inconsistency of policy imply?

a.	It implies that what policymakers say they will do is generally what they will do, but people don't believe them because of current policy.
b.	It implies that when people expect that inflation will be low, it is harder for the Bank of Canada to increase output by increasing the money supply.
c.	It implies that people will believe the Bank of Canada policy will be more inflationary than the Bank of Canada claims.
d.	It implies that the Bank of Canada coordinates its actions with elected officials.

23.   Suppose people in countries that have had persistently high inflation are sceptical about efforts to reduce inflation. What will happen to the short-run Phillips curve and the sacrifice ratio?

a.	The short-run Phillips curve remains to the left, and the sacrifice ratio will be low.
b.	The short-run Phillips curve remains to the left, and the sacrifice ratio will be high.
c.	The short-run Phillips curve remains to the right, and the sacrifice ratio will be low.
d.	The short-run Phillips curve remains to the right, and the sacrifice ratio will be high.

24.   Which of the following statements is consistent with the political business cycle theory?

a.	The economy expands after the elections.
b.	The economy contracts after the elections.
c.	The economy expands before the elections.
d.	The economy contracts before the elections.

Answer 1

21. Ans(b): Households and firms plan their spending in advance and therefore are slow in responding to changes in interest rates.

22. Ans(a): It implies that what policymakers say they will do is generally what they will do, but people don't believe them because of current policy.

23. Ans(d): The short-run Phillips curve remains to the right, and the sacrifice ratio will be high.

24. And(c): The economy expands before the elections.