Question

1.

During the 2008–2009 period, the conventional monetary policy response was to _____ interest rates, while the conventional fiscal policy response was to _____ taxes and to _____ government spending.
	decrease; decrease; increase increase; increase; increase increase; increase; decrease decrease; decrease; decrease

2.

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly, and both generations follow the life-cycle consumption pattern but are not altruistically linked:
	there will be a net increase in overall consumption. there will be no change in overall consumption. both the young and the old will consume more. there will be a net decrease in overall consumption.

3.

According to the traditional view of government debt, if taxes are cut without a cut in government spending, then in Canada this situation will lead to ______ net indebtedness on the part of Canada to foreign countries and ______ net exports.
	fewer; more less; fewer more; more more; fewer

4.

The effect of the financial crisis of 2008–2009 on the real economy in the United States was a(n) _____ in aggregate demand, a(n) _____ in output, and a(n) _________ in the unemployment rate.
	decrease; increase; increase decrease; decrease; decrease decrease; decrease; increase increase; increase; increase

5.

All of the following are arguments against Ricardian equivalence except consumers:
	do not expect future taxes to fall on them. make consumption decisions myopically. are rational and forward looking in consumption decisionmaking. are borrowing constrained.

6.

	Which of the following is an example of moral hazard?
	The sickest people buy health insurance. The healthiest people buy life insurance. The person with health insurance rides a motorcycle without wearing a helmet. The person with life insurance exercises daily and eats healthy foods.

7,

	If the government balances the overall budget every period I: the national debt will stay constant forever. II: the debt-to-GDP ratio will fall to zero as long as nominal GDP growth is positive.
	Neither I nor II is true. Both I and II are true. I is true; II is not. II is true; I is not.

8,

	A rule that the government must balance the cyclically adjusted budget would I: allow the government to carry on a limited countercyclical fiscal policy. II: keep the debt-to-GDP ratio from rising in the long run.
	I is true; II is not. II is true; I is not. Neither I nor II is true. Both I and II are true.

9.

.	According to the traditional view of government debt, if taxes are cut without cutting government spending, then the international effect initially will be a capital ______ and a trade ______.
	inflow; deficit outflow; surplus outflow; deficit inflow; surplus

10.

If government debt reduction by a small open economy has no effect on its interest rate I: the benefits of debt reduction follow from the fact that future generations have smaller debt service payments to foreigners. II: the benefits of debt reduction will be charged by all workers since each worker has more capital to work with.
	II is true; I is not. Both I and II are true. Neither I nor II is true. I is true; II is not.

11.

All of the following are examples of financial intermediaries except:
	stock exchanges. chartered banks. insurance companies. pension funds.

12.

Prior to the financial crisis of 2008–2009 in the United States, financial regulation in that country consisted of a _____ system of regulators, which the Dodd-Frank Act sought to improve upon by _____ the number of regulatory bodies.
	fragmented; increasing coordinated; decreasing fragmented; decreasing coordinated; increasing

Answer 1

1.During the 2008–2009 period, the conventional monetary policy response was to decrease interest rates, while the conventional fiscal policy response was to decrease taxes and to increase government spending.

Explanation- The 2008-09 period was marked by a financial crisis. In order to correct the recession, policy makers implements a lower interest rates to encourage borrowings and increase government spendings to raise the aggregate demand in the economy.

2. If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly, and both generations follow the life-cycle consumption pattern but are not altruistically linked:
There will be no change in overall consumption.

Explanation - This is because the net consumption will be zero as people tend to plan their consumptions over the course of life time, which means they will tend to save more as the income rises.

3. According to the traditional view of government debt, if taxes are cut without a cut in government spending, then in Canada this situation will lead to more  net indebtedness on the part of Canada to foreign countries and fewer net exports.

Explanation - Since the tax revenue received will be less than the government spendings, there will be an increase in net indebtedness. And due to this, the net exports will decrease.

4. The effect of the financial crisis of 2008–2009 on the real economy in the United States was a decrease in aggregate demand, a decrease in output, and an increase in the unemployment rate.
Explanation - Economic recession leads to an increase in unemployment rate owing to the fact that the aggregate demand and output has decreased.

5. All of the following are arguments against Ricardian equivalence except consumers :

are rational and forward looking in consumption decision- making.
Explanation - The Ricardian equivalence theorem suggests that all consumers are rational and forward looking while making consumption decisions.

6. Example of moral hazard -

The person with health insurance rides a motorcycle without wearing a helmet.

Explanation - Moral hazard takes place when a person behaves differently after getting an insurance. In this case, the person became more careless because he knows he has health insurance to cover for any mishaps.