Lec21 iC Questions Flashcards
The Bank of Canada estimates the current output gap at -0.75% and the neutral real interest rates at 0.75%. The target for the overnight interest rate is 2.75%. According to the policy rule of thumb, what must be the Bank of Canada’s inflation expectation for this rate to be “correct”?
Overnight Rate - Inflation = Neutral Rate + 0.5(Inflation - 2%) + Output Gap
2.75 - Inflation = 0.75 + 0.5(Inflation-2) -0.75
2.75 - Inflation = 0.5Inflation - 1
3.75 - Inflation = 0.5Inflation
3.75 = 1.5*Inflation
Inflation = 2.5%
Which of the following events would be most likely to cause the Bank of Canada to raise interest rates?
a) A decrease in investment optimism
b) A decrease in the corporate tax rate
c) A decrease in personal tax rates
d) A decrease in government spending
e) None of the above
b) A decrease in the corporate tax rate
c) A decrease in personal tax rates
Consider the loanable funds model. If the government budget deficit increases, then:
a) Interest rates fall and investment increases
b) Interest rates fall and investment falls
c) Interest rates rise and investment increases
d) Interest rates rise and investment falls
e) None of the above
d) Interest rates rise and investment falls
If business optimism falls, and the government responds with fiscal policy to maintain initial levels of GDP and employment, which of the following would be an option?
a) Reducing interest rates
b) Reducing transfer payments to households
c) Reducing personal tax rates
d) Reducing government purchases
e) None of the above
c) Reducing personal tax rates
The federal government is removing the carbon tax (and the opposition has promised to as well). In the AD/AS model, the effect of this change will be to:
a) Decrease prices and GDP
b) Decrease prices and increase GDP
c) Increase prices and decrease GDP
d) Increase prices and GDP
e) None of the above
b) Decrease prices and increase GDP
e) None of the above
The government (and the opposition) are promising to reduce tax rates on the lowest income bracket covering people making up to (roughly) $57,000 per year. All else equal, in the AD/AS model, this would cause:
a) AD curve to shift left
b) AD curve to shift right
c) AS curve to shift left
d) AS curve to shift right
e) None of the above
b) AD curve to shift right
If a government wanted to reduce poverty in Canada, they should focus on policies to:
a) Reduce corporate tax rates
b) Increase social insurance
c) Increase social assistance
d) Increase tax expenditures
e) None of the above
c) Increase social assistance
Consider the IS-MP-PC model. Which of the following shifts the IS curve to the right?
a) A tax deduction on fees for children’s sports
b) A reduction in the income tax rate for low-income Canadians
c) A reduction in the corporate tax rate
d) An increase in provincial government spending on education
e) All of the above
e) All of the above
