QUESTION 1

Under the optimal monetary policy, the central bank should let the nominal interest rate

a.rise when the inflation gap rises and decline when the output gap rises.

b.decline when the inflation gap rises and rise when the output gap rises.

c.decline when the inflation gap or the output gap rises.

d.rise when the inflation gap or the output gap rises.

e.rise only when the inflation gap rises.

6 points

QUESTION 2

https://blogs.imf.org/2018/06/27/economic-preparedness-the-need-for-fiscal-space/

In macroeconomics, fiscal space is defined as "the amount of room countries have for temporarily increasing their budget deficits without jeopardizing their access to markets or the sustainability of their debt." (Vikram Haksar, Marialuz Moreno-Badia, Catherine Pattillo, and Murtaza Syed, "Economic Preparedness: The Need for Fiscal Space," IMF Blog, June 27, 2018.) Which one of the following statements is correct about the relationship between fiscal space and optimal fiscal policy?

a.A pre-requisite for pursuing optimal fiscal policy is the presence of significant fiscal space.

b.A pre-requisite for pursuing optimal fiscal policy is the absence of significant fiscal space.

c.Pursuit of optimal fiscal policy requires the government to give up its fiscal space.

d.Pursuit of optimal fiscal policy does not require much fiscal space.

6 points

QUESTION 3

Under the optimal fiscal policy, when the economy booms as a result of a temporary favorable demand shock, the government's budget deficit

a.should increase to take advantage of the fiscal space created by the growing economy.

b.should increase to help create more fiscal space for the situation when the boom ends.

c.should decrease to help expand the country's fiscal space in the post-boom situation.

d.should decrease to help curtail the country's fiscal space in the post-boom situation.

6 points

QUESTION 4

Under the optimal fiscal policy, public debt ought to

a.rise when the society's need for government expenditure rises.

b.rise when the society's need for government expenditure declines.

c.remain steady when the society's need for government expenditure rises.

d.rise when the society's need for government expenditure remains steady.

e.decline when the society's need for government expenditure remains steady.

6 points

QUESTION 5

Suppose a government receives a stream of revenues from a natural resource and combines it with optimal fiscal (tax and expenditure) policy to manage its economy. Then, in a given year it suffers an unexpected, exogenous revenue loss from the natural resource, but expects the shock to be temporary and the revenue stream to recover in the following years. The theory of optimal fiscal policy suggests that it should deal with such shock by

a.raising tax rates to compensate for the drop in revenues in that year.

b.reducing government expenditure to match the drop in revenues in that year.

c.reducing tax rates to encourage production and generate additional revenues in that year.

d.borrowing long term to make up for the drop in revenues and paying off the debt gradually by small fiscal adjustments, if necessary, over many years.

6 points

QUESTION 6

In many developing countries fiscal deficits tend to rise during election years. Which one of the following is a more likely explanation for this pattern?

a.Elections are typically scheduled during economic slowdowns when tax revenues decline.

b.The public does not realize that high deficits could eventually cause macroeconomic instability and always demands high fiscal deficits, but incumbent politicians know the problem and resist that demand due to their public spirit, except when they face the challenge of reelections.

c.Incumbent politicians understand that persistent deficits could cause macroeconomic instability and turn the public against them, but they are tempted to spend more and prop up employment and incomes of pivotal voter groups, thus buying their support at election times.

d.Incumbent politicians tend to pay back the government debt at the end of their terms before elections so that the next government that takes office after the election can start with a clean slate.

e.Incumbent politicians want to generate support for themselves among people who save large parts of their incomes by getting the government to act as a safe borrower of those savings.

6 points

QUESTION 7

Some discretion in monetary policy is socially desirable because

a.there is a need to adjust policy according to specific situations when the range of possible circumstances is complex.

b.the ability of policymakers to change policies at will is necessary to make the political system responsive to the voters' demands.

c.investment would always be higher if the public expects the central bank to deviate from its announced policies.

d.fiscal policy is discretionary and must be counterbalanced by discretion in monetary policy.

e.all of the above.

6 points

QUESTION 8

Independent central banks are run by professionals who are appointed by the elected officials. Once appointed, those professionals cannot be removed from office without cause before the end of their tenures, which are sufficiently long to go well beyond the terms of the elected officials. Which one of following isnota social advantage of delegating monetary policy to the professionals running an independent central bank when compared to keeping it under the control of elected politicians?

a.The professionals running an independent central bank are more likely to be responsive to the demands of the public.

b.The professionals running an independent central bank are likely to have more expertise in managing monetary policy.

c.The professionals running an independent central bank are less likely to manipulate monetary policy as a means of gaining political advantage in elections.

d.The professionals running an independent central bank are less likely to monetize government deficits as a way of expanding fiscal policy without a need for public borrowing.

e.The professionals running an independent central bank are likely to conduct monetary policy with longer time horizons in mind.

6 points

QUESTION 9

In countries where government budget is determined by the representatives of various interest groups in the cabinet or in the legislature, fiscal policy may suffer from the "tragedy of the commons" because

a.the budget needs to be approved in the House of Commons.

b.the representatives of interest groups work against the interests of common people.

c.the individual representatives have an incentive to vote for excess expenditures and tax cuts that benefit their constituencies at the cost of the economy as a whole.

d.the individual representatives have an incentive to vote for expenditure reductions and tax increases that hurt everyone in the economy.

6 points

QUESTION 10

When the COVID-19 pandemic hit the U.S. population in 2020, the economy entered a very deep recession that had to be countered by major fiscal and monetary policy responses. Which one of the following frameworks would have offered an optimal macroeconomic policy to follow in that situation?

a.Balanced budget laws.

b.Fiscal golden rule.

c.Constant growth rate rule for money supply.

d.Currency board with a fixed exchange rate.

e.None of the above.