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Chapter 39


True/False
Indicate whether the statement is true or false.
 

 1. 
All ionformation is useful to an economist in making decisions.
 

 2. 
The idea of a black swan is that events are random and so it is impossible to forecast accurately.
 

 3. 
Economists have a very good record in forecasting economic events.
 

 4. 
A structural deficit occurs where the gap between government income and expenditure is not dependent on the economic cycle.
 

 5. 
Government budget deficits tend to redistribute wealth from the current generation to future generations.
 

 6. 
Replacing the income tax with a consumption tax may increase saving, but it will tend to benefit the rich more than the poor.
 

 7. 
Fiscal consolidation could involve cuts in public spending and increases in taxes to reduce a budget deficit.
 

 8. 
The idea of structural deficit assumes an amount that governments borrow when the economy operates at trend levels..
 

 9. 
It is reasonable for a government to run a budget deficit during a recession because tax revenue is likely to fall and spending on benefits will rise automatically during such a slowdown.  .
 

 10. 
A systemic risk to the financial system refers to the effect on investment banks of a financial crisis.
 

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 11. 
In making an economic decision economic agents should:
a.
consider the value of benefits that arise as a result.
b.
none of these answers
c.
listen carefully to the views of government first.
d.
ensure all the information it has at its disposal is 100 per cent reliable.
e.
take into account the relative costs and benefits that would arise as a consequence of the decision.
 

 12. 
Economic forecasting is not perfect:
a.
so this means that any attempt to do so should be abandoned.
b.
but this does not mean no attempt should be made to make forecasts.
c.
because the information on which it is based is always inaccurate.
d.
it is only based on normative information not positive information
 

 13. 
A cyclical deficit occurs where government income and expenditure:
a.
deviate from a trend path.
b.
occur normally over the economic cycle.
c.
move in coordinated ways.
d.
increase and decrease in a predictable manner over the economic cycle.
e.
is disrupted by the normal economic cycle.
 

 14. 
The higher a government budget deficit is the more likely
a.
the risk of default on sovereign debt.
b.
economic growth is to stall.
c.
that interest rates will remain stable over the long run.
d.
the economic cycle will be predictable over a period.
e.
it is that tax rates in the country will remain low.
 

 15. 
The output gap refers to:
a.
the difference between current output and trend output
b.
the size of a structural deficit.
c.
the difference between economic growth and the level of inflation.
d.
the difference between the natural rate of unemployment and the claimant count.
 

 16. 
The size of the output gap depends on which of the following?
a.
The ease with which the unemployed can find work.
b.
The difference between consumption spending and total output.
c.
How far businesses have built up inventories during an economic slowdown.
d.
How far an economic downturn has destroyed economic capacity in a country.
 

 17. 
A government budget deficit tends to
a.
none of these answers
b.
redistribute wealth from future generations to the current generation.
c.
redistribute wealth from the current generation to future generations.
d.
have no redistributive effects.
 

 18. 
Which of the following is not true with regard to government budget deficits?
a.
Budget deficits reduce capital investment, future productivity and, therefore, future incomes.
b.
Budget deficits place the burden of current spending on future taxpayers.
c.
Budget deficits should be scrutinized because they are the only way to transfer wealth across generations of taxpayers.
d.
Budget deficits reduce national saving.
 

 19. 
Economists who argue that the government need not balance its budget make all of the following arguments except which one?
a.
Budget deficits increase future growth because they transfer wealth from the present generation to future generations.
b.
As long as the budget deficit is used to finance investment spending rather than current government spending then a budget deficit is quite acceptable.
c.
Budget deficits will not become an increasing burden as long as they do not grow more quickly than a nation's nominal income.
d.
Cutting the budget deficit means the tax burden on future generations can be lower; but if the deficit reduction is achieved by reducing spending on public services such as education then it may mean that younger generations have lower productivity, and so lower incomes, than would otherwise have been the case.
 

 20. 
Systemic risk refers of which of the following?
a.
The effect of a bank failure on shareholders
b.
The ripple effect which reduces confidence in financial markets during an economic downturn.
c.
The risk taken by traders caused by moral hazard
d.
The effect on the bond market of a sovereign debt failure.
e.
The effect on the whole banking and financial system of a financial crisis.
 

 21. 
The purpose of macroprudential policy is to
a.
regulate monitor risk taking and managing capital ratios of financial institutions.
b.
ensure that the key targets of government policy are achieved equitably.
c.
eradicate moral hazard in financial markets.
d.
prevent asset price bubbles from occurring.
 

 22. 
The idea of a bank being ‘too big to fail’ means:
a.
it has such a large asset base that its risk of failure is eliminated.
b.
banks become more risk seeking because they believe they will be rescued if they fail.
c.
a lack of competition in financial markets which increases risk aversion.
d.
a reduced likelihood of adverse selection in financial markets.
 

 23. 
Critics argue that macroprudential policy will not work because,
a.
it is not possible to separate a bank’s commercial from its investment assets.
b.
asset price bubbles occur too frequently in developed economies.
c.
the practical problems associated are too great for central banks and regulators to manage effectively.
d.
consolidation in the financial services market has meant that all banks are now too big to fail.
 

 24. 
The risk of bank failure would be more likely to be reduced if:
a.
capital asset ratios were capped for all banks regardless of size.
b.
traders were encouraged to be more risk seeking.
c.
policy makers could harmonise economic cycles across developed countries
d.
regulation on banks was reduced and their activities were left to the free market.
e.
capital asset ratios were increased.
 

 25. 
Which one of the following is not true?
a.
A black swan refers to the occurance of a random event which cannot be forecasted with any accuracy.
b.
One of the causes of the financial crisis was the mismatch between leverage and liquidity in financial markets.
c.
A balanced budget would eliminate macroeconomic problems in the short run.
d.
The output gap is a factor influencing the size of a structural deficit – assuming suich a deficit exists.
e.
When a country experiences an economic recovery, tax receipts generally rise and budget deficits shrink.
 



 
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