Quiz #41

• 1. Assume inflation is stable, there is excess productive capacity, and the central bank maintains its current monetary policy setting. It is then true that if government spending increases by $X dollars and private investment and exports are unchanged then nominal income will continue growing until the sum of taxation revenue, import spending and household saving rises by $X dollars.
• False
• True
• 2. The principle of opportunity cost at a macroeconomic level is violated by the existence of mass unemployment.
• False
• True
• 3. The Taylor rule sets interest rates according to the notion that the short-term real interest rate should reflect a mark-up or mark-down on the real natural interest rate. The add or subtract factors are determined by weights on the inflation and output gaps, respectively. Typically the output gap is calculated based on estimates of a natural rate of unemployment with determines the potential output level. If the natural rate of unemployment is above the true full employment level of unemployment, then the Taylor rule will always lead to deflationary monetary policy settings even when the central bank considers it is conducting a neutral policy stance.
• False
• True
• 4. The IMF frequently publishes GDP per capita figures for nations and for comparative purposes it converts the local currencies into US dollar equivalents. The measures however are misleading because they will show a nation is suffering a decline in living standards relative to other countries on this ranking if the local currency appreciates against the US dollar even if there is no change in domestic command over resources in the local currency.
• False
• True
• 5. As soon as adult individuals adopt social norms and start making decisions together which impact on each person in the group, mainstream economic theory becomes irrelevant and the competitive model of decision making and optimisation loses authority. It is only when individuals behave as psychopaths (according to the clinical diagnosis of psychologists) that the mainstream economic theory of choice has any traction at all.
• False
• True