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© 2014 Pearson Canada Inc.$15.6 Should the Bank of Canada Be Independent?
The political business cycle refers to the phenomenon that just before elections, politicians
enact ____ policies. After the elections, the bad effects of these policies (for example,
____ ) have to be counteracted with ____ policies.
A) expansionary; higher unemployment; contractionary
B) expansionary; a higher inflation rate; contractionary
C) contractionary; higher unemployment; expansionary
D) contractionary; a higher inflation rate; expansionary
Answer: B
Diff: 2 Type: MC Page Ref: 363
Skill: Recall
Objective List: 15.3 Describe the relationship between central bank independence and
macroeconomic performance
The case for Bank of Canada independence includes the idea that ____.
A) a politically insulated Bank of Canada would be more concerned with long-run objectives and
thus be a defender of a sound dollar and a stable price level
B) a Bank of Canada under the control of the government might make the so-called political
business cycle more pronounced
C) the principal-agent problem is perhaps worse for the Bank than for politicians since the
former does not answer to the voters on election day
D) Only A and B of the above.
Answer: D
Diff: 3 Type: MC Page Ref: 363
Skill: Recall
Objective List: 15.3 Describe the relationship between central bank independence and
macroeconomic performance
Which of the following statements concerning an independent central bank are true?
A) Politicians may prefer an independent central bank, as it can be used as a "whipping boy" or
"scapegoat" for poor economic performance.
B) Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process may generate a political business cycle, in which just before
an election contractionary policies are pursued to raise unemployment and interest rates.
C) Putting the Bank of Canada under control of the government may place too much pressure on
the Bank of Canada to finance federal budget deficits, thereby imparting an inflationary bias to
monetary policy.
D) Only A and C of the above are true statements.
Answer: D
Diff: 3 Type: MC Page Ref: 363 - 364
Skill: Recall
Objective List: 15.3 Describe the relationship between central bank independence and
macroeconomic performance