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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 expansionary policies are pursued to lower unemployment and interest rates.
C) Putting the Bank of Canada under control of the government may place too much pressure on
the Bank to finance federal budget deficits, thereby imparting an inflationary bias to monetary
policy.
D) All 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
The systematic and permanent differences in macroeconomic outcomes that differ by political
party are known as ____ business cycles.
A) partisan
B) electoral
C) real
D) nominal
Answer: A
Diff: 2 Type: MC Page Ref: 363
Skill: Recall
Objective List: 15.3 Describe the relationship between central bank independence and
macroeconomic performance
Advocates of Bank of Canada independence fear that subjecting the Bank to direct
government control would ____.
A) impart an anti-inflationary bias to monetary policy
B) force monetary authorities to sacrifice the long-run objective of price stability
C) make the so-called political business cycle even more pronounced
D) Both B and C 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