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How do political cycles influence aggregate economic activity?
Answer: We distinguish between two types of political cycles:
a. electoral business cycles: politicians maximize their popularity or their probability of re-
election by following pre-election expansionary fiscal policies in order to please the voters.
These give rise to persistent cyclical patterns of key policy and target variable across electoral
terms, regardless of the political orientation of the incumbent government.
b. partisan business cycles: systematic and permanent differences in macroeconomic outcomes
that differ by political party. In this case politicians are ideological; they represent the interests of
different pressure groups and, when in office, follow policies which are favorable to their
supporting groups.
Diff: 2 Type: SA Page Ref: 363
Skill: Recall
Objective List: 15.3 Describe the relationship between central bank independence and
macroeconomic performance
Explain two concepts of central bank independence. Is the Bank of Canada politically
independent? Why do economists think central bank independence is important?
Answer: Instrument independence is the ability of the central bank to set its instruments, and
goal independence is the ability of a central bank to set its goals. The Bank of Canada enjoys
instrument independence but not goal independence because of the "joint responsibility system."
Independence is important because there is some evidence that independent central banks pursue
lower rates of inflation without harming overall economic performance.
Diff: 3 Type: SA Page Ref: 363
Skill: Recall
Objective List: 15.3 Describe the relationship between central bank independence and
macroeconomic performance