Question 1

Let d be the percentage change in government debt,g the rate of growth in real GDP,RGDP the real GDP,NGDP the nominal GDP,P the price level,and ð the inflation rate.Let G[X] denote the growth rate in variable X,which is the same thing as the percentage change in X; thus,G[X] = (X2 - X1) / X1 ×100% for small changes in X.Here are two properties of the growth rate operator G: (i)G[X×Y] = G[X] + G[Y],and (ii)G[X / Y] = G[X] - G[Y].
a.Show that the growth rate in NGDP is equal to g + ð,where g is the real GDP growth rate and ð is the inflation rate.
b.Show that d is equal to (Deficit / Debt)× 100%.
c.Show that the percentage change in the Debt / NGDP ratio is equal to d - (g + ð).
d.Show that the condition for the Debt to NGDP ratio not to increase is d = g + ð.

Accepted Answer

a.Using the growth rate operator G,the g...

Question 2

Explain the main argument in favour of economic stabilization.

Accepted Answer

Fluctuations in the economy-recessions a...

Question 3

When the government has a deficit,it necessarily imposes a burden on future generations of taxpayers.

Accepted Answer

A) True 
 B)False

Question 4

Some studies have found that saving is not very sensitive to the rate of return on saving.

Accepted Answer

A) True 
 B)False

Question 5

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.The interest rate is 10 percent.To stimulate savings in retirement plans,suppose the interest income is not taxed until it is realized (the money is effectively withdrawn from the account.)To simplify,suppose that,when she is 70,our worker withdraws the entire amount in her account.How much will she receive if the tax on interest is 40 percent?

Accepted Answer

If interest is not taxed until realized,...

Question 6

Some countries have had high inflation for a long time.Others have had low or moderate inflation for a long time.Which statement,at least in theory,could explain why some countries would continue to have high inflation?

Accepted Answer

A)   High-inflation countries have relatively small sacrifice ratios and so see no need to reduce inflation.
B)   Inflation reduction works best when it is unexpected,and people in high-inflation countries would quickly anticipate any change in monetary policy.
C)   In a country where inflation has been high for a long time,people are likely to have found ways to limit the costs.
D)   Persistently low inflation has costs in terms of high unemployment.E) A) and B)
F) A) and C)

Question 7

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Accepted Answer

A) True 
 B)False

Question 8

Suppose that at the start of fiscal year 2015 the government had a debt of $6060 billion.Suppose that during the same fiscal year,real GDP grew by about 3 percent and inflation was about 2 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)   about $122 billion
B)   about $184 billion
C)   about $243 billion
D)   about $303 billionE) B) and D)
F) None of the above

Question 9

Suppose aggregate demand fell.In order to stabilize the economy,what might the government do?

Accepted Answer

A)   increase the interest rate
B)   decrease the money supply
C)   increase government spending
D)   decrease the government expendituresE) C) and D)
F) All of the above

Question 10

Identify three of the five costs of inflation.

Accepted Answer

There are several costs of inflation,inc...

Question 11

In general,what is the longest lag for fiscal and monetary policy?

Accepted Answer

A)   For both fiscal and monetary policy,it is the time it takes to change policy.
B)   For both fiscal and monetary policy,it is the time it takes for policy to affect aggregate demand.
C)   For monetary policy,it is the time it takes to change policy,while for fiscal policy the longest lag is the time it takes for policy to affect aggregate demand.
D)   For fiscal policy,it is the time it takes to change policy,while for monetary policy the longest lag is the time it takes for policy to affect aggregate demand.E) All of the above
F) B) and C)

Question 12

If the Canadian government went from a budget deficit to a budget surplus,what would we expect to happen to interest rates and investment?

Accepted Answer

A)   an increase in interest rates and an increase in investment
B)   an increase in interest rates and a decrease in investment
C)   a decrease in interest rates and a decrease in investment
D)   a decrease in interest rates and an increase in investmentE) A) and C)
F) C) and D)

Question 13

Suppose that a central bank is required to follow a monetary policy rule to stabilize prices.If the economy starts at long-run equilibrium and then aggregate demand shifts right,what should the central bank do,and what will happen to output?

Accepted Answer

A)   The central bank should increase the money supply,which causes output to move closer to its long-run equilibrium.
B)   The central bank should increase the money supply,which causes output to move farther from its long-run equilibrium.
C)   The central bank should decrease the money supply,which causes output to move closer to its long-run equilibrium.
D)   The central bank should decrease the money supply,which causes output to move farther from its long-run equilibrium.E) B) and D)
F) A) and C)

Question 14

Why are deficits undesirable?

Accepted Answer

A)   They reduce future output.
B)   They reduce future consumption.
C)   They increase inflation.
D)   They increase unemployment.E) A) and C)
F) All of the above

Question 15

Why is accountability for monetary policy choices (as opposed to giving policymakers undisciplined discretion) important?

Accepted Answer

A)   Monetary policy has a large and lasting influence on aggregate demand and therefore on employment and income.
B)   Elected policymakers can benefit from manipulating monetary policy.
C)   Monetary policy announcements will be more credible.
D)   Countries with the most independent central banks tend to have the highest rates of inflation.E) None of the above
F) C) and D)

Question 16

How would a permanent reduction in inflation impact menu costs and unemployment?

Accepted Answer

A)   It would permanently reduce menu costs and permanently lower unemployment.
B)   It would permanently reduce menu costs and temporarily raise unemployment.
C)   It would temporarily reduce menu costs and temporarily lower unemployment.
D)   It would temporarily reduce menu costs and temporarily raise unemployment.E) B) and C)
F) A) and D)

Question 17

The theory of a flat short-run aggregate-supply curve implies that an increase in money supply should increase output and employment,while the price level should increase at a slow pace.
a.Why does output increase sometimes much slowly than this theory might predict?
b.How would low inflation hinder economic growth?

Accepted Answer

a.The theory's prediction is based on tw...

Question 18

What could the government do to decrease the costs of inflation without lowering the inflation rate?

Accepted Answer

A)   avoid unexpected changes in the inflation rate
B)   rewrite the tax laws so that nominal gains were taxed instead of real gains
C)   make policy that would discourage firms from issuing indexed bonds
D)   pass legislation to discourage inflation-adjusted work contractsE) A) and B)
F) None of the above

Question 19

Suppose that at the start of fiscal year 2015 the government had a debt of $6220 billion.Suppose that during the same fiscal year,real GDP grew by about 3 percent and inflation was about 1 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Accepted Answer

A)   about $122 billion
B)   about $184 billion
C)   about $249 billion
D)   about $375 billionE) B) and D)
F) B) and C)

Question 20

What would those who desire that policymakers stabilize the economy advocate when aggregate demand is insufficient to ensure full employment?

Accepted Answer

A)   decreasing the money supply
B)   decreasing taxes
C)   decreasing government expenditures
D)   decreasing government deficitE) A) and D)
F) B) and C)

Exam 17: Five Debates Over Macroeconomic Policy

When the government has a deficit,it necessarily imposes a burden on future generations of taxpayers.

Correct Answer
verified

Suppose that at the start of fiscal year 2015 the government had a debt of $6220 billion.Suppose that during the same fiscal year,real GDP grew by about 3 percent and inflation was about 1 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct Answer
verified

Some studies have found that saving is not very sensitive to the rate of return on saving.

Correct Answer
verified

Correct Answer
verified
a.The theory's prediction is based on tw...
View Answer

In general,what is the longest lag for fiscal and monetary policy?

Correct Answer
verified

If the Canadian government went from a budget deficit to a budget surplus,what would we expect to happen to interest rates and investment?

Correct Answer
verified

Correct Answer
verified
If interest is not taxed until realized,...
View Answer

Why is accountability for monetary policy choices (as opposed to giving policymakers undisciplined discretion) important?

Correct Answer
verified

Some countries have had high inflation for a long time.Others have had low or moderate inflation for a long time.Which statement,at least in theory,could explain why some countries would continue to have high inflation?

Correct Answer
verified

Suppose aggregate demand fell.In order to stabilize the economy,what might the government do?

Correct Answer
verified

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Correct Answer
verified

Identify three of the five costs of inflation.

Correct Answer
verified
There are several costs of inflation,inc...
View Answer

Explain the main argument in favour of economic stabilization.

Correct Answer
verified
Fluctuations in the economy-recessions a...
View Answer

Suppose that at the start of fiscal year 2015 the government had a debt of $6060 billion.Suppose that during the same fiscal year,real GDP grew by about 3 percent and inflation was about 2 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct Answer
verified

What could the government do to decrease the costs of inflation without lowering the inflation rate?

Correct Answer
verified

How would a permanent reduction in inflation impact menu costs and unemployment?

Correct Answer
verified

Correct Answer
verified
a.Using the growth rate operator G,the g...
View Answer

What would those who desire that policymakers stabilize the economy advocate when aggregate demand is insufficient to ensure full employment?

Correct Answer
verified

Why are deficits undesirable?

Correct Answer
verified

Suppose that a central bank is required to follow a monetary policy rule to stabilize prices.If the economy starts at long-run equilibrium and then aggregate demand shifts right,what should the central bank do,and what will happen to output?

Correct Answer
verified

Exam 17: Five Debates Over Macroeconomic Policy

When the government has a deficit,it necessarily imposes a burden on future generations of taxpayers.

Correct AnswerverifiedShow Answer

Suppose that at the start of fiscal year 2015 the government had a debt of $6220 billion.Suppose that during the same fiscal year,real GDP grew by about 3 percent and inflation was about 1 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct AnswerverifiedShow Answer

Some studies have found that saving is not very sensitive to the rate of return on saving.

Correct AnswerverifiedShow Answer

Correct Answerverifieda.The theory's prediction is based on tw...View AnswerShow Answer

In general,what is the longest lag for fiscal and monetary policy?

Correct AnswerverifiedShow Answer

If the Canadian government went from a budget deficit to a budget surplus,what would we expect to happen to interest rates and investment?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedIf interest is not taxed until realized,...View AnswerShow Answer

Why is accountability for monetary policy choices (as opposed to giving policymakers undisciplined discretion) important?

Correct AnswerverifiedShow Answer

Some countries have had high inflation for a long time.Others have had low or moderate inflation for a long time.Which statement,at least in theory,could explain why some countries would continue to have high inflation?

Correct AnswerverifiedShow Answer

Suppose aggregate demand fell.In order to stabilize the economy,what might the government do?

Correct AnswerverifiedShow Answer

A "lean against the wind" policy says the government should not use stabilization policy and simply let the economy "weather the storm."

Correct AnswerverifiedShow Answer

Identify three of the five costs of inflation.

Correct AnswerverifiedThere are several costs of inflation,inc...View AnswerShow Answer

Explain the main argument in favour of economic stabilization.

Correct AnswerverifiedFluctuations in the economy-recessions a...View AnswerShow Answer

Suppose that at the start of fiscal year 2015 the government had a debt of $6060 billion.Suppose that during the same fiscal year,real GDP grew by about 3 percent and inflation was about 2 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Correct AnswerverifiedShow Answer

What could the government do to decrease the costs of inflation without lowering the inflation rate?

Correct AnswerverifiedShow Answer

How would a permanent reduction in inflation impact menu costs and unemployment?

Correct AnswerverifiedShow Answer

Correct Answerverifieda.Using the growth rate operator G,the g...View AnswerShow Answer

What would those who desire that policymakers stabilize the economy advocate when aggregate demand is insufficient to ensure full employment?

Correct AnswerverifiedShow Answer

Why are deficits undesirable?

Correct AnswerverifiedShow Answer

Suppose that a central bank is required to follow a monetary policy rule to stabilize prices.If the economy starts at long-run equilibrium and then aggregate demand shifts right,what should the central bank do,and what will happen to output?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
a.The theory's prediction is based on tw...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
If interest is not taxed until realized,...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
There are several costs of inflation,inc...
View Answer

Correct Answer
verified
Fluctuations in the economy-recessions a...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
a.Using the growth rate operator G,the g...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified