Exam 17: Five Debates Over Macroeconomic Policy

The laws governing the activity of the Bank of Canada give some specific recommendations about what goals it should pursue, so it has little discretion in making policy.

A reduction in the tax rate on income from saving would do which of the following?

There are ways that policymakers could reduce the costs of inflation without reducing inflation.

Suppose a country has had a high and relatively stable inflation rate for a long time. How might this affect the costs and benefits of inflation reduction?

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?

If a central bank followed a rule for monetary policy, the time-inconsistency problem would be eliminated.

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

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.

Why should policymakers try to stabilize the economy?

Suppose that at the start of fiscal year 2013 the government had a debt of $6300 billion. Suppose that during fiscal year 2015, real GDP grew by about 4 percent and inflation was about 3 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Why should the central bank aim for zero inflation?

Suppose that a country has an inflation rate of about 5 percent per year and a real GDP growth rate of about 2 percent per year. What is the highest deficit the government can afford without raising the debt-to-income ratio?

What is one reason for the existence of policy lags?

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

It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.

Why should the tax laws to encourage saving remain as they are?

Why should the central bank aim for a moderate rate, instead of a zero rate, of inflation?

Identify three government policies that discourage saving.

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

What does the time inconsistency of monetary policy mean?