Exam 15: Government Spending and Its Financing

Real money demand in the economy is given by L = 0.3Y - 600 i, where Y is real income and i is the nominal interest rate. In equilibrium, real money demand L equals real money supply M/P. Suppose that Y equals 2000 and the real interest rate is 5%. At what rate of inflation is seignorage maximized?

Consider an economy that has the following monetary data: Currency in circulation = $300 Bank reserves = $50 Monetary base = $350 Deposits = $700 Money supply = $1000 The monetary base and the money supply are expected to grow at a constant rate of 20% per year. Inflation and expected inflation are 20% per year. Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest. What is the cost to the public of the inflation tax?

The real seignorage collected by the government is the product of

All of the following are government capital except

Interest payments by the government as a share of GNP have

Assume the marginal tax rate for income above $25000 has risen to 30 percent. If the tax rate for the income less than $25000 is 10 percent, how much tax a person with an income of $40,000 will pay?

Which of the following is not included in the government transfer payments?

The average tax rate is

Which of the following would not act as an automatic stabilizer?

At the beginning of year one, there is no government debt outstanding. The government runs a $100 billion deficit in year one. Interest at a nominal rate of 10% must be paid starting in year two. Assume nominal GDP in year one is $2000 billion and the nominal growth rate of GDP is 4%. Assume the government balances its primary budget in the future and the interest rate and growth rate do not change. a. What will be the government deficit in years two, three, four, and five? b. What will be the value of government bonds outstanding at the end of the fifth year? c. What will be the debt-GDP ratio at the end of year five?

What are the main reasons (give at least three) that Ricardian equivalence might not hold?

The deficit is

Assume the marginal tax rate for income above $25000 has risen to 30 percent. If the tax rate for the income less than $25000 is 10 percent, what is the average tax rate for a person with an income of $40,000?

In which case would you be most likely to expect inflation to occur?

An expansionary fiscal policy will not cause an increase in the price level if the government

A decrease in taxes on the current generation would have no effect on consumption or national saving if

Roads and education are examples of

How is real seignorage revenue related to inflation? How does the quantity of real seignorage revenue change as inflation rises from zero to a positive level, to still higher levels?

A decrease in the average tax rate, with the marginal tax rate held constant, will

Consider an economy that has the following monetary data: Currency in circulation = $300 Bank reserves = $50 Monetary base = $350 Deposits = $700 Money supply = $1000 The monetary base and the money supply are expected to grow at a constant rate of 20% per year. Inflation and expected inflation are 20% per year. Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest. What is the profit to the banks from the inflation?