Exam 17: Five Debates Over Macroeconomic Policy

Suppose that in fiscal year 2015 the government ran a deficit of about $249 billion.The debt at the start of this period was about $5971 billion.Which of the following combinations of inflation and real GDP would have allowed the government to run a deficit this large without raising the debt-to-income ratio?

Deficits do not necessarily burden future generations.Discuss and provide some examples.

In which situation is a program to reduce inflation likely to have the lowest costs?

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year.How are the debt and the burden on future generations created by these continuing deficits?

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

In which of the following situations does the government NOT need to balance its budget?

If the central bank has discretion to make policy,it may create economic fluctuations that reflect the electoral calendar.This is called the political business cycle.

In practice,the problems created by time inconsistency and the political business cycle appear to be quite serious.

The following excerpt from a Wall Street Journal article,"Japan's Revival Bid Has Global Consequences" (http: / / goo.gl / umZMId): "Mr.Abe's government has fired the first of the "three arrows" of Abenomics: It installed a new central-bank governor who has flooded the economy with money.The second arrow,fiscal policy,has only been half-fired.It has embarked on a fiscal stimulus,but hasn't yet announced a medium-term plan to raise taxes and cut spending." Discuss the possible effects of Prime Minister Shinzo Abe's macroeconomic policy approach given that Japan's government debt is excessive.

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?

Why do many economists advocate a consumption tax rather than an income tax?

Which of the following would transfer wealth from the young to the old?

If you deposit $100 now with interest rate of 3 percent,after the first period you will have an amount equal to (100 + 100× 0.03)= 100(1 + 0.03); after the second period the amount will be 100(1 + 0.03)+ [100(1 + 0.03)]×0.03 = 100(1 + 0.03)(1 + 0.03)= 100(1 + 0.03)2.If we continue this reasoning,we find out that the amount in the account after n periods is equal to $100(1 + 0.03)n.In general,if the interest rate is i percent,the formula for compound interest rate becomes (1 + i% / 100)n.Suppose there is a tax rate of t percent on interest income.How does our formula change?

Why should the tax laws be reformed to encourage saving?

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.If the interest rate is 10 percent and there is a tax of 40 percent on interest income,how much will her savings be worth at the age of 70?

What effects does a higher rate of return have on saving?

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?

Which statement is consistent with the political business cycle theory?

Economists agree that if a monetary policy rule is to be used,the best one is one that makes the growth rate of the money supply constant.