Exam 17: Five Debates Over Macroeconomic Policy

Some social programs transfer wealth from younger generations to older generations.

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

What might offset the effects of a decline in the value of financial assets,such as stocks,on consumption and the economy?

The following citation is from the Wall Street Journal's article "Central Bankers Hone Tools to Pop Bubbles," July 9,2013 (http: / / goo.gl / cCkklC) "With interest rates very low in much of the world,cheap money is everywhere,even flooding into smaller economies such as Israel's.The money is driving up Israel's currency,threatening its important export sector.That presents Israel's central bank with a dilemma: Raising interest rates would likely exacerbate the problem by boosting the currency further,but low rates can fuel a borrowing binge,particularly for home buying." a.Using the exchange rate determination model NCO-NX,show how does the money "flooding into smaller economies such as Israel's" drive up Israel's currency.How does this threaten Israel's export sector? b.Using the liquidity preference model and the NCO-NX model,show how "raising interest rates would likely exacerbate the problem." c.Explain the dilemma that the Israeli central bank faces.Why is this issue important for the economy?

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

Suppose the budget deficit is rising 2 percent per year and nominal GDP is rising 7 percent per year.Which of the following best describes the debt created by these continuing deficits?

Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?

Which tax policy will lead to a tax system with increased equality?

What does double taxation mean?

Suppose the budget deficit is rising 8 percent per year and nominal GDP is rising 10 percent per year.Which of the following best describes the debt created by these deficits?

Why should monetary policy be made by rule rather than discretion?

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

Explain how it is possible for the government debt to grow forever.

Assume that the substitution effect is large relative to the income effect.If a tax reform is designed to increase saving,what does it do to the interest rate and spending on capital goods?

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

Suppose that a country has an inflation rate of about 3 percent per year and a real growth rate of about 5 percent per year.Suppose also that it has nominal GDP of about 100 billion units of currency.What is the highest deficit it can have without raising the debt-to-income ratio?

Why should policymakers try to stabilize the economy?

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises.If the economy starts from long-run equilibrium and aggregate supply shifts left,what must the central bank do,and what will happen to output?

In which situation does inflation reduction have the lowest cost?

A recession has no benefit to society-it represents a sheer waste of resources.