Exam 17: Five Debates Over Macroeconomic Policy

Suppose the budget deficit is rising 4 percent per year and nominal GDP is rising 7 percent per year.How are the debt and the burden on future generations created by these continuing deficits?

Suppose the economy goes into recession.Which of the following is a list of things policymakers could do to try to end the recession?

Why should policymakers NOT try to stabilize the economy?

Suppose that changes in aggregate demand tended to be infrequent and that it took a long time for the economy to return to long-run output.How would this affect the arguments of those who oppose using policy to stabilize output?

What do opponents of using policy to stabilize the economy generally believe?

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

Tax laws do not give preferential treatment to some kinds of retirement saving.

During the financial year 2014-2015,the government of Canada ran a surplus of $1.9 billion,bringing the government's public debt to $612.3 billion.(The debt-to-GDP ratio was 31 percent,still down from the preceding year.Source: Government of Canada,Annual Financial report,http: / / www.fin.gc.ca / afr-rfa / 2015 / report-rapport-eng.asp).Assuming an inflation rate of 2 percent,what real GDP growth rate would have allowed the government to run a deficit this large without raising the debt-to-income ratio?

What does the time inconsistency of policy imply?

A reduction in the marginal tax rate includes a substitution effect that tends to increase savings.

Why do the five debates over macroeconomic policy exist?

The cost of inflation reduction is a small but permanent increase in unemployment.

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?

Which of the following best defines the political business cycle?

What does the time inconsistency of monetary policy mean?

If we calculate the amount of debt,measured in real dollars,what was owed by each Canadian in 2015?

What would proponents of tax-law changes to encourage saving most likely do?

Identify three government policies that discourage saving.

What will time inconsistency cause?