Exam 17: Five Debates Over Macroeconomic Policy

Explain why a government deficit is likely to lead to lower living standards in the future.

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

Which of the following is a significant cost of inflation?

Suppose that the government goes into deficit in order to help local school districts build better schools. Does this burden future generations?

Would economists say that, in general, Canadian tax system encourages saving?

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?

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?

Why does Canadian public policy discourage saving?

Those who desire that policymakers stabilize the economy would advocate which of the following when aggregate demand is insufficient to ensure full employment?

During the financial year 2008-2009, the government of Canada ran a deficit of $5.8 billion, bringing the government's public debt to $463.7 billion. (The debt-to-GDP ratio was 29 percent, still down from the preceding year. Source: Government of Canada, Annual Financial report, http://www.fin.gc.ca/afr-rfa/2009/afr-rfa09-eng.pdf). 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?

In which of the following situations is a program to reduce inflation likely to have the highest costs?

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?

The following charts are published by the Government of Canada in its Annual Financial Report 2008-2009. Based on the charts, answer the following questions. -How does Canada compare to other countries as far as public debt is concerned?

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

Suppose the economy goes into recession. Which of the following lists contains things policymakers could do to try to end the recession?

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.

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

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?

Suppose that in fiscal year 2010 the government ran a deficit of about $160 billion. The debt at the start of this period was about $6126 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?