Exam 17: Five Debates Over Macroeconomic Policy

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?

Proponents of zero inflation argue that reducing inflation implies which of the following?

Explain why policy lags could make stabilization policies counterproductive.

Why should the tax laws to encourage saving remain as they are?

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

Why should the government balance its budget?

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

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Why should the central bank aim for zero inflation?

Suppose that a country has an inflation rate of about 4 percent per year and a real GDP growth rate of about 3 percent per year. What is the highest deficit the government can afford without raising the debt-to-income ratio?

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

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, how much will she accumulate until the retirement age?

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?

Which of the following are both policies that are consistent with trying to stabilize output when prices and output rise?

The Bank of Canada raised interest rates in 1999 and 2000. By doing this, what did the Bank of Canada do to the money supply and why?

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. -What was Canada's debt-to-GDP ratio in the fiscal year 1995-1996? What was the debt-to-GDP ratio in 2008-2009?

Under the same circumstances as in (b), if there is a tax of 40 percent on interest income, how much will her savings be worth at the age of 70?

Why should the tax laws to encourage saving be reformed?

Which of the following is a part of the argument against deficits?

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