Exam 17: Five Debates Over Macroeconomic Policy

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

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

Suppose that at the start of fiscal year 2006 the government had a debt of $6800 billion. Suppose that during fiscal year 2006, real GDP grew by about 5 percent and inflation was about 3 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Suppose aggregate demand fell. In order to stabilize the economy, which of the following might the government do?

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 the evolution of Canada's federal debt over the period 1967-2009?

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

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.

What is the political business cycle and how does it relate to whether the central bank should have discretion or use a rule?

A nation's saving rate is not a primary determinant of its long-run economic prosperity.

What does the time inconsistency of policy imply?

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 capital gain. How does our formula change?

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 demand shifts right, what must the central bank do, and what will happen to output?

Suppose the budget deficit is rising 6 percent per year and nominal GDP is rising 10 percent per year. Which of the following best describes the debt created by these deficits?

Some studies have found that saving is not very sensitive to the rate of return on saving.

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

The rate of growth in the Debt to nominal GDP ratio depends on the growth rate in Debt, real GDP, and the price level. Why would one say that inflation is similar to a tax when the government runs a positive public debt?

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

Why should policymakers NOT try to stabilize the economy?

If firms were faced with greater uncertainty because of concern that oil prices might rise, they might decrease expenditures on capital. In response to this change, someone who advocated "lean against the wind" policies might advocate decreasing which of the following?

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.