Question 1

If the private sector wishes to hold a constant quantity of real government bonds,inflation requires that the private sector continuously ________ those bonds,so that the government ends up having to pay out interest on net equal to the ________ interest rate times the bonds outstanding.

Accepted Answer

If the private sector wants to maintain a constant quantity of real government bonds, they need to buy more bonds to offset the erosion of value due to inflation. The government then pays interest based on the real interest rate, which accounts for inflation.

Question 2

Suppose the private sector wishes to hold a constant level of real high-powered money.This means that with an ongoing inflation of p percent,each year the government treasury can obtain goods from the private sector in exchange for ________ p times the existing high-powered money,a government revenue source called ________.

Accepted Answer

Seignorage is the revenue obtained by the government by creating new money. In this context, with ongoing inflation, the government can create new money equivalent to a percentage (p) of the existing high-powered money to maintain its real value, thus obtaining goods or services from the private sector without reducing the money's purchasing power.

Question 3

What is the "inflation tax"?

Accepted Answer

The inflation tax refers to the government obtaining goods in exchange for newly created high-powered money that does not add to the real value of private assets due to the resulting inflation. Essentially, the government is able to increase its own wealth by printing more money, which reduces the purchasing power of individuals and businesses through inflation.

Note: options A and B refer to the effects of inflation rather than the inflation tax itself, while option D describes the concept of crowding out rather than the inflation tax.

Question 4

The short-run simulative effect of a government budget deficit on real GDP is stronger with ________ financing,since this ________ the crowding out effect of the deficit.

Accepted Answer

Bond financing enhances the crowding out effect of the deficit because it increases the demand for loanable funds, which drives up interest rates and reduces investment.

Question 5

Government deficit financing is made easier by a rise in inflation when inflation ________ the private sector's demand for high-powered money,which the government can ________.

Accepted Answer

When inflation raises, the private sector's demand for high-powered money also goes up. This means that the government can create and spend money more easily without having to rely on taxation or borrowing as much. Therefore, option C is the correct choice. Option A is incorrect as it suggests a decrease in inflation leads to an increase in demand for high-powered money by the private sector. Option B is incorrect as it suggests that the government obtains high-powered money through taxation, which is not necessarily true. Option D is also incorrect as it suggests that inflation leads to increased taxation, which might not always be the case.

Question 6

In the United States,who determines the combination of bond and money creation that finances the federal budget deficit?

Accepted Answer

The Federal Reserve is responsible for determining the combination of bond and money creation to finance the federal budget deficit through its monetary policy decisions. The federal government itself does not have the authority to create money or bonds, while the private banking system and bond- and money-holders may have some influence on the market, they do not ultimately determine the government's financing decisions.

Question 7

The government budget constraint tells us that to the extent that government expenditures are NOT financed by tax collection,the public ends up holding ________ government bonds and ________ money.

Accepted Answer

When government expenditures exceed tax collections, the government must finance the deficit by either issuing more government bonds (increasing public debt) or by creating more money. Therefore, the public ends up holding more government bonds and more money.

Question 8

Governments promote long-run inflation when they depend on ________ to finance their expenditures.

Accepted Answer

When governments depend on money creation to finance their expenditures, this increases the money supply and leads to inflation. This is because the increase in the supply of money makes each unit of currency less valuable, resulting in a rise in the general price level. Issuing bonds, taxation, and selling off assets do not necessarily increase the money supply and therefore do not directly promote inflation. While raising the national debt could potentially lead to inflation if it is financed through money creation, this is not always the case and therefore is not the best answer.

Question 9

In the early 1980s the government's primary method of combating inflation was

Accepted Answer

The primary method adopted by the government in the early 1980s to combat inflation was restrictive monetary policy. This involved reducing the money supply, which in turn increased interest rates and reduced consumer spending. By decreasing the amount of money circulating in the economy, the government hoped to reduce the upward pressure on prices caused by excess demand. Price and wage controls were also considered but were not implemented as they were seen as too extreme and could lead to shortages and lower economic growth. Indexing bonds to protect savers was not a primary method of combating inflation but rather a measure to protect investors from the negative effects of inflation. Undoing the "self-inflicted" wounds refers to policies that may have contributed to inflation in the first place, but it is not a specific measure to combat inflation.

Question 10

A needed reform in the U.S.income tax system that would reduce the costs of inflation is to

Accepted Answer

The answer of A needed reform in the U.S.income tax...

Question 11

Presidents running for re-election are tempted to urge the Federal Reserve to ________ the rate of money growth in order to reap the political benefits of ________.

Accepted Answer

Presidents may urge the Federal Reserve to increase the rate of money growth to stimulate the economy, leading to temporarily higher real GDP, which can be politically beneficial during re-election campaigns.

Question 12

Government deficit financing is made easier by a p-percentage-point rise in inflation if it raises the nominal interest rate by ________ than p percentage points,and the private sector wishes to hold ________ quantity of real government bonds.

Accepted Answer

If the nominal interest rate rises by the same amount as the inflation rate, the real interest rate remains unchanged, and therefore the private sector will be willing to hold the same amount of real government bonds. This means that deficit financing will not become more difficult. In fact, a small inflationary increase may even make it easier to finance the deficit. Choice A is incorrect because if the nominal interest rate rises by less than the inflation rate, the real interest rate decreases, which may lead to a decrease in the demand for government bonds. Choice C is incorrect because if the private sector wishes to hold a lower quantity of real government bonds, it suggests that the demand for government bonds has decreased, making it more difficult to finance the deficit. Choice D is incorrect because if the private sector wishes to hold the same quantity of real government bonds despite the inflation increase, it suggests that the demand for government bonds has remained the same, and thus the inflation increase has not made deficit financing easier.

Question 13

When the misery index is used to judge macroeconomic conditions,reducing inflation by one percentage point

Accepted Answer

The misery index is a measure of the economic well-being of a country that combines measures of inflation and unemployment. Therefore, reducing inflation by one percentage point gives the same benefit to the economy as reducing the unemployment rate by one percentage point in terms of improving the misery index. Both actions lead to a decrease in the misery index score, indicating an improvement in macroeconomic conditions.

Question 14

A legitimate objection to the government issuance of "indexed" bonds is that they

Accepted Answer

Indexed bonds have payments that are adjusted based on changes in inflation, which can lead to increased inflation expectations and make it more difficult to combat inflation through monetary policy. This is known as a "inflationary bias" and is a legitimate concern with the issuance of indexed bonds.

Question 15

Less-developed nations may have trouble with ________ financing of their deficits,and the only alternative creates the problem of ________.

Accepted Answer

The answer of Less-developed nations may have trouble with ________...

Question 16

The textbook cites an estimate of the "sacrifice ratio" in the United States of approximately

Accepted Answer

The answer of The textbook cites an estimate of the...

Question 17

Suppose the U.S.public holds $1 trillion in government bonds,all with an 8 percent nominal interest rate.If the Federal Reserve can hold that nominal rate constant,what inflation rate would make the government's net interest expense exactly zero?

Accepted Answer

The government's net interest expense would be zero if the real interest rate is zero. With an 8% nominal interest rate, an 8% inflation rate would result in a 0% real interest rate (nominal rate - inflation rate = real rate).

Question 18

When Okun's "misery index" is used to judge macroeconomic conditions,inflation is being considered

Accepted Answer

The misery index combines both unemployment and inflation rates to provide a measure of economic hardship. Therefore, according to Okun's index, inflation is considered just as serious a macroeconomic problem as unemployment.

Question 19

The three sources of government revenue are taxes,the ________ of government bonds,and the ________ of high-powered money.

Accepted Answer

The issuance of government bonds is a source of revenue for the government because it is essentially borrowing money from investors and promising to pay it back with interest. The issuance of high-powered money refers to the creation of new money by the government, such as by printing more currency or increasing the amount of reserves held by banks. This can also be a source of revenue for the government, such as through seigniorage (the difference between the cost of producing currency and its face value). Taxes are a well-known source of government revenue.

Question 20

In nations where conventional taxes are difficult to collect,the inflation tax is ________,which tends to ________ the inflation rates of those nations.

Accepted Answer

In nations where conventional taxes are hard to collect, the inflation tax serves as a realistic alternative because it can be implemented through the monetary system without direct collection efforts. However, this approach tends to aggravate inflation rates as it involves increasing the money supply, which can lead to higher inflation.

Quiz 10: The Goals of Stabilization Policy: Low Inflation and Low Unemployment

If the private sector wishes to hold a constant quantity of real government bonds,inflation requires that the private sector continuously those bonds,so that the government ends up having to pay out interest on net equal to the interest rate times the bonds outstanding.

What is the "inflation tax"?

The short-run simulative effect of a government budget deficit on real GDP is stronger with financing,since this the crowding out effect of the deficit.

Government deficit financing is made easier by a rise in inflation when inflation the private sector's demand for high-powered money,which the government can .

In the United States,who determines the combination of bond and money creation that finances the federal budget deficit?

The government budget constraint tells us that to the extent that government expenditures are NOT financed by tax collection,the public ends up holding government bonds and money.

Governments promote long-run inflation when they depend on ________ to finance their expenditures.

In the early 1980s the government's primary method of combating inflation was

A needed reform in the U.S.income tax system that would reduce the costs of inflation is to

Presidents running for re-election are tempted to urge the Federal Reserve to the rate of money growth in order to reap the political benefits of .

Government deficit financing is made easier by a p-percentage-point rise in inflation if it raises the nominal interest rate by than p percentage points,and the private sector wishes to hold quantity of real government bonds.

When the misery index is used to judge macroeconomic conditions,reducing inflation by one percentage point

A legitimate objection to the government issuance of "indexed" bonds is that they

Less-developed nations may have trouble with financing of their deficits,and the only alternative creates the problem of .

The textbook cites an estimate of the "sacrifice ratio" in the United States of approximately

Suppose the U.S.public holds $1 trillion in government bonds,all with an 8 percent nominal interest rate.If the Federal Reserve can hold that nominal rate constant,what inflation rate would make the government's net interest expense exactly zero?

When Okun's "misery index" is used to judge macroeconomic conditions,inflation is being considered

The three sources of government revenue are taxes,the of government bonds,and the of high-powered money.

In nations where conventional taxes are difficult to collect,the inflation tax is ,which tends to the inflation rates of those nations.