Question 1

The effect of budget deficits on interest rates

Accepted Answer

When the government runs a budget deficit, it has to borrow money to finance its spending. This increases the demand for credit in the market, which in turn drives up the interest rates. Higher interest rates reduce the level of private investment, as it becomes more expensive for firms to borrow money. This decrease in investment eventually leads to a decrease in the capital stock. Therefore, option D is the correct answer.

Question 2

Zero inflation

Accepted Answer

The answer of Zero inflation
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Question 3

An added benefit of inflation is that it allows for the possibility of

Accepted Answer

Inflation can lead to negative real interest rates, as the nominal interest rate may not keep up with the pace of inflation, resulting in an effectively lower real interest rate. This can make borrowing more attractive and stimulate investment and economic activity. Menu costs are not a benefit of inflation, as they refer to the costs incurred by firms having to adjust prices due to inflation. Aggregate supply shocks and recessions are not benefits of inflation either, as they can have negative impacts on the economy.

Question 4

Some economists believe that there are positives from a little inflation and that it may "grease the wheels"

Accepted Answer

Some economists believe that a little inflation can help the labor market by making it easier for employers to adjust wages and create a more flexible labor force. This is because inflation can reduce the real wages of workers without requiring employers to actually reduce nominal wages, which can be difficult to do. This can make it easier for employers to adjust to changes in market conditions and may ultimately lead to better employment outcomes.

Question 5

Real interest rates

Accepted Answer

The answer of Real interest rates
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Question 6

In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a deficit of $159 billion. Other things the same, this change would be expected to have

Accepted Answer

When the government runs a deficit, it needs to borrow money to cover its expenses. This increases the demand for credit, which in turn increases interest rates. Higher interest rates tend to discourage investment, as borrowing becomes more expensive. Therefore, we would expect decreased investment and increased interest rates due to the government's shift from a surplus to a deficit.

Question 7

Economists agree that at least in the short run disinflation

Accepted Answer

Economists generally agree that disinflation (a decrease in the rate of inflation) leads to a temporary period of higher unemployment. However, there is disagreement among economists regarding the costs of moderate inflation. While some argue that even moderate inflation can have negative impacts on economic growth and stability, others contend that moderate inflation can be beneficial in stimulating demand and investment.

Question 8

Government deficits mean that

Accepted Answer

Government deficits mean that public saving is negative, as the government is spending more than it is taking in through taxes. As a result, national saving is lower than it would be otherwise, as the negative public saving offsets any private saving. Therefore, option D is the correct answer.

Question 9

Part of the argument against deficits is that they

Accepted Answer

Deficits increase the supply of government bonds, which can lead to a decrease in the demand for other investments and an increase in interest rates. Higher interest rates can discourage investment as borrowing becomes more expensive. Therefore, deficits can lead to higher interest rates and a decrease in investment.

Question 10

When wages are set by contract, inflation

Accepted Answer

When wages are set by contract, they are usually fixed for a set period of time. If inflation occurs during this time, real wages (wages adjusted for inflation) will decrease. This can make labor markets more flexible as it may reduce the cost of hiring new workers, which can lead to increased employment.

Question 11

In fiscal year 2008, the U.S. government ran a deficit of about $459 billion. In fiscal year 2009, the government ran a deficit of about $1,413 billion. Other things the same, this change would be expected to have

Accepted Answer

When the government runs a deficit, it typically borrows more money, increasing the demand for credit and leading to higher interest rates. This in turn makes it more expensive for businesses to borrow, which can lead to decreased investment. Therefore, the change from a $459 billion deficit to a $1,413 billion deficit would be expected to increase interest rates and decrease investment.

Question 12

Some economists argue that since inflation

Accepted Answer

Inflation reduces the real value of fixed nominal wages, which can make it easier for labor markets to adjust because employers can effectively lower real wages without nominal wage cuts, facilitating adjustments in labor demand and supply.

Question 13

If the budget deficit were reduced

Accepted Answer

When the budget deficit is reduced, it leads to a decrease in government borrowing, which decreases the competition for funds and reduces the demand for loans. This, in turn, leads to a decrease in interest rates. Additionally, with the reduction in the budget deficit, there is an increase in confidence in the economy, leading to an increase in investment. Therefore, interest rates would decrease and investment would increase.

Question 14

The national debt

Accepted Answer

The national debt is the total amount of money owed by the government due to past deficits, which occur when government spending exceeds government revenue in a given year. It is not related to household or firm borrowing and saving.

Question 15

In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998, the government ran a surplus of about $69.3 billion. Other things the same, we would expect this change

Accepted Answer

When the government runs a surplus, it means that it is collecting more revenue than it is spending, which usually leads to a decrease in interest rates. Lower interest rates make it cheaper for businesses and individuals to borrow money, which in turn usually leads to increased investment. Therefore, we would expect decreased interest rates and increased investment in this scenario.

Question 16

Economists

Accepted Answer

Economists have differing opinions on the costs of moderate inflation, so option C is not correct. However, it is generally agreed upon that reducing inflation can lead to an increase in unemployment. If inflation expectations remain high, this increase in unemployment will be larger, as people may demand higher wages to compensate for the perceived loss in purchasing power. Therefore, option D is the correct choice. Option A is also incorrect as it implies that economists universally agree on the costs of moderate inflation.

Question 17

Demand for workers in some industry declines. These workers are reluctant to have a cut in their nominal wage. However,

Accepted Answer

The answer of Demand for workers in some industry declines....

Question 18

Economists

Accepted Answer

The answer of Economists
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Question 19

Economists

Accepted Answer

Economists do not agree whether the costs of reducing inflation to zero are worth the benefits. Furthermore, the increase in unemployment from reducing inflation will be larger if inflation expectations remain high.

Question 20

Over time, continued budget deficits lead to

Accepted Answer

Continued budget deficits lead to an increase in government debt. This can cause higher interest rates, which may crowd out private investment, reduce future economic growth, and hurt productivity. This reduction in growth and productivity can lead to a lower capital stock over time.

Quiz 18: Six Debates Over Macroeconomic Policy

The effect of budget deficits on interest rates

Zero inflation

An added benefit of inflation is that it allows for the possibility of

Some economists believe that there are positives from a little inflation and that it may "grease the wheels"

Real interest rates

In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a deficit of $159 billion. Other things the same, this change would be expected to have

Economists agree that at least in the short run disinflation

Government deficits mean that

Part of the argument against deficits is that they

When wages are set by contract, inflation

In fiscal year 2008, the U.S. government ran a deficit of about $459 billion. In fiscal year 2009, the government ran a deficit of about $1,413 billion. Other things the same, this change would be expected to have

Some economists argue that since inflation

If the budget deficit were reduced

The national debt

In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998, the government ran a surplus of about $69.3 billion. Other things the same, we would expect this change

Economists

Demand for workers in some industry declines. These workers are reluctant to have a cut in their nominal wage. However,

Economists

Economists

Over time, continued budget deficits lead to