Question 1

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

Accepted Answer

This means that people tend to save regardless of the interest rate they can earn on their savings.

Question 2

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?

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Question 3

Explain the main argument in favour of economic stabilization.

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Question 4

Explain how a higher rate of return on saving could, at least in theory, lead to lower saving.

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Question 5

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?

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Question 6

Identify four of the six costs of inflation.

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Question 7

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

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Question 8

Why do many economists advocate a consumption tax rather than an income tax?

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Question 9

Explain why policy lags could make stabilization policies counterproductive.

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Question 10

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

Accepted Answer

When the marginal tax rate is reduced, people have more incentive to save their money rather than spend it because they get to keep more of the money they earn. This is known as the substitution effect, and it tends to increase savings.

Question 11

Explain how it is possible for the government debt to grow forever.

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Question 12

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

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Question 13

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?

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Question 14

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

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Question 15

Let d be the percentage change in government debt, g the rate of growth in real GDP, RGDP the real GDP, NGDP the nominal GDP, P the price level, and ð the inflation rate. Let G[X] denote the growth rate in variable X, which is the same thing as the percentage change in X; thus, G[X] = (X2 - X1)/X1 ×100% for small changes in X. Here are two properties of the growth rate operator G: (i) G[X×Y] = G[X] + G[Y], and (ii) G[X/Y] = G[X] - G[Y].
a. Show that the growth rate in NGDP is equal to g + ð, where g is the real GDP growth rate and ð is the inflation rate.
b. Show that d is equal to (Deficit/Debt) × 100%.
c. Show that the percentage change in the Debt/NGDP ratio is equal to d - (g + ð).
d. Show that the condition for the Debt to NGDP ratio not to increase is d = g + ð.

Accepted Answer

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Question 16

In essence, a consumption tax puts all saving into tax-advantaged savings accounts.

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Question 17

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

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Question 18

Explain the time inconsistency of monetary policy.

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Question 19

Identify three government policies that discourage saving.

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Question 20

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

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Quiz 18: Five Debates Over Macroeconomic Policy