Question 1

The following excerpt from a Wall Street Journal article,"Japan's Revival Bid Has Global Consequences" (http://goo.gl/umZMId):
"Mr.Abe's government has fired the first of the "three arrows" of Abenomics: It installed a new central-bank governor who has flooded the economy with money.The second arrow,fiscal policy,has only been half-fired.It has embarked on a fiscal stimulus,but hasn't yet announced a medium-term plan to raise taxes and cut spending."
Discuss the possible effects of Prime Minister Shinzo Abe's macroeconomic policy approach given that Japan's government debt is excessive.

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Question 2

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 interest income.How does our formula change?

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Question 3

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

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Question 4

During the financial year 2008-2009,the government of Canada ran a deficit of $5.8 billion,bringing the government's public debt to $463.7 billion.(The debt-to-GDP ratio was 29 percent,still down from the preceding year.Source: Government of Canada,Annual Financial report,http://www.fin.gc.ca/afr-rfa/2009/afr-rfa09-eng.pdf).Assuming an inflation rate of 2 percent,what real GDP growth rate would have allowed the government to run a deficit this large without raising the debt-to-income ratio?

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Question 5

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

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Question 6

Consider a 25-year-old worker who saves $1000 for retirement.She plans to retire at the age of 70.The interest rate is 10 percent.To stimulate savings in retirement plans,suppose the interest income is not taxed until it is realized (the money is effectively withdrawn from the account.)To simplify,suppose that,when she is 70,our worker withdraws the entire amount in her account.How much will she receive if the tax on interest is 40 percent?

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Question 7

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

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Question 8

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 by the retirement age?

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Question 9

The following chart,published by the Wall Street Journal,shows the debt-to-GDP ratios for several countries.The obvious outlier in this chart is Japan.
  
a. What was Japan's debt-to-GDP ratio in 2013, compared to other countries?
b. What are the possible effects of a large government debt?

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Question 10

The following citation is from the Wall Street Journal's article "Central Bankers Hone Tools to Pop Bubbles." (http://goo.gl/cCkklC)
"With interest rates very low in much of the world,cheap money is everywhere,even flooding into smaller economies such as Israel's.The money is driving up Israel's currency,threatening its important export sector.That presents Israel's central bank with a dilemma: Raising interest rates would likely exacerbate the problem by boosting the currency further,but low rates can fuel a borrowing binge,particularly for home buying."
a. Using the exchange rate determination model NCO-NX, show how does the money "flooding into smaller economies such as Israel's" drive up Israel's currency. How does this threaten Israel's export sector?
b. Using the liquidity preference model and the NCO-NX model, show how "raising interest rates would likely exacerbate the problem."
c. Explain the dilemma that the Israeli central bank faces. Why is this issue important for the economy?

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Question 11

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

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Question 12

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

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Question 13

The theory of a flat short-run aggregate-supply curve implies that an increase in money supply should increase output and employment,while the price level should increase at a slow pace.
a.Why does output increase sometimes much slowly than this theory might predict?
b.How would low inflation hinder economic growth?

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Question 14

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 p 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 + p, where g is the real GDP growth rate and p 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 + p).
d.Show that the condition for the Debt to NGDP ratio not to increase is d = g + p.

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Question 15

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 16

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 17

The following citation is from the Wall Street Journal article "Low Inflation Poses a Growth Test." (http://goo.gl/LatY8B)
"Consumer prices fell 0.4% in April,the second straight month of declines,the Labor Department said Thursday.Over the past year,prices have risen just 1.7%,omitting food and energy,below the roughly 2% level that Federal Reserve officials consider healthy for the economy.While tame inflation is good news for consumers,it also reflects the considerable slack in the economy: including factories with spare capacity that isn't being used and the nearly 12 million Americans who are looking for work but can't find it.The slowing price growth: and the risk of deflation,however small: gives the Federal Reserve more room to continue its easy-money policy,designed to boost growth.The Fed could also increase the amount of bonds it is buying to help push more money into the economy and perhaps lift inflation toward its target."
a. What does the quantity theory of money predict about prices when the central bank increases the money supply? Does the reality described in the article confirm this prediction?
a.k.a. "easy money," fail to increase inflation?
b. In the author's opinion, why do the expansionary monetary policies pursued by the central bank,
c. What does the reality of "easy money-low inflation" suggest about the shape of the short-run aggregate-supply curve? Does such a shape of the short-run aggregate-supply curve explain the evidence of low inflation and low employment?

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Question 18

Identify three government policies that discourage saving.

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Question 19

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 20

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 and there is a tax of 40 percent on interest income,how much will her savings be worth at the age of 70?

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Quiz 17: Five Debates over Macroeconomic Policy

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

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

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

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 by the retirement age?

The following chart,published by the Wall Street Journal,shows the debt-to-GDP ratios for several countries.The obvious outlier in this chart is Japan. a. What was Japan's debt-to-GDP ratio in 2013, compared to other countries? b. What are the possible effects of a large government debt?

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

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

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

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?

Identify three government policies that discourage saving.

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?

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 and there is a tax of 40 percent on interest income,how much will her savings be worth at the age of 70?