Question 1

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.

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Question 2

The following citation is from the Wall Street Journal's article "Central Bankers Hone Tools to Pop Bubbles," July 9,2013 (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 3

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 4

Identify three government policies that discourage saving.

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Question 5

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 6

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 7

Identify three of the five costs of inflation.

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Question 8

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

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Question 9

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

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Question 10

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

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Question 11

During the financial year 2014-2015,the government of Canada ran a surplus of $1.9 billion,bringing the government's public debt to $612.3 billion.(The debt-to-GDP ratio was 31 percent,still down from the preceding year.Source: Government of Canada,Annual Financial report,http: / / www.fin.gc.ca / afr-rfa / 2015 / report-rapport-eng.asp).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 12

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 13

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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Question 14

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 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

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

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Question 17

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

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Question 18

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 19

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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Quiz 17: Five Debates Over Macroeconomic Policy

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?

Identify three government policies that discourage saving.

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 of the five costs of inflation.

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

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

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

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?

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

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

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