Question 1

"The baby boomer generation is responsible for pushing the U.S. economy into more debt." Is this statement true or false? Give reasons supporting your answer.

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Question 2

What is Ricardian equivalence? Give at least three reasons why Ricardian equivalence might not correctly describe an economy.

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Question 3

Spending more than earning will always cause a deficit in the budget and is always considered a bad thing. Is there a possibility that a budget deficit in any economy can have some advantages, too? Give two examples of these advantages, if any.

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Question 4

Graphically illustrate the traditional view of the short-run impacts of a debt-financed tax cut on:

a. interest rates and output in a closed economy in the short run, using the $L S - L M$ model.
b. exchange rates and output in a small open economy with a flexible exchange rate in the short tun, using the Mundell-Fleming model.

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Question 5

Many people are concerned about the budget deficit of the U.S. federal government. Suggest at least three possible negative economic effects of a budget deficit and three possible economic benefits of a budget deficit.

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Question 6

Using the model of aggregate demand-aggregate supply to illustrate the traditional view, graphically compare the short-run and long-run impact of debt-financed tax cuts on:

a. output,
b. prices.

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Question 7

The U.S. Treasury reports the budget deficit or surplus of the federal government. Give at least one reason why the measured budget deficit might overstate the "true" deficit and at least one reason the measured figure might understate the "true" deficit.

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Question 8

Printing money increases inflation. The higher the inflation, the lower the real value of debt. So why is this method not used to pay debts?

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Question 9

In 2014, the United States had budget deficit of $483 billion. Some economists say that this deficit is understated. Why do they say this?

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Question 10

War is the generator of debt burden for countries. How does war generate debt for a country?

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Question 11

The government of Moneyland decides that it is not going to change its spending, but will decrease the tax rates. As per the theory of Ricardian equivalence, what will be the effects of the government action on national saving?

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Question 12

A country with total debt of $500 million has a nominal interest rate of 10 percent and a real interest rate of 6 percent. Is the budget deficit of the country underestimated or overestimated, and by how much?

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Question 13

Index bonds have a very low interest rate but still are considered a good option for investment. Why is this so?

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Question 14

If an individual should subtract the present value of future tax obligations due to the government deficit from his or her disposable income, this situation suggests that, in aggregate analysis, the government deficit should be subtracted from disposable income. That is, instead of 
C = a + b(Y - T), we should use: C = a + b((Y - T - (G - T)), or = a + b(Y - G).

a. Using this consumption function and the further relations:
$$\begin{array} { l } 
I = I \
\mathrm { G } = G \
\mathrm {~T} = T \
\mathrm { Y } = C + I + G
\end{array}$$
write the equilibrium equation determining $Y$ as a function of $a , I , G$, and $T$.
b. If $b$ equals $0.5$, what are the numerical values of the multipliers for $l , G$, and $T$, respectively?

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Question 15

According to the Mundell-Fleming model, if government spending is kept constant, but taxes are increased, what will be the short-run effect on net exports?

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Question 16

Assume an economy with zero interest and inflation rates. Also assume that the theory of Ricardian equivalence is correct, i.e. people are rational and practice foresight. How will people's consumption pattern change if the current tax system is replaced with a lifetime one-time tax?

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Question 17

Compare the traditional view versus the view of Ricardian equivalence of the effects of a debt-financed tax cut on: 
a. national saving
b. current consumption, and
c. the real interest rate.

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Question 18

Explain how tax cuts can affect both aggregate demand and aggregate supply.

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Question 19

Countries seeking to adopt the euro as their currency must meet certain criteria, including the requirements to keep their government budget deficit equal to 3 percent or less of GDP, and to hold government debt levels below 60 percent of GDP. Discuss why there are fiscal policy criteria for joining a monetary union.

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Question 20

Graphically illustrate the traditional view of the long-run impacts of a debt-financed tax cut on :

a. saving, investment, and real interest rate using the classical model (Chapter 3 ).
b. steady state capital per worker and output per worker using the Solow growth model.

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