Question
updated 3 years ago
Category:
Macroeconomics
Suppose the federal government cuts taxes and increases spending, raising the budget deficit to 12 percent of GDP. If nominal GDP is rising 5 percent per year, are such budget deficits sustainable forever? Explain. If budget deficits of this size are maintained for 20 years, what is likely to happen...
Editor July 23, 2021
Here is a tip: The ratio of the government's debt and the real gross domestic product (GDP) is called the debt-GDP ratio. Explanation No, the budget deficits cannot sustain forever (View full solution)
updated 3 years ago
Category:
Macroeconomics
Why are the benefits of reducing inflation permanent and the costs temporary? Why are the costs of increasing inflation permanent and the benefits temporary? Use Phillips-curve diagrams in your answer.
Editor July 23, 2021
Here is a tip: In the long-run, monetary policy affects only nominal variables (prices and inflation) and has a neutral effect on output and unemployment level. Explanation Unemployment rate is (View full solution)
updated 3 years ago
Category:
Macroeconomics
Chapter 2 explains the difference between positive analysis and normative analysis. In the debate about whether the central bank should aim for zero inflation, which areas of disagreement involve positive statements and which involve normative judgments?
Editor July 23, 2021
Here is a tip: Positive analysis deals with the facts and figures and thus comes to a conclusion whereas normative analysis is based on values, opinions and judgements. Explanation The (View full solution)
updated 3 years ago
Category:
Macroeconomics
The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories. a. If investors believed that capital taxes would remain low, how would the government's action affe...
Editor July 23, 2021
part d Here is a tip: Problem of time inconsistency refers to the discrepancy between the announcements of the policymakers and their revealed actions. Explanation Decision of the government to (View full solution)
updated 3 years ago
Category:
Macroeconomics
Policymakers who want to stabilize the economy must decide how much to change the money supply, government spending, or taxes. Why is it difficult for policymakers to choose the appropriate strength of their actions?
Editor July 23, 2021
Here is a tip: Government opts for fiscal policy through changes in taxes and/or government spending. Whereas, monetary policy is adopted by the central banks through changes in the interest (View full solution)