Answered: Paranoia, the largest country in…

Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781305971509

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 5CQQ

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Paranoia, the largest country in central Antarctica, receives word of an imminent penguin attack. The news

causes expectations about the future to be shaken. As

a consequence, there is a sharp decline in investment

spending plans.

a. Explain in detail the effects of such an event on the economy of Paranoia, assuming no response on the part of the

central bank or the Treasury (Ms

, T, and G all remain constant.) Make sure you discuss the adjustments in the goods

market and the money market.

b. To counter the fall in investment, the King of Paranoia

calls for a proposal to increase government spending. To

finance the program, the Chancellor of the Exchequer has

proposed three alternative options:

(1) Finance the expenditures with an equal increase in taxes

(2) Keep tax revenues constant and borrow the money

from the public by issuing new government bonds

(3) Keep taxes constant and finance expenditures by

printing new money

Consider the three financing options and rank them from

most expansionary to least expansionary. Explain your

ranking.

reduce money supply.
2.2 Paranoia, the largest country in central Antarctica, re-
ceives word of an imminent penguin attack. The news
causes expectations about the future to be shaken. As
a consequence, there is a sharp decline in investment
spending plans.
a. Explain in detail the effects of such an event on the econ-
omy of Paranoia, assuming no response on the part of the
central bank or the Treasury (M³, T, and G all remain con-
stant.) Make sure you discuss the adjustments in the goods
market and the money market.
b. To counter the fall in investment, the King of Paranoia
calls for a proposal to increase government spending. To
finance the program, the Chancellor of the Exchequer has
proposed three alternative options:
(1) Finance the expenditures with an equal increase in taxes
(2) Keep tax revenues constant and borrow the
from the public by issuing new government bonds
(3) Keep taxes constant and finance expenditures by
printing new money
Consider the three financing options and rank them from
most expansionary to least expansionary. Explain your
ranking.
money
and
2.3 A few months ago, a new program of "quantitative
easing" was launched by the European Central Bank
ew
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Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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