MyLab Economics with Pearson eText -- Access Card -- for Principles of Macroeconomics
12th Edition
ISBN: 9780134061191
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 10, Problem 6.1P
Subpart (a):
To determine
The combined effect of treasury sale and outstanding debt on the total debt of Country D. Also, find its impact on the debt of the private sector.
Subpart (b):
To determine
To discuss the effect of Treasury sale on the money supply in Country D.
Subpart (c):
To determine
To discuss the effect of Central Bank purchase of bonds on the money supply.
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Suppose the US Federal Government decides to engage in deficit spending whereby it increases its expenditure through debt financing. Which of the following statements describes deficit spending's short-run and long run affects on the price level?
A) The price level remains unchanged over the short run and the long run.
B) The price level increases above its initial level in short run and further increases over the long run.
C) The price level decreases below its initial level in the short run and further decreases over the long run.
D) The price level decreases below its initial level in the short-run but increases above its initial level over the long run.
It’s probably fair to say that for many years fiscal policy has been the poor relation to monetary policy in macroeconomic policy making circles. Now it is back in vogue. In their recent assessment of the economic impact of the pandemic, the World Bank (p56, 2021) concluded, for advanced economies such as the United Kingdom (UK), that,
“With monetary policy increasingly constrained, fiscal policy has taken on a critical role in macroeconomic stabilization during the crisis, delivering unprecedented stimulus in 2020 in the form of cash transfers and income support to households and firms.”
Firstly, explain how monetary and fiscal policy is implemented and how they can be used to influence GDP and the price level.
Secondly, the quotation above highlights the unprecedented use that has been made of fiscal policy in countries such as the UK during the crisis. Briefly consider whether fiscal policy will remain the key policy instrument in these sorts of countries in the near future.
Public deficits arise whenever government expenditure exceeds government receipts. This phenomenon may result from various factors, such as an increase in government expenditure, a decrease in taxation, or a decline in receipts due to an economic slowdown. The accumulation of deficit leads to a rise in public debt. This is precisely what happened in many countries in the wake of 2007-2008 financial crises, when a combination of expensive bank bailouts, a decline in tax receipts due to recession, and an increase in government expenditure to fend off recession led to a record high deficit of 7.5 percent of GDP for the entire OECD area in 2010 and a record high public debt-to-GDP ratio of 94 percent in 2014.
However, government budget deficits might be quite unsavory to the electorate. Thus, elected governments are sometimes tempted to “cook the books” and use “creative accounting” to present official deficit figures that seriously underestimate the real balance of government budgets.…
Chapter 10 Solutions
MyLab Economics with Pearson eText -- Access Card -- for Principles of Macroeconomics
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