Principles of Macroeconomics (12th Edition)
12th Edition
ISBN: 9780134078809
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
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.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
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
Principles of Macroeconomics (12th Edition)
Knowledge Booster
Similar questions
- Q1 Assume that the actual deficit is $200 billion, with the economy well below potential output. Once the level of economic activity rose to its potential level, tax revenues increased by $50 billion, and transfer payments fell by $20 billion. Then the structural deficit is ___________ billion and the cyclical deficit is _________________ billion Q2. Suppose that the required reserve ratio is 10%. An increase in the initial reserve of $10,000 can expand the money supply by $100,000. The value of deposit multiplier is then __________.arrow_forwardSuppose 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 real GDP? A) Real GDP rises above the natural level in the short run, but it returns to the natural level in the long run.B) Real GDP remains at the natural level in both the short run and the long run.C) Real GDP falls below the natural level in the short run, but it returns to the natural level in the long run.D) Real GDP rises above the natural level in both the short run and the long run.arrow_forwardNigeria typically runs a gov budget surplus, and it has a small debt to GDP ratio (approximately 40%). This year, Nigeria is running a government budget deficit, and it is financing that deficit by selling government bonds.This year's government budget deficit is causing interest rates to (increase/decrease/remain the same/change ambiguously) and the debt to ( increase/decrease/remain the same/change ambiguously.) Nigeria is predicted to return to a surplus position next year. If it is successful, interest rates will (increase/decrease/remain the same/change ambiguously) and the debt will (increase/decrease/remain the same/change ambiguously.) In August 2019, Nigeria announced that it would increase its sale of government bonds from 55 billion nigerian currency to 85 billion nigerian currency. This resulted in (an increase, decrease, no change, an ambiguous change) in the price of government bonds and (an increase, decrease, no change, an ambiguous change) in the yield of government…arrow_forward
- Explain what kind of fiscal policy and what kind of monetary policy are likely to reduce GDP.arrow_forwardDiscuss the fiscal policy measures adopted by the government in the last two years. Evaluate the expected effects of these measures on aggregate demand and supply, as well as their impact on the major macroeconomic goals of steady GDP growth, price stability, and full employment. Determine whether these measures are expansionary or contractionary and consider their implications for the budget deficit and national debt. Explain the most recent monetary policy move by the Federal Reserve (the FED). Determine whether this policy is expansionary or contractionary and elaborate on the reasons behind the Fed's decision. Analyze the observed impacts of this policy. For best results and up-to-date information, refer to recent announcements made by the Federal Open Market Committee (FOMC).arrow_forwardLike any economic crisis, unemployment rises, aggregate income falls, and tax collections drop during the Great Recession. While unemployment rises, safety net spending rises. To stabilize the economy, the government appears to have just two options: harsh austerity (reduce spending) or more borrowing. It is difficult to defend cuts in federal government programs, especially those that provide a minimum standard of living for the poor, but increasing indebtedness hurts the economy. In a few words, analyze Costs of eliminating the budget deficit solely through (1) personal tax increases, and/or (2) through spending cut by decreasing in transfer payments (i.e., Social Security, Medicare and Medicaid) and in discretionary spending (such as defense and education budgets)arrow_forward
- Q.1.1 An increase in the budget deficit is the result of: (a) Expansionary monetary policy;(b) Contractionary monetary policy;(c) Expansionary fiscal policy;(d) Contractionary fiscal policy.arrow_forwardRespond to the following in a minimum of 175 words: Explain the chain of events that occurs for expansionary and contractionary monetary policy to affect the long-run equilibrium level of real gross domestic product (GDP). Compare and contrast expansionary and contractionary fiscal policy.arrow_forwardWhy it could be the case that after an initial sharp increase, the budget deficit could drop through time (as it did in the USA after the 2008 financial crisis)?arrow_forward
- At the monetary policy meeting in February 2021, the central bank of Mexico cut its policy the rate for the first time since September in an effort to stimulate the economy. However, after the United States government announced in March 2021 the introduction of a new financial stimulus package to boost the US economy, the Governor of the Mexican central bank announced that the board would consider the impact of the US fiscal stimulus in the Mexican economy, and whether it is necessary to change their monetary response. Explain how a US fiscal stimulus may affect the Mexican economy and why the central bank may respond to it. (100 words max)arrow_forwardExpansionary fiscal policy refers to the ________ to increase real GDP. A. Federal Reserve's increasing the money supply and decreasing interest rates B. government's increasing spending and lowering taxes C. Federal Reserve's decreasing the money supply and increasing interest rates D. government's decreasing spending and raising taxesarrow_forwardWhich of the following about government deficits is true? it is a flow variable it is controlled by the Comptroller of Currency it is a stock variable it is controlled by the Federal Reservearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
