EBK ECONOMICS: PRINCIPLES AND POLICY
13th Edition
ISBN: 8220100605932
Author: Blinder
Publisher: Cengage Learning US
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Chapter 30, Problem 7DQ
To determine
The effect of an increase in budget deficit.
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The economy is at full employment, with fairly low levels of unemployment and inflation. What is likely to happen to GDP, unemployment, interest rates, and inflation if:
d) the government increases its deficit at the same time that the Fed is reducing the money supply.
e) the government increases its surplus at the same time that the Fed is increasing the money supply
After a series of measures to remedy the mortgage crisis that has beset the US economy, Ben Bernanke, chairman of the Board of Governors of the Federal Reserve and his colleagues are once again looking at cutting the central banks key interest rate as they hope that lowering the interest rates will give the economy a boost by encouraging investors and consumers to borrow and spend (Associated Press, n. pag.). The Fed is looking at slashing the interest rate by a full percent however, many economist believe that this is not the appropriate remedy for economic conundrum (Gavin, n. pag).
According to many analysts, the issue of the economy regarding the mortgage is the lack of confidence by both the lender and the borrower. Even as the Fed resorts to drastic interest cuts, the first time the central bank has cut a full percentage point in one shot since 1982, this provides little help if lenders are not loaning money out of fear they will not be repaid and the borrowers…
If bondholders expect the Fed to raise interest rates, what action might they take? How would this affect the Fed’s goal?
Chapter 30 Solutions
EBK ECONOMICS: PRINCIPLES AND POLICY
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- Why would a central bank be concerned about persistent,long-term budget deficits?arrow_forwardIn what ways does the Fed utilize their monetary policy tools to affect or counter-balance fiscal policy?arrow_forwardPredict how possible changes in monetary and/or fiscal policy may impact the supply and demand of the iPhone.arrow_forward
- The economy is at full employment, with fairly low levels of unemployment and inflation. What is likely to happen to GDP, unemployment, interest rates, and inflation if: a) the government increases its surplus. b) the government increases its deficit. c) the government increases its surplus at the same time that the Fed is reducing the money supply. D) the government increases its deficit at the same time that the Fed is reducing the money supply. e) the government increases its surplus at the same time that the Fed is increasing the money supply.arrow_forwardIf the Federal Reserve wants to keep aggregate demand (i.e. spending growth) stable, what will it do to the growth rate of money supply when a lot of good news comes out about the economy increase it, decrease it, or leave it unchanged? Explain your answer.arrow_forwardImagine you're sitting around talking with your relatives during some family R&R. You hear members of your family discussing how "out of control" federal government spending has become as reflected in ballooning federal government budget deficits and the skyrocketing national debt. You also hear several family members express grave concern over the United States' huge trade deficit. Having just learned something about modern monetary theory (MMT), you jump into the conversation and explain that obsessing over federal government budget deficits and the U.S. trade deficit is, from a MMT perspective, misguided. Your family members are puzzled by vour remark and ask you to explain this MMT perspective. What would you say?arrow_forward
- Which policy should be more effective to use during recession to increase spending and borrowing, or decrease spending and borrowing during high inflation. Explain?arrow_forwardConsidering what you've learned about both fiscal and monetary policy, what are some of the benefits you might see from using monetary policy instead of fiscal policy to address common economic downturns? What could be some of the disadvantages?arrow_forwardThe Fed has conducted expansionary monetary policy to combat a recession but is running up against the zero lower bound, and the economy is still not recovering. What other steps could the government take to try to stabilize the economy? Steps the government could take to stabilize the economy increase government spending raise real interest rates lower taxes increase transfer payments Steps the government should not or cannot take to stabilize the economy Answer Bank decrease government spending raise taxes lower real interest rates decrease transfer paymentsarrow_forward
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