ECON 1000-Ch. 16 and 17- Study Module and Homework Questions

If the inflation rate is 6 percent and the nominal rate of interest is 4 percent, then the real interest rate is __________. 2 percent -2 percent 10 percent

-2 percent (If the inflation rate is 6 percent and the nominal rate of interest is 4 percent, then the real interest rate is -2 percent. The real rate is equal to the nominal rate minus the rate of inflation so the real rate = 4% - 6% = -2%. This is how inflation harms savers. A saver will lose 2 percent of their purchasing power by keeping money in the bank drawing the nominal return.)

Hyperinflation exists when the inflation rate exceeds per month. 10% 100% 50%

50% (Hyperinflation exists when the inflation rate exceeds 50% per month. When inflation is at this level, an item that costs $1 today will cost $1.50 in 30 days. However, many hyperinflations have far exceeded this rate of inflation. For example, in Hungary immediately after WWII, the inflation rate was 19,800% each month.)

If the Federal Reserve increases the money supply at 5% a year, in the long run there will be __________. 5% annual inflation something less than 5% annual inflation something greater than 5% annual inflation

something less than 5% annual inflation (If the Federal Reserve increases the money supply at 5% a year, in the long run there will be something less than 5% annual inflation. The long-run inflation rate should be equal to the money supply growth minus the growth in real GDP. The money supply needs to expand as real GDP expands so that money is available to meet the transaction demand. However, if money supply grows faster than real GDP, it is inflationary.)

A sales tax that is levied at all stages of production is known as a A. production tax. B. ​value-added tax. C. property tax. D. sales tax

value-added tax

To finance a budget​ deficit, a government can either borrow from the public or

Create money To finance an existing budget​ deficit, the government can either borrow or have the central bank create money.

Policy Options for the Federal Budget. Which of the following options could the government use to reduce future deficits or push the budget into​ surplus? A. Increases in the money supply. B. Increases in government spending. C. Economic growth. D. Increases in the Social Security retirement age.

D. Increases in the Social Security retirement age.

The profits earned from the sale of stocks, bonds, real estate or other assets are known as; ordinary income. capital gains. wages.

capital gains.

Nominal wages are wages expressed in dollars. current inflation adjusted future

current

Economic variables that are calculated in current year prices are referred to as __________ variables, while variables that have been corrected to account for the effects of inflation are __________ variables. real, nominal nominal, real nominal, deflated

nominal, real

A consumption tax would income from capital gains. not tax stabilize the tax on increase the tax on

not tax

The links the money supply, velocity, and the nominal GDP. seignorage money illusion quantity equation

quantity equation

The quantity equation links prices, money, velocity and

real income

The government funds budget deficits via . borrowing and creating new money. selling assets and tax revenues. tax revenues and borrowing.

borrowing and creating new money.

In the past 30 years there have been cases of hyperinflation. several two no

several

A Phillips curve is a curve showing the __________ inflation rate and the money supply short-run relationship between the unemployment rate and the inflation rate inflation rate and the exchange rate

short-run relationship between the unemployment rate and the inflation rate (A Phillips curve is a curve showing the short-run relationship between the unemployment rate and the inflation rate. Economist A.W. Phillips was the first to plot the data and show the general relationship between unemployment and inflation. Lower unemployment rates tend to be accompanied by higher inflation, and vice versa. As the economy employs more and more workers, the firms are forced to pay higher wages to entice the next worker, and this ultimately translates to higher inflation. The Phillips curve does not investigate the relationships between inflation and exchange rates and the money supply.)

Suppose that velocity is 3 and the money supply is $500 million. According to the quantity theory of money, nominal output equals: $1.5 billion. $150 million. $150 billion.

$1.5 billion. (According to the quantity theory of money M x V = P x Q. Because P x Q is equal to output, if V = 3 and M = $500 million then the nominal output is equal to 3 x $500 million = $1.5 billion.)

Under our current corporate tax​ system, earnings from corporations that are paid out as dividends are taxed_________times.

2

Tax Smoothing or Strategic Tax​ Policy? Assume the pressures of an aging population and increases in​ health-care costs will increase total federal spending in the future significantly. a. Under the theory of tax​ smoothing, what should happen to the current level of taxes if future spending is scheduled to​ rise? A. The current level of taxes should gradually increase to pay for the increases in​ health-care costs as they occur. B. The government should run a deficit and issue debt to pay for the increases in​ health-care costs when they occur. C. The current level of taxes should be reduced but increased in the future to meet the significant increases in​ health-care costs. D. The government should keep the current level of taxes constant but increase tax rates in the future to meet the significant increases in​ health-care costs. __________________________________________________________________________________________________ b. Now suppose future spending increases are not inevitable and​ that, as a practical​ matter, you believe Congress will spend whatever revenue it collects. Would you still recommend tax​ smoothing? Part 5 A. ​No, it could cause excess distortions in the economy. B. ​No, because the spending increases are not​ inevitable, and there is no reason to increase the tax revenue. C. ​Yes, the revenue can be used to reduce the debt. D. ​Yes, unexpected needs​ arise, and the revenue will be available.

A. The current level of taxes should gradually increase to pay for the increases in​ health-care costs as they occur. B. ​No, because the spending increases are not​ inevitable, and there is no reason to increase the tax revenue.

Money​ Neutrality, Long Run​ Inflation, and the Natural Rate. The natural rate of unemployment is independent of the long run inflation rate because money is neutral in the A. long​ run, that​ is, it cannot influence​ output, only prices. B. long​ run, that​ is, it cannot influence​ prices, only output. C. short​ run, that​ is, it cannot influence​ prices, only output. D. short​ run, that​ is, it cannot influence​ output, only prices.

A. long​ run, that​ is, it cannot influence​ output, only prices. Monetary policy is neutral in the long run. Even though the money supply may be higher or​ lower, the price level will also be higher or lower. Suppose the Fed increases the money supply causing the aggregate demand to shift to the right triggering inflation. It is likely that workers did not fully anticipate some of this sudden increase in the price level. Actual inflation will then exceed expected inflation. Workers will see their nominal wages​ increase, but because they do not fully expect this sudden​ inflation, they will think their real wages have risen and will accept the jobs firms offer them. As a​ result, unemployment will fall below the natural rate.​ Eventually, workers will recognize that the inflation rate is higher and will incorporate this higher inflation rate into their expectations of inflation. They will no longer confuse the higher nominal wages firms offer with higher real wages. Unemployment will then return to its natural rate. So there is no permanent relationship between the level of unemployment and the level of inflation.

Oil Price​ Changes, Vacancies and the Natural Rate. During the​ mid-1970s, changes in oil prices required products to be produced by different types of firms in different locations. This raised the number of vacancies relative to the unemployment rate. According to the theory of William​ Dickens, the natural rate was approximately A. 5 percent in the mid​ 1960s, rose in the late 1960s and peaked near 7 percent in the late 1970s and early 1980s. B. 7 percent in the mid​ 1960s, fell in the late 1960s and reached a low near 5 percent in the late 1970s and early 1980s. C. 4 percent in the mid​ 1960s, was constant in the late 1960s and peaked near 6 percent in the late 1970s and early 1980s. D. 5 percent in the mid​ 1960s, fell in the late 1960s and then leveled off near 5 percent in the late 1970s and early 1980s.

A. 5 percent in the mid​ 1960s, rose in the late 1960s and peaked near 7 percent in the late 1970s and early 1980s. William Dickens found that shifts in the relationship between vacancies and unemployment allowed him to make new estimates of the natural rate. He found that the natural rate was approximately 5 percent in the mid​ 1960s, but then rose in the late 1960s and peaked near 7 percent in the late 1970s and early 1980s.

Losing Wars and Hyperinflation. Why do hyperinflations occur more frequently after countries lose wars than if they win​ them? A. Defeated governments may have high budget deficits and no way of financing them other than printing money. B. Wars that countries lose are more expensive than wars that countries win. C. Defeated countries have no incentive to prevent​ hyperinflations, since they already lost the war. D. A country that loses a war cannot collect any tax revenues from its people.

A. Defeated governments may have high budget deficits and no way of financing them other than printing money.

Fiscally Troubled States Today. A number of major stateslong dash for ​example, Kansaslong dash have experienced fiscal problems in recent years. Although no states have defaulted on their debts in the last several​ decades, a number of cities have. Should the federal government​ "bail out" the states and help them meet their​ debts? Providing a​ "bail out" for a state that has been experiencing fiscal problems A. has never happened. B. is not constitutional. C. can reduce the incentive for a state to be fiscally responsible D. would requuire a​ bi-partisan, multi-state agreement.

C. can reduce the incentive for a state to be fiscally responsible

Velocity and New Investment Opportunities for Households. Suppose the introduction of new personal investment opportunities for households led them to hold less of their wealth as deposits in banks or savings and loans. This would cause measured velocity to A. decrease because the money supply would rise. B. increase because the money supply would fall. C. decrease because the money supply would fall. D. stay the same because this is just an exchange of assets.

C. increase because the money supply would fall. The Volocity of Money= Nominal GDP/ Money Supply The money supply includes deposits in banks or savings and loans. If the money supply​ falls, the velocity of money would increase.

Public Pronouncements and Fed Officials. In addition to political and institutional​ factors, public pronouncements also affect the credibility of the Fed. When Alan​ Blinder, a Princeton University professor of​ economics, was appointed​ vice-chair of the Federal Reserve in​ 1994, he gave a speech to a group of central bankers and monetary policy specialists. In that​ speech, he repeated one of the lessons in this​ chapter: In the long​ run, the rate of inflation is independent of unemployment and depends only on money​ growth; in the short​ run, lower unemployment can raise the inflation rate and vice versa.​ Blinder's speech caused an uproar in the financial press. Some commentators attacked him as not being sufficiently vigilant against inflation. Which of the following best explains why an apparently innocent speech would cause an uproar in the financial​ community? A. ​Blinder's comments suggested that he did not understand the relationship between inflation and unemployment. B. ​Blinder's comments suggested that the Fed could not set a credible monetary policy. C. ​Blinder's comments suggested that the Fed might use monetary policy to fight​ unemployment, which could be inflationary. D. ​Blinder's comments suggested that money is neutral in the long​ run, which is bad news for financial markets.

C. ​Blinder's comments suggested that the Fed might use monetary policy to fight​ unemployment, which could be inflationary.

Hysteresis and the Labor Force Participation Rate. In economics the term​ "hysteresis" means that the history of the economy has a lingering effect on current economic performance. During the U.S. recession starting in​ 2007, the labor force participation rate continued to remain below the levels that prevailed before the recession. Could this be an example of​ hysteresis? A. ​Yes, those participating in the labor force continued to participate. B. ​No, those participating in the labor force continued to participate. C. ​Yes, people who left the labor force during the recession did not return. D. ​No, people who left the labor force during the recession did not return. __________________________________________________________________________________________________ Another explanation could be A. discouraged workers rejoined the labor force. B. fewer people changed jobs. C. many people changed jobs. D. the continuing retirement of baby boomers.

C. ​Yes, people who left the labor force during the recession did not return. This could be an example of hysteresis. People who left the labor force during the recession simply did not return _____________________________________________________________________________ Another explanation could be D. the continuing retirement of baby boomers.

Hyperinflation as a Tax. Hyperinflation can be viewed as a tax because it is created by A. buying foreign currencies which reduces the purchasing power of​ consumers, so it is a destructive tax. B. lowering interest rates which increases​ investments, so it is a beneficial tax. C. printing money which reduces the purchasing power of​ consumers, so it is a destructive tax. D. raising interest rates which decreases​ investments, so it is a destructive tax.

C. printing money which reduces the purchasing power of​ consumers, so it is a destructive tax The government raises funds by printing​ money, so it is a tax.​ However, it is a very destructive tax.

The Primary​ Deficit, and Government Debt. The gap between spending and​ taxes, excluding interest on the​ debt, is known as the primary deficit.Suppose there is $ 180million of outstanding public debt. Suppose the interest rate is 4 percent. Any amount of primary deficit will lead to continued growth of the total stock of debt over time because A. outstanding public debt increases as interest rates increase. B. interest in the debt will continue to grow. C. the debt is accumulated deficits. D. positive interest rates lead to increased debt payment

C. the debt is accumulated deficits. As long as there is a primary​ deficit, this will add to that net spending so the government will be spending more than it is receiving in taxes every year.​ Hence, the debt will grow over time.

One criticism of a balanced budget amendment is that; the economy would rapidly overheat as business investment soared. it could not be immediately implemented in the current environment. Congress would simply move some financial discretion to "off budget."

Congress would simply move some financial discretion to "off budget."' One criticism of a balanced budget amendment is that Congress would simply move some financial discretion to "off budget." Congress can get very creative when they want to spend money, so it is likely that a balanced budget amendment would not truly function they way proponents envision it functioning. The primary reason for such an amendment is to curb the runaway spending of the U.S. government. If business investment soared, the government could easily raise taxes if needed. And, most proposed amendments do have a phase-in period.

Why Has the United States Not Instituted a​ VAT? The United States differs from virtually all developed countries in that it does not have a VAT. Most states rely heavily on sales taxes. How might this explain the reluctance of the United States to adopt a​ VAT? A. A VAT is harder to​ collect, making it less efficient than a sales tax. B. This type of tax rewards those who spend while penalizing those who save. C. There is some concern that the​ VAT, like all consumption​ taxes, could be a progressive tax. D. The VAT is a consumption tax and so is a sales tax. States might view this as impinging on their fiscal territory.

D. The VAT is a consumption tax and so is a sales tax. States might view this as impinging on their fiscal territory.

Buying Gold to Protect Against Inflation. Consider the following​ statement: ​"Since gold is a commodity and prices of commodities by definition increase with​ inflation, buying gold will protect me from any inflationary​ increases." A possible problem with buying gold to protect yourself against inflation is that A. gold has a fixed exchange rate with currency. B. gold prices sometimes increase more than inflation. C. gold is expensive. D. the price of gold does not necessarily increase with inflation.

D. the price of gold does not necessarily increase with inflation. The price of gold is determined by the demand and supply of gold and will not necessarily increase with inflation.

Hyperinflation and Barter. Some economists and journalists noticed that during​ Zimbabwe's hyperinflation, the economy was turning to a barter economy. This could be expected to occur because A. the value of money was increasing rapidly. B. the high population density made this practical. C. the government banned the use of currency. D. the value of money was decreasing rapidly.

D. the value of money was decreasing rapidly. The value of money deteriorates sharply during hyperinflations and no longer serves as a good store of value. People turn to other types of​ exchanges, such as barter.

Which of these predictions can be made using the growth rates associated with the quantity equation? If the money supply grows at the same rate as real GDP, there will be deflation. If the money supply grows at a slower rate than real GDP, there will be inflation. If the money supply grows at a faster rate than real GDP, there will be inflation.

If the money supply grows at a faster rate than real GDP, there will be inflation.

Which of these statements about interest rates and inflation is true? The real interest rate is equal to the nominal interest rate plus the inflation rate. The real interest rate is equal to the nominal interest rate divided by the inflation rate. If there is zero inflation, the nominal interest rate is equal to the real interest rate.

If there is zero inflation, the nominal interest rate is equal to the real interest rate.

​Inflation: A Recipe for​ Japan? In the late​ 1990s, Japan's economy was still in a prolonged slump. Nominal interest rates were approximately​ zero, which many economists believed limited the scope for monetary policy. Professor Paul Krugman of Princeton University disagreed. He argued that​ Japan's central bank should increase the money supply rapidly with the intention of causing inflation.​ Moreover, it should credibly promise to continue this inflation policy into the future. The​ result, he​ predicted, would be increased investment and higher GDP growth. ​Krugman's recommendation was based on the distinction between real and nominal interest rates. A permanent monetary expansion would_________(increase, not change, decrease) expectations of​ inflation, which would in turn________(increase, not change, decrease) real interest​ rates, even if nominal interest rates remain at zero. At this new level of real interest​ rates, _______(consumption, investment, government spending, wages and prices) should​ increase, which in turn increases aggregate demand and GDP.

Increase Decrease investment

Among developed nations, had the highest debt to GDP ratio according to 2013 data. Japan France the U.S.

Japan

___________advocates active government intervention via fiscal policy when the economy is in recession Rational expectations theory Keynesian theory Classical

Keynesian theory

An aggressive union will shift the aggregate supply curve________(rightward leftward) causing prices to (decrease, not change, increase) and real GDP to (stay the same, increase, decrease).

Leftward, increase , decrease

Targeting the Natural​ Rate? Because the natural rate of unemployment is the​ economists' notion of what constitutes​ "full employment", it might seem logical for the Fed to use monetary policy to move unemployment toward its natural rate.​ However, many economists believe such a policy would be unwise because the natural rate may shift over time and policy makers may misjudge the correct rate. Suppose that the Fed targeted a 5 percent unemployment rate but the true natural rate was 6 percent. Monetary policy would be too______(tight, neutral, loose) ​, and this will in turn create________(recession, inflation, long-run growth).

Loose, Inflation

The equation of exchange is (M x V) / (P x Q) P x V = M x Q M x V = P x Q

M x V = P x Q (The equation of exchange is M x V = P x Q. This equation is a brief summation of the monetarist position. M = money supply V = velocity of money P = price level Q = quantity In this equation, (P x Q) is output since it is price x quantity. The velocity of money, or the number of times money changes hands in a given year is considered a constant. So, the only thing that will change output is a change in the money supply (M). If M grows too fast it will merely increase P and not Q. For this reason, a stable growth rate in M is preferred to activist monetary policy.)

The equation of exchange is: P x V = M x Q M x V = P x Q (M x V) / (P x Q)

M x V = P x Q The equation of exchange is M x V = P x Q. This equation is a brief summation of the monetarist position. M = money supply V = velocity of money P = price level Q = quantity In this equation, (P x Q) is output since it is price x quantity. The velocity of money, or the number of times money changes hands in a given year is considered a constant. So, the only thing that will change output is a change in the money supply (M). If M grows too fast it will merely increase P and not Q. For this reason, a stable growth rate in M is preferred to activist monetary policy.

The economist that is considered the founder of monetarism is __________. Milton Friedman Robert Lucas John Maynard Keynes

Milton Friedman

The inverse relationship between unemployment and inflation is known as the; expectations Phillips curve. Laffer curve. Phillips curve.

Phillips curve (The inverse relationship between unemployment and inflation is known as the Phillips curve. This relationship was first noted by economist A.W. Phillips using British economic date. He noticed that inflation increased when unemployment was falling. The expectations Phillips curve is the inverse relationship between unemployment and inflation when expected inflation is taken into account. The Laffer curve shows the relationship between marginal tax rates and tax revenues. As marginal tax rates increase, total tax revenues will begin to fall at some point.)

In the face of an upward​ (leftward) shift in the aggregate supply​ curve, the Fed can increase the supply of money. This will prevent a​ recession, but will cause an increase in GDP Prices Consumption Supply Imports

Prices

If a government runs a surplus ​,it will________-its outstanding de

Reduce When tax revenues exceed government​ spending, the government runs a budget surplus and thus will reduce its existing debt.

________________________is the proposition that it is irrelevant whether government expenditures are financed with tax receipts or debt. Ricardian equivalence Keynesian theory Monetarism

Ricardian equivalence Ricardian equivalence is the proposition that it is irrelevant whether government expenditures are financed with tax receipts or debt. Economists who believe in Ricardian equivalence think that deficit spending financed with debt will signal to the public to save more money, anticipating higher taxes in the future. For example, a tax cut that results in the need to deficit spend to finance the budget will result in higher savings, which can then be used to buy the debt. Therefore, there is no difference whether the expenditure was financed with taxes or debt. Keynesian theory maintains that the economy can remain below the full employment level of output indefinitely due to sticky wages and prices. Active government intervention may be necessary to stimulate consumption and push the economy back to full employment. Monetarism is the theory that the money supply can influence nominal income and prices. Monetary theorists advocate a constant growth in the money supply.

maintains that the public forms reasonable accurate forecasts about inflation and economic activity. Classical theory The rational expectations theory Keynesian theory

The rational expectations theory

During the​ 1980s, Germany had low inflation and an independent central bank. A. False B. True

True

Proponents of Ricardian equivalence believe that deficits do not really matter as long as taxes are raised in the future. True or false

True Some economists do not believe that government​ deficits, resulting in government​ debt, impose a burden on a society. These economists believe in Ricardian​ equivalence, the proposition that it does not matter whether government expenditure is financed by taxes or financed by issuing debt. Proponents of Ricardian equivalence do not believe that government debt will crowd out the stock of capital.

Velocity is defined as: V = (P x Q) / M V = M / (P x Q) V = M x P x Q

V = (P x Q) / M

When transfer payments spontaneously increase during a recession, it functions as a(n); budget balancer. automatic stabilizer. spending reduction.

automatic stabilizer.

Proponents of the Fed engaging solely in inflation targeting believe it would; keep fiscal policy from being ineffective. enhance the Fed's credibility. increase the employment level.

enhance the Fed's credibility.

The Federal Reserve has been criticized for __________ as a result of the financial crisis of 2008-2009. expanding the money supply too much not being aggressive enough with regard to monetary policy contracting the money supply too much

expanding the money supply too much

In the short run, a policy of easy money leads to: Higher interest rates, higher inflation, and no impact on output slower money growth, higher interest rates, and lower output faster money growth, lower interest rates, and higher output

faster money growth, lower interest rates, and higher output (In the short run, a policy of easy money leads to faster money growth, lower interest rates, and higher output. The Fed may ease the money supply in order to get the short-term benefits of stimulating the economy. However, at some point, the Fed typically needs to reverse the stimulus in order to keep inflation from getting out of control. Easing the money supply always pushes interest rates lower in the short run since interest is the price of money.)

About 60% of the capital gains and dividend income goes to households with incomes that are; less than $1 million. greater than $500,000. greater than $1 million.

greater than $1 million. About 60% of the capital gains and dividend income goes to households with incomes that are greater than $1 million. More than 70% goes to households with incomes greater than $500,000. This disparity is why many people oppose a consumption tax since the tax burden will fall disproportionately on households with lower levels of income

In the long run, the rate of inflation is determined by the __________. growth of the money supply growth of real GDP level of unemployment

growth of the money supply

New​ Savings? Suppose the government developed a new program to allow parents to save for their​ children's college education in tax free accounts. A wealthy parent decides to take advantage of this new program and sells some currently taxable bonds and places the proceeds into this account. This action A. has created new​ savings, it is a reduction in consumption. B. has created new savings by transferring existing funds from one account to another. C. has not created new​ savings, it is a transfer of existing funds from one account to another. D. has not created new​ savings, it is a reduction in consumption.

has not created new​ savings, it is a transfer of existing funds from one account to another.

According to rational expectations theory, any announced policy change will: have no impact on output. cause the economy to falter. increase economic activity.

have no impact on output.

According to rational expectations theory, any announced policy change will: cause the economy to falter. have no impact on output. increase economic activity.

have no impact on output. (According to rational expectations theory, any announced policy change will have no impact on output. This is because the public will have time to adjust their expectations and therefore there will be no difference between expectations and actual which is the only factor that will create change.)

A consumption tax is likely to benefit: firms. higher income individuals. lower income individuals.

higher income individuals

A worker who rejoices from an increasing paycheck but fails to take into account inflation is suffering from money

illusion

The increase in the fraction of young people in the labor force that occurred when the​ baby-boom generation came of working age tended to________(increase, not change, decrease the natural rate of unemployment).

increase

During the mid-to-late 1970s the economy was experiencing both high inflation and high unemployment. The Fed adopted a policy of: increasing interest rates to combat the inflation. leaving rates unchanged until a clear direction emerged. lowering interest rates to stimulate growth.

increasing interest rates to combat the inflation. (During the mid-to-late 1970s the economy was experiencing both high inflation and high unemployment. The Fed adopted a policy of increasing interest rates to combat the inflation. The Fed under chairman Paul Volcker felt that inflation was the primary concern and increased interest rates until the inflation was curbed. At the current time, higher interest rates would be problematic given the high level of government debt.)

The evidence shows that lower inflation rates are associated with central bank exclusivity regulation independence monitoring

independence

If Ricardian equivalence holds true, then government debt; must be reduced over time. can be harmful. is irrelevant

is irrelevant

It is not clear if a consumption tax will lead to significantly more saving because: businesses will not demand additional investment funds so rates will be low. households will not understand there is an incentive to save. it is not clear whether the typical household will adjust consumption in favor of more savings.

it is not clear whether the typical household will adjust consumption in favor of more savings.

One primary concern about the dramatic expansion of the Fed's balance sheet after the 2008 financial crisis is that it may; Lead to high inflation in the long run. not be enough to stimulate full employment. have pushed firms to expand output unnecessarily.

lead to high inflation in the long run.

Deficit spending during recessions can; negate the impact of monetary policy. lessen the impact of the recession. make the recession worse

lessen the impact of the recession.

Countries with lower rates of money growth have lower nominal interest rates.

lower

Government financing of deficit spending via borrowing will ultimately result in; higher national income. lower national income. lower interest rates.

lower national income.

When a central bank purchases new government​ bonds, it is_________the deficit.

monetizing

When a nation's central bank buys newly issued bonds it is known as; inflating the deficit. fiscal policy. monetizing the deficit.

monetizing the deficit.

High levels of government debt will result in an economy having__________capital stock. no change in lower levels of higher levels of

no change in

The stated rate of interest on a loan is the __________ nominal interest rate real interest rate rate of inflation

nominal interest rate

The stated rate of interest on a loan is the __________. real interest rate rate of inflation nominal interest rate

nominal interest rate (The stated rate of interest on a loan is the nominal interest rate. The nominal, or stated or quoted rate, incorporates the real rate of interest plus an expected inflation premium. If inflation differs from expected, savers can be harmed and borrowers will benefit. The nominal rate of interest = real rate of interest + rate of inflation.)

If the president announced that "we should do something to stimulate economic growth" this is an example of a __________. normative statement positive statement democratic statement

normative statement If the president announced that "we should do something to stimulate economic growth" this is an example of a normative statement. A normative statement implies a value judgment as in this case with the word "should." Positive statements are merely statements of fact. For example, "the economy grew at a 3.0 percent rate." Normative statements are made by both political parties in advocating intervention.

Most economists are __________ a balanced federal budget mandate. not in favor of in favor of indifferent to

not in favor

The funds required to service the debt will be; immaterial since interest rates are low. paid by all taxpayers. sent primarily to foreign owners.

paid by all taxpayers.

The Federal Reserve is charged with pursuing full employment and; price stability. income equality. social justice.

price stability.

One of the problems associated with inflation targeting is; stable prices are not easy to identify. inflation targets are often too high. it creates too much uncertainty.

stable prices are not easy to identify. One of the problems associated with inflation targeting is stable prices are not easy to identify. Measuring inflation is not an exact science given the rapid product improvements and changes in technology. In fact, many economists believe the current way inflation is computed overstates inflation. If that is the case, a 2% inflation rate may actually be stable prices. Inflation targeting should create greater certainty since the Fed's actions would no longer be subject to speculation. All market participants would know the likely Fed action given the current level of inflation. And, most economists advocate an inflation rate between one and three percent.

Proponents of a balanced budget amendment to the U.S. Constitution believe it; may result in fewer wars since wars are costly. will increase the interest rates savers earn on deposits. will force the federal government to have financial discipline.

will force the federal government to have financial discipline.