Chapter 13: Q2. (page 282)
What are the government’s fiscal policy options for ending severe demand-pull inflation?
Reduced government spending and amplified taxes are the fiscal options to regulate demand-pull inflation.
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Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag.
To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.
Distracted by a war that is going badly, politicians take no notice until inflation reaches 8 percent.
Politicians recognize a sudden recession, but it takes many months of political deal making before they finally approve a stimulus bill.
To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses—but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.
Trace the cause-and-effect chain through which financing and refinancing of the public debt might affect real interest rates, private investment, the capital stock, and economic growth. How might investment in public capital and public-private complementarities alter the outcome of the cause-effect chain?
What is the relationship between the multiplier and the AD component of government spending?
In January, the interest rate is 5 percent and firms borrow \(50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from \)25 billion to \(50 billion, driving the interest rate up to 7 percent. As a result, firms cut back their borrowing to only \)30 billion per month. Which of the following is true?
There is no crowding-out effect because the government’s increase in borrowing exceeds firms’ decrease in borrowing.
There is a crowding-out effect of \(20 billion.
There is no crowding-out effect because both the government and firms are still borrowing a lot.
There is a crowding-out effect of \)25 billion.
What do economists mean when they say Social Security and Medicare are “pay-as-you-go” plans? What are the Social Security and Medicare trust funds, and how long will they have money left in them? What is the key long-run problem of both Social Security and Medicare? To fix the problem, do you favor increasing taxes or do you prefer reducing benefits?
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