4) "Americans face the most predictable economic crisis in this nation's history. Absent reform, the panic ahead is no longer a question of if, but rather when. A deterioration of confidence by investors in government's ability to pay its bills will drive interest rates up, increasing borrowing costs for government, small businesses and families alike. A vicious cycle of debt will compound upon itself; the available exit options once the crisis hits will be limited; and all will involve pain" - Paul Ryan, Path to Prosperity, 2012. Answer the following questions: a) How can a deterioration of investor confidence drive interest rate up? Explain and show on a relevant graph. How can high interest rates impact exchange rates? What does that mean for trade balance and flow of international capital? Explain and show on a relevant graph. (9) b) Why will the rise in interest rates hurt businesses and households? How can households also benefit from high interest rates? (3) c) Increasing government debt is not necessarily always a problem. Under what condition may accumulation of debt not cause reason to worry? What must the government do to achieve the condition? (3)

4) "Americans face the most predictable economic crisis in this nation's history. Absent reform, the panic ahead is no longer a question of if, but rather when. A deterioration of confidence by investors in government's ability to pay its bills will drive interest rates up, increasing borrowing costs for government, small businesses and families alike. A vicious cycle of debt will compound upon itself; the available exit options once the crisis hits will be limited; and all will involve pain" - Paul Ryan, Path to Prosperity, 2012. Answer the following questions: a) How can a deterioration of investor confidence drive interest rate up? Explain and show on a relevant graph. How can high interest rates impact exchange rates? What does that mean for trade balance and flow of international capital? Explain and show on a relevant graph. (9) b) Why will the rise in interest rates hurt businesses and households? How can households also benefit from high interest rates? (3) c) Increasing government debt is not necessarily always a problem. Under what condition may accumulation of debt not cause reason to worry? What must the government do to achieve the condition? (3)

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter12: Fiscal Policy, Incentives, And Secondary Effects

Section: Chapter Questions

Problem 10CQ

See similar textbooks

Similar questions

"How do central banks use quantitative easing (QE) to stimulate economic growth during periods of recession or low inflation? Analyze the potential impacts of QE on different sectors of the economy, including housing, corporate investment, and consumer spending. Additionally, discuss the possible long-term effects of sustained quantitative easing on national debt and inflation."
Explain the difference between traditional and Ricardian view of impact of budget deficit on the Economy. Do you think existence of “Mypopia” among economic agents can reconcile these opposing views?
c) How worrying is the increases in government deficits and debt? Answer these questions in detail and While answering these questions please write academic references in havard referencing style and site them in text please.
3. Can a government run persistent budget deficit? Can national debt grow forever without bankrupting the nation? Let D(t), y(t), and r be the amount of debt at year t, national income at year t, and interest rate on debt per-year, respectively, with D(0) = 0 and y(0) = 1. Here bankruptcy means whether the ratio of interest payment to national income will exceed one i.e. rD(t)/y(t) > 1 at some year. Suppose that time path of debt is given by D = by(t), b > 0 || and the time path of income is given by ģ = gy(t), g > 0. (a) How does the time path of rD(t)/y(t) look like? (b) What is the steady-state value of rD(t)/y(t)? (c) Does it exceed one? Interpret your result.
Multiple Choice Question.... Which statement is a major consequence of high government budget deficits? A) All else held constant, high budget deficits financed by borrowing will lead to lower interest rates. B) If the government finances the deficit by borrowing money, it can crowd out business investment. C) Budget deficits cause unemployment as firms relocate to countries with balanced budgets. D) Printing money to finance the deficit can lead to a significantly deflationary environment.
Consider the following data for Country A and Country B. Country A 2.2% 80% 5% Primary Budget Surplus/GDP Sovereign Debt/GDP Nominal GDP Growth Rate Country B 2.5% 90% 2% Nominal Interest Rate on Debt In this scenario Country A is likely to see fiscal stabilization. How will monetary policy likely change in the country that will not see stabilization? 7% 4% O The central bank will decrease interest rates. No new government debt will be issued. The central bank will keep interest rates stable, but increase the money supply. O Congress will decrease spending.
Consider an economy characterized by the following facts: • The debt-to-GDP ratio is 40% • The primary deficit is 4% of GDP • The growth rate of GDP is 3%. • The real interest rate is 3%, and there is no inflation. (a) Using your favorite spreadsheet software, compute the debt-to-GDP ratio in 10 years, assuming that the primary deficit stays at 4% of GDP each year; the economy grows at the normal growth rate in each year; and the real interest rate is constant, at 3%. (b) Suppose the real interest rate increases to 5%, but everything else remains as in part (a). Compute the debt-to-GDP ratio in 10 years. (c) Suppose the normal growth rate falls to 1%, and the economy grows at the normal growth rate each year. Everything else remains as in part (a). Calculate the debt-to-GDP ratio in 10 years and compare your answer to part (b)
How is the Social Security system currently influencing the size of the budget deficit? If it is not re-formed, how will Social Security influence the budget deficit a decade from now? Is this a cause for concern? Why or why not?
(B). Because developed countries issue debt denominated in foreign currencies, they are able to reduce the burden of that debt by devaluing their currencies. true, false or uncertain and provide explanation
1. Consider an economy characterized by the following facts: i. The official deficit is 4% of GDP. ii. The debt-to-GDP ratio is 100%. iii. The nominal interest rate is 10%. iv. The inflation rate is 7% a. What is the primary deficit/surplus ratio to GDP? b. What is the inflation-adjusted deficit/surplus ratio to GDP? For this economy a reliable rule-of-thumb is that a 1% decrease in output leads automatically to an increase in the deficit of about 0.5% of GDP. c. Suppose that output is 2% below its natural level. What is the cyclically adjusted, inflation-adjusted deficit/surplus ratio to GDP? d. Suppose instead that output begins at its natural level and that output growth remains constant at the normal rate of 2%. What will be the debt-to-GDP ratio: after 1 year, after 2 years, after 10 years? (Assume primary surplus stays the same for all years)
Is a high national debt a problem for future economic growth? What is the ideal debt-to-GDP ratio? Government spending increases national debt and can cause a crowding-out effect. Explain what the crowding-out effect is and why it’s considered a negative effect of increased government spending. How does an open economy versus a closed economy impact government policy decisions? Why is the economic indicator “consumer sentiment” relevant for making successful policy decisions?
Fiscal policy refers to a) the spending and taxing policies used by the government to influence the economy. b) the behaviour of the nation's central bank, regarding the nation's money supply. c) the techniques used by a firm to reduce its tax liability. d) the government's ability to regulate a firm's behaviour in the financial markets.