What does it mean to “monetize the deficit”? Why is it important in discussions of fiscal policy? Use an appropriate diagram to illustrate your answer.
What will be an ideal response?
If the Fed wishes to keep interest rates low during a budget deficit, it must create money to expand the supply. While interest rates increase the effectiveness of fiscal policy (a greater impact on GDP), there is also a danger that the increase in money will trigger inflation. Although the Fed has not monetized much debt, there is always the danger that a central bank will do so under pressure from elected politicians. Latin America and Russia provide examples of what monetization can lead to. The diagrams illustrating the effects of monetization should resemble Figure 32-8 in the text, showing the effects on the economy of an increasing money supply.
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Because the government has so much money, and can print more, it does not need to borrow and therefore rarely pays net interest on debt.
Answer the following statement true (T) or false (F)
Given that the income for a franchise restaurant manager is directly tied to profits, while the income for the manager of a company-owned restaurant is paid a flat fee, we might expect profits to be:
A. equal in both types of restaurants. B. Profit comparisons cannot be made based on the given information. C. higher in franchise restaurants. D. lower in franchise restaurants.
The level of output determined by the intersection of the short-run aggregate supply curve and the aggregate demand curve
A. is always above full-employment output. B. always corresponds to full-employment output. C. is always below full-employment output. D. may be above, below, or equal to full-employment output.
Before the Industrial Revolution, living standards in the world:
A. Were relatively stagnant for long periods of time B. Were already rising significantly for many decades C. Are not known, for lack of reliable records from that period D. Were declining because of rapid increases in population