Governments are also affected by inflation. In which of the following ways is the government affected by inflation?
a. Expected inflation increases the real interest rate paid by the government on its new bond issues (i.e., deficit financing).
b. Inflation increases nominal income tax revenues received by the government.
c. Inflation automatically decreases government spending.
d. All of the above are true. In other words, the government is affected by each one of them.
.B
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When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ________ equilibrium.
A. recessionary B. long-run C. expansionary D. short-run
Starting from long-run equilibrium, a large increase in government purchases will result in a(n) ________ gap in the short-run and ________ inflation and ________ output in the long-run.
A. expansionary; higher; potential B. recessionary; higher; potential C. recessionary; lower; lower D. expansionary; higher; higher
Refer to the figure above. If the government of China wants to peg the exchange rate above E yuan per dollar:
A) it will have to buy dollars and sell yuan. B) it will have to buy both dollars and yuan. C) it will have to buy yuan and sell dollars. D) it will have to sell both dollars and yuan.
Suppose that in the absence of trade, the U.S. price for bicycles was higher than the world price for bicycles. Would allowing international trade mean that the United States would import or export bicycles? Who in the United States would benefit and who would lose with a free trade policy, and would the gains be greater than the losses?