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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If the Fed wishes to decrease the money supply it can:
A. Raise the discount rate. B. Buy bonds on the open market. C. Decrease the required reserve ratio. D. Decrease the federal funds rate.
Labor saving nonneutral technical progress allows a firm to
A) produce more output with the same inputs. B) use less labor and the same amount of other inputs to produce the same level of output. C) use more labor to produce the same level of output. D) use less labor and more of other inputs to produce the same level of output.