Основы экономики. Земскова Л.П. - 19 стр.

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19
PROBLEMS
1. How does the national debt grow?
2. In what sense, if any, is the debt a burden on the economy?
3. Why does the federal government bother to finance itself through taxes at all
when it could borrow in order to cover all its outlays?
4. What would happen to the income if the government raises the tax rate?
5. Explain why a tax rate increase reduces the budget deficit even though it
reduces the level of income.
LECTURE 9. MONEY AND THE ECONOMY
1. The demand for money is a demand for real balances. An increase in the
price level raises the demand for nominal balances proportionally but leaves
real money demand unchanged.
2. An increase in the opportunity cost of holding money – the excess of the
interest rate on bonds over that on money – reduces the demand for real
balances. An increase in real income raises real money demand.
3. The Fed determines the supply of nominal balances. In monetary equilibrium
the quantity of real balances demanded equals the quantity of real balances
supplied. With the price level given, the Fed determines the supply of real
balances.
4. The interest rate adjusts to clear the money market. An increase in the
quantity of real balances reduces the equilibrium rate of interest. Higher real
income raises the equilibrium interest rate.
5. The real interest rate is the nominal, or dollar, interest rate minus the rate of
inflation. Investment spending depends on the real rate of interest. The higher
the real interest rate firms have to pay, the less likely that given investment
projects will be sufficiently profitable to repay the loan plus interest.
Therefore, higher real interest rates reduce investment.
6. When the price level is constant, the Fed affects the real interest rate through
its control over the supply of money. Then monetary policy works by
affecting the supply of real balances, the equilibrium interest rate, and
thereby investment, aggregate demand, and output. A reduction in the real
money stock through an open market sale of securities raises interest rates
and reduces output. An open market purchase increases output.
7. A fiscal expansion crowds out or displaces investment because the increase
in output raises the quantity of money demanded and thus interest rates. A
combination of easy money and tight fiscal policy will encourage investment.
A combination of tight money and tight fiscal policy will lead to a slowdown,
or recession.
8. The investment tax credit, which subsidizes investment, makes it possible for
fiscal policy to increase the level of investment even in the face of rising
interest rates.

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