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Chapter 25: Q.8 (page 676)

Many economists are worried that a high level of budget deficits may lead to inflationary monetary policies in the future. Could these budget deficits have an effect on the current rate of inflation?

Short Answer

Expert verified

Yes, if these actions are fully expected, they may cause a short-term aggregate supply shift.

Step by step solution

01

Content Introduction

Inflation, or the constant rise in price levels, is one of the key threats of a budget deficit. A budget deficit in the United States can prompt the Federal Reserve to pump more money into the economy, feeding inflation

02

Content Explanation

Budget deficit is the difference between government receipts (mainly from taxes) and spending. There is a deficit when spending exceeds revenue. A surplus exists when revenue exceeds expenditure. When the budget deficit grows due to an increase in government spending or a decrease in government revenue, the Treasury must issue more bonds. This lowers bond prices and raises interest rates.

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Most popular questions from this chapter

Suppose two countries have identical aggregate demand curves and potential levels of output, and γis the same in both countries. Assume that in 2019 , both countries are hit with the same negative supply shock. Given the table of values below for inflation in each country, what can you say, if anything, about the credibility of each country's central bank? Explain your answer.

In some countries, the president chooses the head of the central bank. The same president can fire the head of the central bank and replace him or her with another director at any time. Explain the implications of such a situation for the conduct of monetary policy. Do you think the central bank will follow a monetary policy rule, or will it engage in discretionary policy?

Robert Lucas won the Nobel Prize in economics. Go to http:/nobelprize.org/nobel_prizes/economics/ and locate the press release on Robert Lucas. What was his Nobel Prize awarded for? When was it awarded?

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI). Convert the units setting to "Percent Change from Year Ago, " and download the data. Beginning in January 2012, the Fed formally announced a 2% inflation goal over the "longer-term."

a. Calculate the average inflation rate over the last four and the last eight quarters of data available. How does it compare to the2% inflation goal?

b. What, if anything, does your answer to part (a) imply about Federal Reserve credibility?

What traits characterize a “conservative” central banker?
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