Explore BrainMass
Share

government benefits from inflation

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

What are government's fiscal policy options for ending severe demand-pull inflation? Use the aggregate demand-aggregate supply model to show the impact of these policies on the price level. Which of these fiscal policy options do you think might be favored by a person who wants to preserve the size of government? A person who thinks the public sector is too large?

Explain why relatively flat as opposite relatively steep labor demand curves are more consistent with the empirical observation that there are relatively minor changes in the real wage rate over the course of the business cycle.

Is sustainable long-run equilibrium always reached when the AD and SAS curves intersect? Why or why not?

If the equilibrium real wage remains constant, what happens to the nominal wage when the actual inflation rate exceeds the expected inflation rate?

"In the steady state, the government benefits from inflation." Explain.

© BrainMass Inc. brainmass.com October 25, 2018, 1:14 am ad1c9bdddf
https://brainmass.com/economics/inflation/government-benefits-from-inflation-257041

Solution Preview

The government has two tools when it wants to influence the macroeconomy: one, it can change taxes, and two, it can change its spending patterns. In case the economy is facing a demand-pull inflation it means AD is rising fast. The four components of AD are household consumption (C), gross private investment (I), government expenditure (G), and net exports (NX). We usually take I, G and X (exports) to be exogenous variables. Thus to curtail a demand-pull inflation the government has to work on somehow curtailing consumption (C) and imports (M), or cut down its own spending. The two options with the government in such a case are:
(a) Cut down government spending: a reduction in G will reduce AD.
(b) Increase taxes: That will bring down the disposable income and will hence bring down both C and M.

See ...

Solution Summary

This solution shows how a government benefits from inflation.

$2.19
See Also This Related BrainMass Solution

Production, Unemployment and Inflation

1. Suppose that in 2013, the economy produced 10 shirts at $20 each and 5 hamburgers at $5 each. In 2014, the economy produced 15 shirts at $21 each and 10 hamburgers at $6 each.
2. What is the value of real GDP produced in 2014 using 2013 as the base year?
3. What would be the growth in real GDP?
4. Why is there unemployment even when the economy is at "full employment"?
5. What are some "costs of unemployment"?
6. Use the table below:
Year CPI
2008 100.0
2009 102.5
2010 106.0
2011 111.0
a. What is the inflation rate from 2010 to 2011?
b. Suppose that you have an income of $30,000 in 2008. How much would you need to be able to have the same standard of living in 2009?
c. What are some of the problems with using the CPI as a measure of standard of living?
7. Explain some limitations of using GDP as an indicator of standard of living (be sure to do some research on your own).
8. According to Okun's Law, if the normal rate of growth of GDP is 3% and the current unemployment rate is 6%, an increase in GDP growth to 4% would cause unemployment to change by what percentage?
9. When total output, income, employment, and trade decline for 6 to 12 months, the economy is in what part of the business cycle?
10. Which has a larger effect on aggregate demand: an increase in government expenditure or an equal sized decrease in taxes? Explain your answer.
11. To eliminate a recessionary gap, what fiscal policy should the government pursue? Be specific.
12. Indicate which of the following is expansionary OR contractionary fiscal policy:
• Increasing income tax
• Bailing out the auto industry
• The purchase of military helicopters
13. Are credit cards or debit cards money? Explain your answer.
14. Assume that the bank holds no excess reserves and that the required reserve ratio equals 10% of deposits. If a customer deposits $5,000, what would be the total increase in checking account balances throughout all banks? Explain the process by which the banking system creates money.

15. In your own words, list the Fed's main policy tools and briefly explain each one.
16. TRUE or FALSE. "When the Fed makes an open market purchase of government securities, the quantity of money will eventually decrease by a fraction of the initial change in the monetary base." Is the previous statement correct or incorrect? Explain your answer.
17. Explain how governments restrict international trade and who benefits as well as who loses from the restrictions.
18. Because wage rates are so low in Africa, why don't Microsoft, Cisco and other major corporations close down their American operations and move to Africa?
19. Consider the foreign exchange market for Japanese Yen and Dollars. Assume a market where the U.S. dollars are on the x axis as shown in the background material. Indicate whether the dollar would APPRECIATE or DEPRECIATE if the following events occur (be sure to explain your answer such as including reference to the demand or supply curve):
a. The interest rate in Japan is lowered.
b. Prices are lower in U.S.
c. Higher US interest rates.
20. What is the effect of a higher exchange rate on exports and imports?
21. (a.) Suppose real GDP was $13.1 trillion in 2013 and $13.3 in 2014, what is the growth rate? (b.) How many years would it take for GDP (gross domestic product) to double (using your answer from part (a)?
22. What are the sources of human capital? Discuss some specific examples.
23. What is the law of diminishing returns? Give an example of what the law of diminishing returns implies.
24. What happens when the government raises taxes and uses revenue to engage in spending?
25. Identify and briefly describe DirectTV and why do you think it will be an interesting focus for your application of macroeconomic ideas?
26. Select three macroeconomic indicators from http://www.investopedia.com/university/releases/ that you feel have the greatest impact on the operations and/or planning for DirectTV
27. Why they are important to the current or future condition of DirectTV.
28. Suppose the U.S. government removed tariffs in your industry. What impact would that have on DirectTV?
29. What are some obstacles DirectTV might face with production in another country?
30. Make an argument FOR free trade. Be sure to discuss the advantages and disadvantages of Free Trade.

View Full Posting Details