Question Details

Accelerated inflation is an alternative to taxation in this context because 



multiplier is 5, the income multiplier with respect to the money supply is 3, the real interest rate is 3%, the current budget deficit is $30b, the long-run real rate of growth is 2%, the current money supply is $200b, velocity is constant, and the nominal interest rate is 10%. 
1. Inflation is 
a) less than 7% b) 7% c) 8% d) more than 8% 
2. Money growth is 
a) less than 7% b) 7% c) 8% d) more than 8% 
3. Seigniorage is 
a) less than or equal to $5b b) between $5b and $10b 
c) between $10b and $20b d) greater than or equal to $20b 
4. "If we can't borrow all of the funds we need to finance expenditures which we are going to make in any event, we should at least look at the advisability of the central bank itself financing some of those expenditures simply by creating the money." This suggestion is 
a) unadvisable, because it creates inflation b) advisable, because it means lower taxes 
c) unadvisable, because it creates unemployment 58 
d) advisable, because it minimizes interest costs 
5. "It is the rare consumer or investor who would not conclude that where government debt was growing faster than GDP, tax increases and/or accelerated inflation could not be far off." Accelerated inflation is an alternative to taxation in this context because 
a) the government may pay off the debt by printing money 
b) if inflation is accelerated people will refuse to pay taxes 
c) people may pass on higher taxes by increasing wages and prices 
d) people may fear a financial crisis and increase wages and prices accordingly 
6. "There is no direct connection between the deficit and inflation. If there were, why did inflation hit 14 percent in 1948, a year when the government had a spending surplus? And why has inflation continued to fall the past two years while the deficit has been rising?" The strongest connection between the budget deficit and inflation is that 
a) inflation results indirectly if the deficit is financed by printing money 
b) inflation results directly from deficit spending creating excess demand 
c) inflation results indirectly from the higher interest rate caused by the deficit 
d) inflation increases nominal government spending which increases the deficit



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