03 Jun Question Econ 471/571 Answer Key for Midterm 2A Spring 2013
Question
Econ 471/571
Answer Key for Midterm 2A
Spring 2013
Part I: (22 points total) The Government Budget Constraint: Illustrations
0. (6 points) For this question, assume that the Central Bank of Oregon is committed to constant prices – its
a. What is Oregon’s projected basic deficit for 2015 (in dollars)? $__
b. What is Oregon’s projected total deficit for 2015 (in dollars)?
c. How much new debt will Oregon’s Treasury issue(?BT) during 2015? $___
d. How much of the new debt issued by Oregon’s Treasury during 2015 will be purchased by the Central Bank of Oregon? $_
e. How much of the new debt will be purchased by Oregon’s public(?B)? $____
f. Oregon’s federal debt at the end of 2015 (B2015) will be $ ___.
2. (4 points) Suppose that Oregon continues pursue this set of policies (including target inflation of zero) indefinitely. Then
a. Oregon’s total deficit will [remain unchanged ; increase by declining amounts ; i; decrease ; decline in real terms] over time.
b. Oregon’s federal debt will [remain unchanged ; increase by declining amounts ; decrease ; decline in real terms] over time.
‘3. (9 points) Now return to the beginning of the year 2015 and consider a different policy scenario. Oregon’s population has elected new deranged leaders who:
• Default on the federal debt, so that Oregon begins 2015 with B=0.
• Do not change taxes or government spending (T and G remain at 60B and 39B in real terms).
• Recognize that they have blown their credit rating, so debt financed spending is not an option.
• Pass legislation requiring the central bank to purchase any government debt issued by the Treasury in its entirety.
a. What is Oregon’s projected total deficit for 2015 (in dollars)? $__
b. How much new debt will Oregon’s Treasury issue (?BT) during 2015? $____
c. How much of the new debt issued by Oregon’s Treasury during 2015 will be purchased by the Central Bank of Oregon? $___
d. By how much will high-powered money increase during 2015? $____
e. The inflation rate in Oregon over the year 2015 will be ____%.
f. The consequences for Oregon in subsequent years of continuing to pursue this set of policies will be continuing inflation at [an increasing ; constant] rate.
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