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Final Exam Principles of Macroeconomics WINTER session Instructor: T. Cummings NAME: XXXXXXXXXXCOURSE NAME/NO./SECTION: DATE: Principles of MACROECONOMICS Final Exam INSTRUCTIONS: • This online exam...

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Final Exam Principles of Macroeconomics WINTER session Instructor: T. Cummings

Final Exam
• This online exam is not being proctored however it is understood as stated in the syllabus, and in the
student code of conduct that plagiarism will result in this exam being rejected. Plagiarism in this case
includes the use of and access to google searches to determine the answers, the use of paid subscription
services to answer the questions, the use of non-approved content, the assistance of other person(s) to aid
in this exam, using response developed by other(s) without crediting the source, etc.
• Read the question and scenario before writing and/or graphing your response.
• Label all curves on your graph(s); annotate shifts in curves, price, equili
ium, etc. to support your
esponse. This is required to earn points for your response(s).
• Answer all questions in this exam to increase maximum (earning) points.
• Partial credit is given when parts of questions are answered fully and co
ectly using college-level writing
standards, and grammar.
• Graphing: Graphs are required in Economics (Principles of Macroeconomics, and Principles of
Microeconomics). Indicate shifts of curves in your graphs, and label the curves (e.g. 1, 2, A, B) and indicate
the equili
ium point, changes to the equili
ium, price, total expenditures, optimal output, etc.
Final Exam Principles of Macroeconomics WINTER session Instructor: T. Cummings
Name: XXXXXXXXXXFinal Exam Response Page
I. Claim: Recessions are caused by excessive savings on the part of the public. People save buy less now. Will this
cause an increase in producers' inventories? Will this behavior cause producers to reduce their levels of output
and the number of employers? When people lose their jobs, they also spend less because their incomes
Evaluate (must have pros and cons) from a positive economic lens this claim that those who spend create a robust
economy whereas those who save
ing on economic recessions.
Final Exam Principles of Macroeconomics WINTER session Instructor: T. Cummings
Name: XXXXXXXXXXFinal Exam Response Page
II. Read the article below. It is one that was previously assigned for in-class discussion. You are somewhat
familiar with key points articulated in this article. Once you finish reading the article, answer
esponding questions/graphs.
Does the National Debt Matter?
December 04, 2020
By David Andolfatto
In the second quarter of 2008, U.S. federal debt held by the public totaled about $5.3 trillion, or 35% of gross
domestic product (GDP). This figure grew to $20.5 trillion—or 105% of GDP—by the second quarter of 2020.
To put it another way, the national debt has increased 400% in 12 years, while over the same period, national
income has grown by only 30%.
Since the Congressional Budget Office projects that federal budget deficits of 4%-5% of GDP will persist in the
foreseeable future, a growing number of analysts and policymakers are raising alarms about whether this fiscal
situation is sustainable.1
Most people have a very personal view of the nature of debt. We know that high levels of debt and deficit
spending at the household level are not sustainable. At some point, household debt has to be paid back. If a
household is unable to do so, its debt will have to be renegotiated. It is natural to think that the same must hold
true for governments. But this “government as a household” analogy is imperfect, at best. The analogy
down for several reasons.
Debt Issuance
While a household has a finite lifespan, a government has an indefinite planning horizon. So, while a household
must eventually retire its debt, a government can, in principle, refinance (or roll over) its debt indefinitely.
Yes, debt has to be repaid when it comes due. But maturing debt can be replaced with newly issued debt.
Rolling over the debt in this manner means that it need never be “paid back.” Indeed, it may even grow over
time in line with the scale of the economy’s operations as measured by population or GDP.
Unlike personal debt, the national debt consists mainly of marketable securities issued by the U.S. Treasury as
onds. It is of some interest to note that the Treasury Department issued some of its securities in the form of
small-denomination bills, called United States Notes, from XXXXXXXXXXthat are largely indistinguishable from
the cu
ency issued by the Federal Reserve today.
Today, U.S. Treasury securities exist primarily as electronic ledger entries.2 These securities are used
extensively in financial markets as a form of wholesale money. The cash management division of a large
corporation, for example, may prefer to hold Treasury securities instead of bank deposits because the latter are
insured only up to $250,000.
If cash is needed to meet an obligation, the security can either be sold or used as collateral in a short-term loan
called a “sale and repurchase agreement,” or repo, for short. Because investors value the liquidity of Treasury
securities, they trade at a premium relative to other securities. So, investors are willing to ca
y Treasury
securities at relatively low yields, the same way we are willing to ca
y insured bank deposits at very low
interest rates, or the same way we are willing to ca
y securities that bear zero interest like the ones displayed
Final Exam Principles of Macroeconomics WINTER session Instructor: T. Cummings
Ultimately, the federal government has control over the supply of the nation’s legal tender. Both of the notes
above have been legal tender since the gold recall of 1933. Now, consider the fact that the national debt consists
of U.S. Treasury securities payable in legal tender. That is, imagine the national debt consisting of interest-
earing versions of the U.S. Note shown above.
When the interest comes due, it can be paid in legal tender—that is, by printing additional U.S. or Federal
Reserve Notes. It follows that a technical default can only occur if the government permits it. The situation here
is similar to that of a corporation financing itself with debt convertible to equity at the issuer’s discretion.
Involuntary default is essentially impossible.3 This aspect of U.S. Treasury securities renders them highly
desirable for investors seeking safety—a property which again serves to drive down their yields relative to other
Debt as Cu
To the extent that the national debt is held domestically, it constitutes domestic private sector wealth. The extent
to which it constitutes net wealth can be debated, but there’s not much doubt that at least some of it is viewed in
this manner.4 The implication of this is that increasing the national debt makes individuals feel wealthier.
When this “wealth effect” is generated by a deficit-financed tax cut (or transfers) in a depression, it can help
stimulate private spending, making everyone better off. When the economy is at or near full employment,
however, such a policy is instead more likely to increase the price level, which can lead to a redistribution of
Together, these considerations suggest that we might want to look at the national debt from a different
perspective. In particular, it seems more accurate to view the national debt less as form of debt and more as a
form of money in circulation.
Investors value the securities making up the national debt in the same way individuals value money—as a
medium of exchange and a safe store of wealth. The idea of having to pay back money already in circulation
makes little sense, in this context. Of course, not having to wo
y about paying back the national debt does not
mean there is nothing to be concerned about. But if the national debt is a form of money, wherein lies the
Debt Service
Unlike the U.S. Notes issued in the past, Treasury securities bear interest (or sell at discount, in the case of
Treasury bills). So even if the national debt doesn’t have to be paid back, it still needs to be serviced. The
interest expense associated with ca
ying debt is called the ca
y cost.
Debt management strategies employed in government treasury departments seem heavily influenced by
corporate practices. But corporations have to wo
y about rollover risk, whereas governments can always (if
they choose) have their central banks support refinance operations. As well, corporations operate in the interests
of a smaller set of constituents than a federal government. Given these considerations, it is not immediately
clear whether corporate debt management principles apply to the Treasury Department.
If one had to draw on the corporate sector for analogy, an example might be a bank. A significant amount of
debt issued by banks is in the form of insured deposit liabilities. Because insured deposits are safe and because
they constitute money, investors are willing to ca
y deposits at low yields. As a result, deposits are a very
cheap source of funding for banks.
Final Exam Principles of Macroeconomics WINTER session Instructor: T. Cummings
This low-cost source of funds is used to ca
y higher return assets, like mortgages and business loans. One
might say that the net ca
y cost of debt, in this case, is negative. To the extent that the federal government
invests in programs designed to enhance productivity (e.g., healthcare and infrastructure), the same thing might
apply to the national debt, which is willingly ca
ied by investors at relatively low yields.
But even if government expenditures do not generate high pecuniary rates of return, the federal government
may still be in a position to ca
y its debt at an effective negative rate. This would be true, for example, if the
interest rate on the national debt was on average less than the growth rate of the economy or, as the condition is
expressed in more technical terms, if r ‹ g.
It follows as a matter of simple arithmetic
Answered Same Day Jan 12, 2022


Komalavalli answered on Jan 12 2022
83 Votes
Recessions are times of
oad reduction in economic activity and economic performance indices. It has negative impact on all kind of business activities. Manufacturers will decrease or freeze employment as sales and earnings fall. Firms can reduce expenses and enhance profitability by not purchasing new equipment, reducing R&D, and abandoning new goods. Costs for marketing and advertising can also be decreased. These cost-cutting initiatives will have an influence on other firms, both large and small, that offer products and services to large manufacturers.
If public debt is kept domestically, it symbolizes the private sector's domestic wealth. The extent...

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