Question

Question 12 1 pts In section 8.5 of the textbook on the fiscal causes of high inflation, the government's budget constraint is given by G =T + AB+AM. G is government expenditures, T is total tax revenue, AB is the net issuance of bonds (i.e. new bonds issued minus redemptions of old bonds), and AM is the change in the money supply. Suppose the budget deficit is 4% of GDP (denoted by Y) and the net issuance of bonds is 1% of GDP. If the money supply is twice the size of GDP (i.e. M = 29), then the growth rate of the money supply is _percent. (Round to the nearest tenth.) (Hint: Divide the budget constraint by GDP and rearrange terms. Multiply and divide by M in order to get an expression that includes the growth rate of M, i.e.

Answer 1

Government Budget constraint

G=T - AB+AM

or, G-T= AB+AM

$or,\ \frac{G-T}{Y}=\frac{\Delta B}{Y}+\frac{\Delta M}{Y}$

........................ as M=2Y

or, 4% = 1% + M/2

or, 3% = 2 AM м.

:: (4x) = 1.5%