Question

4 Short Answer (20 MARKS) 1. Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve. 2. Suppose that the Bank of Canada unexpectedly decreases the money supply. What will happen to unemployment in the short run? What will happen to unemployment in the long run? 3. Why do many economists advocate a consumption tax rather than an income tax? 4. The following chart, published by the Wall Street Journal, shows the debt-to-GDP ratios for several countries. The obvious outlier in this chart is Japan. (Source: http://goo.gl/umZMld) Debt Buildup Gross government debit as a percentage of GDP for major industried countries Bay us Germany SO 2000 a. What was Japan's debt-to-GDP ratio in 2013, compared to other countries? b. What are the possible effects of a large government debt?

Answer 1

1. The relation between those that both show that there is no relationship between inflation and the unemployment rate in the long run. In the long run, at natural rate of unemployment, both are vertical.

2. Unemployment will increase in the short run. A decreased money supply will result in decrease in output, which will result in higher unemployment.

In the long run the economy will be back at natural rate of unemployment.

3. Many economists argue in favor of consumption tax because it encourages saving and investment and makes the economy more efficient, while income taxation penalizes savers and rewards spenders. his is because income tax is levied at the source, and hence has no regards to how much the person will actually spend. This reduces savings in the economy. A tax on consumption will increase savings.

4. Japan's debt to GDP ratio in 2013 was 188.88%.

A high debt to GDP ratio means not only that the country has to pay a big part of its revenues as interest and repayments on the debt, it also means that debtors are not less confident about the ability of the country to pay back. This results in even higher interest rates being charged, which results in even higher debt to GDP ratio. This spiral can often force government to print money, resulting in very high inflation.