1. Trace the cause-and-effect chain through which financing and refinancing of the public debt might affect real interest rates, private investment, the stock of capital, and economic growth.How might investment in public capital and complementarities between public capital and private capital alter the outcome of the cause-effect chain?
2. Briefly state and evaluate the problems of time lags in enacting and applying fiscal policy. Explain the idea of a political business cycle. How might expectations of a future policy reversal weaken fiscal policy based on changes in tax rates? What is the crowding-out effect and why might it be relevant to fiscal policy? In view of your answers, explain the following statement: "Although fiscal policy clearly is useful in combatting severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real GDP and keep the economy there indefinitely."
3. Explain why merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. What risk did goldsmiths introduce into the payments system by issuing loans in the form of gold receipts?