Essay Questions

  1. A consultant report to the State Tax Review Commission had recommended that the state general excise tax be increased from the current 4% to 4.5%, in view of its observation that the current rate is less than the median rate of 6% in sales tax across the nation.  Discuss the fallacy of this statement.  Are we comparing apples to apples?  What are the unique characteristics of Hawaii’s general excise tax?  What is the effective tax rate of a 4.5% GET?  Do you agree with the consultant report and why so?


2. Some economists seem to claim that there is a one-for-one correspondence between the government budget deficit and trade deficit.  Under what conditions would this be the case?  What relationship is there between the government budget deficit and trade deficit?  How does the translation mechanism works?


4. Milton Friedman, the 1976 Nobel Prize winning economist and leading monetarist scholar is widely quoted as saying “Inflation is always and everywhere a monetary phenomenon.”  Discuss the concept of monetary policy, who conducts monetary policy in the U.S., the various tools of monetary policy, and how monetary policy can lead to inflation.  Include in your discussion the theoretical construct(s) of this relationship between money and inflation.  Additionally, discuss the concepts of seignorage and hyper-inflation.


5. The U.S. Bureau of Labor Statistics (BLS) reported recently that prices in Honolulu, as measured by the Consumer Price Index for All Urban Consumers (CPI-U) was 1.8 percent in the second half of 2015.  What does this mean?  Discuss the concept of inflation – definition, the different approaches (3), strengths and weaknesses of the measures, as well as potential costs and benefits of inflation.  Include in your discussion, the impacts of expected (anticipated) versus unexpected (unanticipated) inflation.

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