Deck 13: A: Fiscal Policy, Deficits, Surpluses, and Debt

Question 1

Give a brief definition of fiscal policy? What are its economic goals?

Answer 1

Fiscal policy is the use of the government budgetary actions to achieve full employment, control inflation, and stimulate economic growth.The changes to the budget can be made through changes in government spending or taxes.

Question 2

Assume that without any taxes the consumption schedule for an economy is as shown in the table.Also assume that investment, net exports, and government expenditures do not change with changes in real GDP. (a) What are the MPC, MPS, and the size of the multiplier?
(b) Assume a lump-sum tax of $10 billion is imposed at all levels of GDP.Determine consumption and the tax rate at each level of GDP by completing the following table.Is tax regressive, proportional, or progressive? Compare the multiplier under the lump-sum tax with the pre-tax multiplier. (c) Assume instead that a proportional tax of 10% is imposed at all levels of GDP.Determine consumption at each level of GDP by completing the following table.Compare the multiplier under the proportional tax with the multiplier under the lump-sum tax.Explain why a proportional or progressive tax system contributes to greater economic stability as compared with the lump-sum tax.

Answer 2

(a) The MPC is .8.(160/200).The MPS is .2 (1 - .8).The multiplier is 5 (1/.2).
(b) The lump-sum tax reduces disposable income by $10 billion.Since the MPC is .8, consumption at each level of GDP falls by $8 billion.
The lump-sum tax is a regressive tax because the average tax rate decreases as GDP increases.Since the after-tax MPC and MPS are unchanged, the multiplier under the lump-sum tax is the same as the pre-tax multiplier.
(c) Because the tax is 10% of GDP and the MPC is .8, consumption is reduced by the amount of the tax multiplied by .8.For example, when GDP is $800 billion, taxes are $80 billion and disposable income is reduced by $80 billion.This decrease in disposable income reduces consumption by $64 billion.
Under the proportional tax, the after-tax MPC is .72 ($144/$200).As a result, the after-tax MPS is .28 (1 - .72) and the multiplier is 3.57 (1/.72).Therefore, the multiplier is smaller.
Compared to a regressive tax system, a proportional or progressive tax system takes a smaller portion of low income and a bigger portion of high incomes.Thus, a proportional or progressive tax system leaves more disposable income for spending during low-income periods and less disposable income for spending during expansionary phases.As a result, any change in aggregate expenditures produces a smaller change in GDP.In other words, the multiplier is smaller and there is greater built-in stability under a proportional or progressive tax system.

Question 3

Which fiscal policy, government spending or taxes, is preferable?

Answer 3

The answer depends on one's point of view and economic conditions.Those who believe that the government is too large and inefficient would favour a cut in taxes during recessions and cuts in government expenditures during periods of demand-pull inflation.On the other hand, those who believe that social and physical infrastructure are inadequate would favour increases in government spending during recessions and higher taxes in times of demand-pull inflation.

Question 4

During which phases of the business cycle would fiscal policies that reduce budget deficits (or even increase surpluses) be appropriate?

Question 5

Give two examples of contractionary fiscal policy.What will be the effect on government surplus/deficit?

Question 6

What does the "full-employment budget" measure and of what significance is this concept? (Note: full-employment budget and cyclically adjusted budget are synonyms.)

Question 7

Under a particular tax system, the government collects $80 billion in tax revenues when GDP is $800 billion and $88 billion when GDP is $900 billion.Is this tax system regressive, proportional, or progressive?

Question 8

If the government is not implementing a discretionary expansionary fiscal policy, how can its budget move into a deficit?

Question 9

Explain how the below graph illustrates the built-in stability of the tax structure.

Question 10

In Year 1, the full-employment budget showed a deficit of $100 billion and the actual budget showed a deficit of $150 billion.In Year 2, the full employment budget showed a deficit of $125 billion and the actual budget showed a deficit of $175 billion.Based on the data, what can be concluded about the direction of fiscal policy and the performance of the economy between Years 1 and 2?

Question 11

Explain the aspects of expansionary and contractionary fiscal policy.During which phases of the business cycle would each be appropriate?

Question 12

Differentiate between discretionary fiscal policy and non-discretionary policy (or built-in stabilization).

Question 13

In Year 1, the full-employment budget showed a deficit of $100 billion and the actual budget showed a deficit of $150 billion.In Year 2, the full employment budget showed a deficit of $125 billion and the actual budget showed a deficit of $150 billion.Based on the data, what can be concluded about the direction of fiscal policy and the performance of the economy between Years 1 and 2?

Question 14

Give two examples of expansionary fiscal policy.What will be the effect on government surplus/deficit?

Question 15

"The more progressive a tax system, the greater is the economy's built-in stability." Explain this statement for both recessionary and peak phases of the business cycle.

Question 16

Evaluate: A tax system in which those with higher incomes pay more taxes is progressive.

Question 17

Explain what is meant by a built-in stabilizer and give two examples.

Question 18

Under a particular tax system, the government collects $40 billion in tax revenues when GDP is $800 billion and $45 billion when GDP is $900 billion.Is this tax system regressive, proportional, or progressive?

Question 19

In Year 1, the full-employment budget showed a deficit of $100 billion and the actual budget showed a deficit of $150 billion.In Year 2, the full employment budget showed a deficit of $75 billion and the actual budget showed a deficit of $100 billion.Based on the data, what can be concluded about the direction of fiscal policy and the performance of the economy between Years 1 and 2?

Question 20

Describe Canada's Economic Action Plan to combat the Great Recession of 20089 - 2009.

Question 21

Using the below graph, illustrate the possible impact of a crowding-out effect of a fiscal policy by drawing in the relevant aggregate demand shifts.Label and explain any shifts in the demand curve shown.

Question 22

"If economic forecasting was a more exact science, the business cycle could be entirely corrected by fiscal measures." Do you agree?

Question 23

Explain how the net-export effect would reduce the effectiveness of fiscal policy.

Question 24

Explain the crowding-out effect.

Question 25

What is the difference between the actual deficit, the full-employment deficit, and the cyclical deficit?

Question 26

Identify and explain the three lags associated with the implementation of fiscal policy.

Question 27

Why do some economists, who favour government intervention to address high unemployment or demand-pull inflation, nonetheless reject the use of fiscal policy?

Question 28

In 2011, the public debt was $617 billion.Put this number in perspective by relating the debt to GDP, to other countries' debt, to the amount of interest payments on the debt, and to ownership of the debt.

Question 29

In Year 1, the full-employment budget showed a deficit of $100 billion and the actual budget showed a deficit of $125 billion.In Year 2, the full employment budget showed a deficit of $100 billion and the actual budget showed a deficit of $150 billion.Based on the data, what can be concluded about the direction of fiscal policy and the performance of the economy between Years 1 and 2?

Question 30

State three causes of the public debt.

Question 31

Given the problems with fiscal policy, why might some economists support its use?

Question 32

Complete the table below by stating whether the direction of discretionary fiscal policy was contractionary (C), expansionary (E), or neither (N), given the hypothetical budget data for an economy.

Question 33

Identify five problems or complications that arise in the implementation of fiscal policy.

Question 34

What fiscal policy is most likely to be invoked during a period of rapid inflation? A period of severe unemployment? What political, investment, and international problems might the government encounter in enacting these policies and putting them into effect?

Question 35

The following table shows government spending and tax revenue for a hypothetical economy over a five-year period.All figures are in billions. (a) In what years were there budget deficits and what were the amounts?
(b) In what year was there a budget surplus and what was the amount?
(c) What is the public debt in this economy over the five years?

Question 36

Differentiate between the federal deficit and the federal debt.

Question 37

How can the government finance its expenditures?

Question 38

Describe the European Sovereign Debt Crisis.

Question 39

What information would be important for assessing the size of the public debt beside the absolute amount of the public debt?

Question 40

Comment on the statement: "Discretionary fiscal policy offers an ideal approach to dealing with the nation's economic problems."

Question 41

Describe the impact of the European Sovereign Debt Crisis on interest rates for government bonds in Europe

Question 42

How can the effect of an expansionary fiscal policy be weakened?

Question 43

What are four real and potential problems with the public debt?

Question 44

Is it possible to impose a burden on future generations by increasing the public debt?

Question 45

Is the public debt a burden on future generations? Explain.

Question 46

The table below gives data on interest rates and investment demand in a hypothetical economy.Figures are in billions. (a) Use the I_d1 schedule.Assume that the government needs to finance a budget deficit and this public borrowing increases the interest rate from 5% to 6%.How much crowding-out of private investment will occur?
(b) Now assume that the deficit is used to improve the performance of the economy, and that as a consequence the investment-demand schedule changes from I_d1 to I_d2.At the same time, the interest rate rises from 5% to 6% as the government borrows money to finance the deficit.How much crowding-out of private investment will occur in this case?
(c) Graph the two investment-demand schedules on the graph below and show the difference between the two events.Put the interest rate on the vertical axis and the quantity of investment demanded on the horizontal axis.

Question 47

Can a large public debt cause a nation to go bankrupt? Explain.

Question 48

If the public debt is a debt that we owe to ourselves, then there are obviously no problems connected with such a debt.Critically evaluate.

Question 49

What two factors could reduce the net economic burden that might be shifted to future generations from the public debt?

Question 50

Adam Smith once wrote: "What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom." Evaluate in terms of the national debt.

Question 51

Describe what occurred during the European Sovereign Debt crisis from 2010 till mid-2017.

Question 52

How does the public debt contribute to income inequality?

Question 53

If we as individuals continue to spend more than we made, we would sooner or later have to pay up or go bankrupt.Our government is in the same position or will be unless we get serious about our liabilities and reduce expenditures enough to reduce the deficits or increase revenues enough to pay our bills and have some left over to pay the old bills.Evaluate this statement.