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

Question 1

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?

Answer 1

The full-employment budget is a better indicator of the direction of fiscal policy than the actual budget.Fiscal policy was expansionary because the full-employment budget deficit increased from one year to the next.
The actual deficit is composed of the full-employment portion and the cyclical portion.To determine how the economy performed between the two years,the cyclical deficit must be examined.The cyclical portion of the actual deficit is determined by subtracting the full-employment deficit from the actual deficit.The cyclical portion of the actual deficit did not change.The economy must have remained unchanged between Years 1 and 2.All of the increase in the actual deficit was the result of the discretionary,expansionary fiscal policy.

Question 2

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

Answer 2

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 3

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

Answer 3

Lower government spending and higher taxes are contractionary fiscal policies that lead to smaller budget deficits (or even surpluses).Such policies are most appropriate during recovery and peak phases of the business cycle to decrease aggregate demand.

Question 4

"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 5

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

Question 6

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 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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

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

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.

Question 21

The following table shows government spending and tax revenue for a hypothetical economy over a five-year period.All figures are in billions.

Question 22

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 23

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

Question 24

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 25

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 26

Describe the European Sovereign Debt Crisis.

Question 27

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

Question 28

State three causes of the public debt.

Question 29

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 30

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

Question 31

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

Question 32

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 33

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

Question 34

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

Question 35

Explain the crowding-out effect.

Question 36

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

Question 37

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

Question 38

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

Question 39

Differentiate between the federal deficit and the federal debt.

Question 40

How can the government finance its expenditures?

Question 41

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

Question 42

How does the public debt contribute to income inequality?

Question 43

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.

Question 44

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 45

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

Question 46

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

Question 47

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

Question 48

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 49

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

Question 50

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

Question 51

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