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

Question 1

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

Answer 1

Discretionary fiscal policy is the deliberate manipulation of taxes and government spending by the government to alter real domestic output and employment, to control inflation, and to stimulate economic growth during a particular period of time.Non-discretionary fiscal policy, on the other hand, is the change in transfer payments or taxes which occurs automatically as a result of existing laws.In particular, personal income taxes have progressive rates.As GDP expands, taxes will increase by a greater proportion to slow spending and inflation.As GDP declines, taxes will decrease by a more than proportionate amount allowing incomes and spending to decline at a slower rate than GDP.There are also many transfer programs, which become effective when incomes decline or unemployment occurs to reduce the decline in disposable income.Conversely, these programs automatically are reduced when the economy expands and unemployment declines and spending increases.

Question 2

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

Answer 2

Expansionary fiscal policy increases aggregate demand - shifts the aggregate demand curve to the right.In order to do this, governments can increase spending or decrease taxes (or both).Any of these actions will have the tendency to decrease surpluses or increase deficits.

Question 3

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?

Answer 3

The full-employment budget is a better indicator of the direction of fiscal policy than the actual budget.Fiscal policy was contractionary because the full-employment budget deficit decreased 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 decreased from $50 to $25 billion.In other words, the economy must have expanded between Years 1 and 2 because net tax revenues increased and the size of the cyclical deficit fell.

Question 4

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

Question 5

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 6

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 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

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

Question 9

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

Question 10

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

Question 11

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 12

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

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

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

Question 15

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.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

"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 21

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 22

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

Question 23

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 24

Describe the European Sovereign Debt Crisis.

Question 25

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

Question 26

Explain the crowding-out effect.

Question 27

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 28

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

Question 29

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 30

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

Question 31

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

Question 32

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

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

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 35

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

Question 36

Differentiate between the federal deficit and the federal debt.

Question 37

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

Question 38

State three causes of the public debt.

Question 39

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 40

How can the government finance its expenditures?

Question 41

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

Question 42

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 43

How does the public debt contribute to income inequality?

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

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

Question 46

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 47

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

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

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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