Economics Principles, Problems, and Policies

Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn

Chapter 30

Fiscal Policy, Deficits, and Debt - all with Video Answers

Educators

Chapter Questions

Problem 1

What is the role of the Council of Economic Advisers (CEA) as it relates to fiscal policy? Class assignment: Determine the names and educational backgrounds of the present members of the CFA.

Sujita Thavva

Sujita Thavva

Numerade Educator

Problem 2

Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $\mathrm{S} 25$ billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish the same goal.

Sujita Thavva

Numerade Educator

Problem 3

What are government's fiscal policy options for ending severe demand-pull inflation? Which of these fiscal options do you think might be favored by a person who wants to preserve the size of government? A person who thinks the public sector is too large? How does the "ratchet effect" affect anti-inflationary fiscal policy?

Sujita Thavva

Numerade Educator

Problem 4

(For students who were assigned Chapter 28 ) Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 28.7 ). Explain how equal-size increases in $G$ and $T$ could eliminate a recessionary gap and how equal-size decreases in $G$ and $T$ could eliminate an inflationary gap.

Sujita Thavva

Numerade Educator

Problem 5

Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy's built-in stability?

Sujita Thavva

Numerade Educator

Problem 6

Define the standardized budget, explain its significance, and state why it may differ from the actual budget. Suppose the full-employment, noninflationary level of real output is $\mathrm{GDP}_{3}\left(\mathrm{not} \mathrm{GDP}_{2}\right)$ in the economy depicted in Figure $30.3 .$ If the economy is operating at $\mathrm{GDP}_{2}$, instead of GDP $_{3}$, what is the status of its standardized budget? The status of its current fiscal policy? What change in fiscal policy would you recommend? How would you accomplish that in terms of the $G$ and $T$ lines in the figure?

EA

Erwin Antoni

Numerade Educator

Problem 7

Some politicians have suggested that the United States cnact a constitutional amendment requiring that the Federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession.

Sujita Thavva

Numerade Educator

Problem 8

Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy. Explain the idea of a political business cycle. How might expectations of a near-term 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 combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the fullemployment, noninflationary level of real GDP and keep the economy there indefinitely."

Sujita Thavva

Numerade Educator

Problem 9

(For students who were assigned Chapter 28 ) Assume that, without taxes, the consumption schedule for an economy is as shown below:(TABLE CANNOT COPY)
a. Graph this consumption schedule and determine the size of the MPC.
b. Assume that a lump-sum (regressive) tax of SI0 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.
c. Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule and note the $\mathrm{MPC}$ and the multiplier.
d. Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is $$ 100,5$ percent at 200 dollars 10 percent at 300,15 dollars percent at 400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and the multiplier. e. Explain why proportional and progressive taxes contribute to greater cconomic stability, while a regressive tax does not. Demonstrate, using a graph similar to Figure 30.3

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 10

How do economists distinguish between the absolute and relative sizes of the public debt? Why is the distinction important? Distinguish between refinancing the debt and retiring the debt. How does an internally held public debt differ from an externally held public debt? Contrast the effects of retiring an internally held debt and retiring an externally held debt.

Sujita Thavva

Numerade Educator

Problem 11

True or false? If false, explain why. LO4
a. The total public debt is more relevant to an economy than the public debt as a percentage of GDP.
b. An internally held public debt is like a debt of the left hand owed to the right hand.
c. The Federal Reserve and Federal government agcncies hold more than three-fourths of the public debt.
d. The portion of the U.S. debt held by the public (and not by government entities) was larger as a percentage of GDP in 2007 than it was in $1995 .$
e. In recent years, Social Security payments to retirees have exceeded Social Security tax revenues from workers and their employers.

Sujita Thavva

Numerade Educator

Problem 12

Why might economists be quite concerned if the annual interest payments on the debt sharply increased as a percentage of GDP?

Sujita Thavva

Numerade Educator

Problem 13

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?

Sujita Thavva

Numerade Educator

Problem 14

What would happen to the stated sizes of Federal budget deficits or surpluses if the current annual additions or subtractions from the Social Security trust fund were excluded?

Sujita Thavva

Numerade Educator

Problem 15

What is the index of leading economic indicators, and how does it relate to discretionary fiscal policy?

Sujita Thavva

Numerade Educator