Some politicians have suggested that the United States cnact...

Name: Problem 7, Chapter 30: Economics Principles, Problems, and Policies
Uploaded: 2020-07-05T16:42:26-08:00
Duration: 1 min 11 s
Channel: Sujita Thavva
Description: 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.

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.

Key Concepts

Automatic Stabilizers

Automatic stabilizers are economic policies and programs, like unemployment insurance and graduated tax systems, that naturally counterbalance economic fluctuations. However, a strict balanced budget requirement can weaken these stabilizers, because it forces adjustments such as tax increases or spending cuts when economic conditions worsen, further contracting economic activity.

Contractionary Fiscal Policy

Contractionary fiscal policy involves measures that reduce government spending and/or increase taxes, thereby pulling money out of the economy. In the context of a balanced budget amendment, adhering to budget balance may compel the government to enact such policies even during recessions, when expansionary measures would normally be employed to boost demand.

Fiscal Policy

Fiscal policy is the use of government spending and taxation to influence the economy. It can be expansionary in a recession by increasing spending or cutting taxes to stimulate demand, or contractionary by reducing spending or raising taxes to slow down an overheated economy.

Balanced Budget Amendment

A balanced budget amendment is a constitutional mandate that requires the government to not spend more than its income in any fiscal year. This restricts the government's ability to run budget deficits, which are commonly used as a tool to counteract economic downturns.

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