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

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Question 1

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Explain the crowding-out effect.

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The crowding-out effect is the notion th...

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Question 2

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

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There are numerous problems with the use of fiscal policy to stimulate the economy or to reduce inflation.However, some economists might continue to support the use of fiscal policy for its impacts on long-run aggregate supply.Government spending and tax cuts, for example, may not be effective in the short run to address high unemployment because of timing, unexpected responses by the public, conflicts with political goals, unforeseen international shocks, the crowding-out effect and the net export effect.However, in the long run, such policies can increase work incentives and encourage investment and innovation.As a result, fiscal policy can produce long term economic growth.

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

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.

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

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

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.

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?

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.

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.

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

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?

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

State three causes of the public debt.

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

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

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

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

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

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