Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 27, Problem 4.1P
To determine
Identify the effects of fiscal policy and
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The federal government ran a budget surplus in the late 1990 and in the year 2000, but has since returned to running a budget deficit.
Explain why reducing the budget deficit can cause short-term pain in the form of lower employment, higher unemployment, and a recession. (Use diagram and analysis)
What effect did the economic program have on the federal deficit?
Do treasury securities finance a federal budget deficit? If so would the government purchase treasury securities to finance the budget deficit or would they sell them?
Chapter 27 Solutions
Principles of Economics (12th Edition)
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- How could the government lower the federal deficit?arrow_forwardLook into the current level of the national debt and the federal deficit in the U.S. Pick any government program and research how much the U.S. spends on it. Does the amount surprise you? What might happen if the budget for the program were increased or reduced? Should the current deficit and debt be cut down? What would be some pros and cons of reducing them?arrow_forwardDavid Rubenstein mentions that stock and bond traders are not presently very worried about the increase in the federal deficit. However, he adds that they might become more concerned in six to twelve months. The accompanying diagram shows the market for loanable funds. Use the graph to show the effect of an increase in the federal deficit on this market. Real interest rate (%) Loanable funds ($) Supply Demand Why might traders be worried about the deficit increasing? The resulting change in the interest rate stocks and bonds - less valuable. will makearrow_forward
- In an attempt to reduce the large budget deficit, the government raised taxes and reduced government expenditure but unemployment soared and the budget deficit actually increased. A leading economist remarked: 'The time to attempt to reduce the deficit is when the economy is at overfull employment. Then policies designed to reduce the deficit will not only work but they will also achieve other desirable macroeconomic goals.' Do you agree with the economist? Why or why not?arrow_forwardEconomists at which of the following government offices help formulate spending plans and regulatory policies? Office of Management and Budget Congressional Budget Office Department of the Treasury The Federal Reservearrow_forwardComment on either (a) the type of fiscal policy or monetary policy that is currently being implemented, or (b) the type of fiscal policy or monetary policy you think should be implemented. In your comment you might discuss how government spending, taxes, or interest rates are or should be being changed and why.arrow_forward
- A news headline reads, "Time for change: let free market forces determine the money supply." Which statement offers a valid claim in direct support of this headline? Congress affects the economy through fiscal policy; controlling the money supply is unnecessary. Congress should lose its role in fiscal policy; it often fails to influence the money supply. The Fed is just as important as Congress, as monetary policy works differently in the economy. The Fed should be controlled by Congress, and monetary policy should be publicly voted upon.arrow_forwardCongress recently passed and President Biden signed the American Rescue Plan (ARP), which will add $1.9 trillion to the federal deficit over the next ten years. Even before this new spending, federal debt held by the public was slated to reach 107% of GDP by 2031, the highest in history. What do high deficits mean going forward?arrow_forward10 eBook The diagram shows government expenditures and tax revenues for the fictional country of Mountainia. Currently, there is a recession in Mountainia. The country's leaders want to use tax-rate changes to create a cyclically adjusted budget deficit of $3 billion. a. Illustrate how the country's tax revenues will change after the government adjusts tax rates to create this cyclically adjusted budget deficit. Instructions: Use the tool provided 'T2' to illustrate the country's tax revenues after the tax changes are enacted. Government expenditures, G, and tax revenues, T (billions) $25 $20 $15 $10 $5 0 G $40 $80 $120 $160 $200 Real domestic output, GDP (billions) Tools T₂arrow_forward
- How is the Social Security system currently influencing the size of the budget deficit? If it is not re-formed, how will Social Security influence the budget deficit a decade from now? Is this a cause for concern? Why or why not?arrow_forwardMost economists agree that individual consumers and business cannot pull the economy out of a severe recession without help from either the government or the Federal Reserve. Which group(s) believe fiscal policy is ineffective: Keynesians or Monetarists? Briefly explain the answer. Which group(s) believe monetary policy is ineffective in the short run: Keynesians or Monetarists? Briefly explain the answer. Which group(s) believe monetary policy is ineffective in the long run: Keynesians or Monetarists? Briefly explain the answer.arrow_forwardSummarize MMT in one sentence. Why should federal debt be thought of differently than household debt? If fiscal budgets don’t need to balance, what should we be trying to balance in an economy? Explain how a government deficit is society’s surplus. If we don’t care about the size of the “deficit”, then is there NO limit on government spending? How does MMT advise that the above problem be handled?arrow_forward
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