Krugman's Economics For The Ap® Course
3rd Edition
ISBN: 9781319113278
Author: David Anderson, Margaret Ray
Publisher: Worth Publishers
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Question
Chapter 30, Problem 2CYU
To determine
The reason behind the phenomenon that why states that balance their budgets due to constitutional obligation are more prone to evidence severe economic fluctuations as compares to other states which do possess any such obedience.
Expert Solution & Answer
Explanation of Solution
Making it mandatory to maintain a balanced budget each year would weaken the automatic stabilizing effects of taxes and transfers. Recessions are kept to a minimum in size by the propensity of tax collection to decline and transfers to increase as the economy declines. However, a fiscal deficit is being created by increased transfer payments and declining tax receipts. The government would be forced to react to this imbalance with contractionary fiscal measures if the balanced budget rule were to apply, which would likely cause the recession to worsen.
Chapter 30 Solutions
Krugman's Economics For The Ap® Course
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