Ch. 10: Fiscal Policy and Debt

The government budget constraint is represented as

G - T = ΔM + ΔB + ΔA.

Suppose Congress enacts a new Medicare benefit and finances it by raising payroll taxes such that each year's additional outlay is matched by additional revenue. Would this be considered fiscally sustainable?

no, this is still a pay-as-you go plan, which shifts the burden to future generations

How large is the government's budget deficit if asset sales are $200 billion, the money supply grows by $500 billion, the government sells $1 trillion in bonds, and tax revenues are $500 billion?

$1.7 trillion; The government's budget deficit is financed by asset sales and bond sales. G − T = ΔM + ΔB + ΔA.

If Amanda has an income of $40,000 and disposable income of $30,000, how much does she pay in taxes?

$10,000; Disposable income is equal to income minus taxes (Y - T)

In September 2010, the National Bureau of Economic Research announced that the recession that began in December 2007 ended in June 2009. This illustrates _____ lag.

recognition; Recognition lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession. Policymakers depend on information sources such as the NBER.

Which of these is a supply-side fiscal policy?

repealing unnecessary government regulations; Fiscal policies to increase aggregate supply reduce unnecessary regulations and provide incentives for business investment, as well as support for basic research and investment in human capital.

Which of these methods of government deficit finance is MOST likely to cause inflation?

selling bonds to the Federal Reserve

Eliminating unnecessary regulations for businesses

shifts the long-run aggregate supply curve to the right.

Annually balancing the budget would

undercut fiscal policies aimed at maintaining full employment during recessions.

As baby boomers keep retiring in coming years, it is likely that fiscal imbalance will

worsen; The increasing liabilities of the U.S. federal government means that fiscal imbalance will worsen.

According to the Laffer curve, an increase in tax rates will lead to

According to the Laffer curve, an increase in tax rate can lead to an increase, a decrease, or no change in tax revenue.

In July 2011 the House of Representatives began to discuss a balanced budget amendment to the Constitution. Proponents of the amendment said, "We have to learn to live within our means!" From this you can conclude that they were pushing for a(n)

annually balanced budget.; With an annually balanced budget, federal expenditures and taxes would have to be equal each year.

President Reagan implemented a policy of supply-side economics, what did this mainly entail?

decreasing marginal tax rates; Presidents Kennedy and Reagan decreased marginal tax rates. President Kennedy reduced the top marginal rate from 70% to 50%, and President Reagan reduced the top marginal rate from 50% to 28%.

For the U.S. government, which of the given is NOT an example of mandatory spending?

education spending; Mandatory spending includes Medicare, Social Security, interest on the national debt, food stamps, TANF (temporary assistance for needy families), etc.

Which type of spending currently takes up a larger proportion of the U.S. federal budget?

mandatory spending; Mandatory spending accounts for about 60%, whereas discretionary spending accounts for about 40%.

For the U.S. government, which of the given is NOT an example of discretionary spending?

medicare; Discretionary spending includes defense, science, income security (including Medicaid), transportation, environment, education, veterans' benefits and services, etc.