Chapter 10: Fiscal Policy & Debt

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

$1.7 trillion The government's budget deficit is financed by asset sales and bond sales. G − T = ΔM + ΔB + ΔA. $200,000,000,000 = $1,700,000,000,000, or $1.7 trillion.

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

$10,000 Amanda pays $10,000 in taxes. The amount is determined by subtracting disposable income from total income.

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

10,000

What is one of the dangers of a country having high debt as a percentage of GDP?

A country may default on the debt. This is a danger of a high debt-to-GDP ratio. Countries may not be able to pay the interest payments or meet maturity obligations.

What does it mean that the income tax is progressive?

As income increases, the income tax rate increases. A progressive tax means that as income increases, the income tax rate also increases.

What is one of the weaknesses of fiscal policy directed at the supply side of the economy?

It can take a long time to work. Fiscal policy directed at the supply side tends to take a long time to work.

Which of the following makes it difficult to maintain a cyclically balanced budget?

The business cycle takes time to define because of lags, making it difficult to enforce such a rule in practice. The business cycle does take time to define because of lags, making it difficult to enforce such a rule in practice.

Which of the following is NOT suggested by public choice analysis?

The government is a benevolent actor looking out for the best interests of its citizens. Public choice analysis suggests that politicians act in a self-interested manner, often caving in to special interests and shifting the costs of government programs to the next generation. As a result, public choice analysis suggests that government action should be limited.

What is the information lag?

The time policymakers must wait for economic data to be collected, processed, and reported. The information lag is the time policymakers must wait for economic data to be collected, processed, and reported.

Which of the following is a description of an automatic stabilizer of the business cycle?

When the economy is in decline, tax receipts decrease. When the economy is in decline, incomes are falling and tax receipts decrease. This acts as a cushion during a downturn in the business cycle, taking less money out of the economy.

Which or who of the following would hold external debt?

a Japanese citizen Externally held debt is debt that is held by foreigners.

In 2016, the percentage of the publically held national debt owned by foreigners was:

almost equal to the percentage held by the U.S. public. In 2016, 38.8% of the national debt held by the public was owned by U.S. banks, corporations, mutual funds, pension plans, and individuals. The remaining 33.5% was held by foreigners.

Compared with demand-side fiscal policy, supply-side fiscal policy:

can take a long time to work. Fiscal policy directed at the supply side tends to take a long time to work.

The part of the national debt held by _____ constitutes a claim on government assets.

foreign governments The part of the national debt held by the public (including foreign governments) constitutes a claim on government assets.

The generational imbalance is an estimate of how much of any fiscal imbalance is being shifted to:

future generations. The generational imbalance is an estimate of how much of any fiscal imbalance is being shifted to future generations

The _____ lag is the time required to turn fiscal policy into law and then eventually affect the economy.

implementation The implementation lag is the time required to turn fiscal policy into law and then eventually affect the economy.

Which of the following uses would most likely help to mitigate the crowding-out effects of deficit spending?

improved highways The crowding-out effect can be mitigated if the funds from deficit spending are used for public investments, such as transportation infrastructure, education, or research.

The goal of expansionary fiscal policy is to:

increase aggregate output. The goal of expansionary fiscal policy is to increase aggregate output by putting more money into the hands of consumers and businesses.

Reducing tax rates may result in all of the following, EXCEPT:

increases in aggregate supply because market prices are higher. Reducing taxes will not cause higher market prices.

Which of the following is a supply-side fiscal policy?

more rapid depreciation schedules for plant and equipment When a firm can expense its capital equipment over a shorter period, it cuts its taxes now rather than later. Cutting taxes can shift aggregate supply to the right.

About how long is the information lag?

one to six months The information lag is generally one to six months because most information is made available quarterly, with adjustments being done the following quarters.

Which part of government finance is called monetized debt?

the sale of bonds to the Federal Reserve When the Federal Reserve buys bonds from the federal government, the money supply increases, and that part of the government's debt is therefore monetized.

What is the implementation lag?

the time required to turn fiscal policy into law and eventually affect the economy This is the implementation lag.

Why have the purchases of U.S. debt by foreign governments increased so rapidly since the 1990s?

to keep their currencies from rising against the dollar The major reason that foreign governments purchase U.S. debt is to keep their currencies from appreciating and making their exports more expensive.

_____ are highly liquid, providing the closest thing there is to risk-free returns.

Treasury bills Treasury bills are highly liquid, providing the closest thing there is to risk-free returns.

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

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

Even after a problem is recognized, it takes some time for Congress and the administration to decide on a policy. This is known as _____ lag.

decision Decision lag is the time required for Congress and the administration to decide on a policy.

The _____ lag is the time it takes Congress and the administration to settle on a policy once a problem is recognized.

decision The decision lag is the time it takes Congress and the administration to decide on a policy once a problem is recognized.

Presidents Kennedy and Reagan each 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%.

The _____ lag is the time policymakers must wait for economic data to be collected.

information The information lag is the time policymakers must wait for economic data to be collected.

Which of these could be part of a supply-side fiscal policy to encourage long-run economic growth?

investments in human capital Modern growth theory suggests that government should focus on investments in human capital to stimulate economic growth.

As a percentage of the federal government budget, mandatory spending

is larger than discretionary spending. Mandatory spending accounts for more than 60% of the budget.

The goal of fiscal policies that influence aggregate supply is to shift the _____ curve to the _____.

long-run aggregate supply; right The goal of fiscal policies that influence aggregate supply is to shift the long-run aggregate supply curve to the right.

What is the main strategy of the cyclically balanced budget?

raise taxes and lower spending in times of prosperity The main strategy of the cyclically balanced budget is to raise taxes and lower spending in times of prosperity to pay for deficits incurred during economic contraction.

It can often take more than a year for researchers and policymakers to determine that an economy is moving out of a recession. That year is known as _____ lag.

recognition Recognition lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession.

The _____ lag is the time it takes for policymakers to confirm that the economy is trending in or out of recession.

recognition The recognition lag is the time it takes for policymakers to confirm that the economy is trending in or out of recession.

Policymakers realize that unemployment is trending higher several months after firms started laying workers off. This is a description of the:

recognition lag. The time it takes for policymakers to confirm that the economy is trending in or out of a recession is the recognition lag.

An increase in government spending on national defense should:

shift the long-run aggregate demand curve to the right. Higher levels of spending on national defense should shift the LRAD to the right.

Which of the following is a public choice theory issue?

the impact of election incentives on politicians This is a public choice theory issue. Public choice theory is the economic analysis of public and political decision making.

The part of the national debt that constitutes a claim on government assets is the debt held by:

the public, including foreign governments. Debt held by the public (including foreign governments) is debt that constitutes a claim on government assets.

The crowding-out effect can be mitigated if the funds from deficit spending are:

used for public investment. The crowding-out effect can be mitigated if the funds from deficit spending are used for public investments such as transportation infrastructure, education, or research.