Economics 201: Chapter 13 Assignment

When economists say Social Security and Medicare are "pay-as-you-go" plans, they mean

most of the current revenues from the Social Security tax are paid to current Social Security retirees

True or False?: An internally held public debt is like a debt of the left hand owed to the right hand

true

Paying off an internally held debt

would not burden the economy as a whole

True or False?: As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations

false

True or False?: The Federal Reserve and federal government agencies hold more than three-fourths of the public debt

false

True or False?: The total public debt is more relevant to an economy than the public debt as a percentage of GDP

false

The cyclically adjusted budget measures what the federal deficit or surplus would be if the economy reached the __________ level of GDP

full-employment

Refinancing of the public debt might drive up real interest rates because

government borrowing to finance the debt increases demand for funds and competes with private borrowing

Social Security and Medicare trust funds are projected to be depleted by

2033 and 2024, respectively

What type of tax system would have the most built-in stability?

Progressive tax system, because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes

In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion, driving the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true?

There is a crowding-out effect of $20 billion

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand and raising taxes simultaneously to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:

a mediocre and contradictory combination of tax and expenditure changes

The crowding-out effect is

a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending

The Council of Economic Advisers (CEA) advises the president on

economic matters and provides recommendations for discretionary fiscal policy action

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag: Politicians recognize a sudden recession, but it takes many months of political deal making before they finally approve a stimulus bill.

administrative lag

Social Security and Medicare trust funds are

assets held by these programs to help pay for future projected tax revenue shortfalls

Expectations of a near-term policy reversal weaken fiscal policy because

consumers may hesitate to increase their spending because they believe that tax rates will rise again

If the government wants to move the economy to full employment, it should

cut taxes or increase spending

If the cyclically adjusted budget is balanced, then

government is not engaging in either expansionary or contractionary policy

Refinancing of the public debt might cause

higher interest rates, which can lower investment, and economic growth slows

The problem of time lags in enacting and applying fiscal policy is

in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed

The two ways to measure the public debt are

its absolute dollar size and its relative size as a percentage of GDP

Paying off an externally held debt

may lower the dollar exchange rate

Some politicians have suggested that the United States enact a constitutional amendment requiring that the federal government balance its budget annually. Such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession because

net tax revenue falls and transfer payments rise during a recession, so balancing the budget would require lowering transfer payments and raising taxes

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag: To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin

operational lag

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag: To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses—but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

operational lag

A political business cycle is the idea that

politicians are more interested in reelection than in stabilizing the economy

If public investment financed through borrowing complements private investment

private borrowers may be willing to pay higher interest rates associated with financing the public debt

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag: Distracted by a war that is going badly, politicians take no notice until inflation reaches 8 percent

recognition lag

Government's fiscal policy options for ending severe demand-pull inflation include

reducing government spending, increasing taxes, or both.

Refinancing the public debt means

selling new bonds to retire maturing bonds

Built-in (automatic) stabilizers work by changing __________ so that changes in GDP are reduced

taxes and government payouts

The distinction between the absolute and relative sizes of the public debt is important because

the absolute size doesn't tell you about an economy's capacity to repay the debt

The key long-run problem of both Social Security and Medicare is

the aging population and age distribution of the U.S. population

An internally held debt is one in which

the bondholders live in the nation having the debt

If the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP, then

the government would have to use tax revenues or go deeper into debt

During the recession of 2007-2009, the U.S. federal government's tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?

yes