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