Critical Thinking Questions

19 . How would a balanced budget amendment change the effect of automatic stabilizer programs?

Review Questions

20 . Give some examples of changes in federal spending and taxes by the government that would be fiscal policy and some that would not. 21 . Have the spending and taxes of the U.S. federal government generally had an upward or a downward trend in the last few decades? 22 . What are the main categories of U.S. federal government spending? 23 . What is the difference between a budget deficit, a balanced budget, and a budget surplus? 24 . Have spending and taxes by state and local governments in the United States had a generally upward or downward trend in the last few decades? 25 . What are the main categories of U.S. federal government taxes? 26 . What is the difference between a progressive tax, a proportional tax, and a regressive tax? 27 . What has been the general pattern of U.S. budget deficits in recent decades? 28 . What is the difference between a budget deficit and the national debt? 29 . What is the difference between expansionary fiscal policy and contractionary fiscal policy? 30 . Under what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy? 31 . What is the difference between discretionary fiscal policy and automatic stabilizers? 32 . Why do automatic stabilizers function “automatically?” 33 . What is the standardized employment budget? 34 . What are some practical weaknesses of discretionary fiscal policy? 35 . What are some of the arguments for and against a requirement that the federal government budget be balanced every year?

Critical Thinking Questions

36 . Why is government spending typically measured as a percentage of GDP rather than in nominal dollars? 37 . Why are expenditures such as crime prevention and education typically done at the state and local level rather than at the federal level? 38 . Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy whereas a cut in a state income tax is not fiscal policy? 39 . Excise taxes on tobacco and alcohol and state sales taxes are often criticized for being regressive. Although everyone pays the same rate regardless of income, why might this be so? 40 . What is the benefit of having state and local taxes on income instead of collecting all such taxes at the federal level? 41 . In a booming economy, is the federal government more likely to run surpluses or deficits? What are the various factors at play? 42 . Economist Arthur Laffer famously pointed out that, in some cases, income tax revenue can actually go up when tax rates go down. Why might this be the case? 43 . Is it possible for a nation to run budget deficits and still have its debt/GDP ratio fall? Explain your answer. Is it possible for a nation to run budget surpluses and still have its debt/GDP ratio rise? Explain your answer. 44 . How will cuts in state budget spending affect federal expansionary policy? 45 . Is expansionary fiscal policy more attractive to politicians who believe in larger government or to politicians who believe in smaller government? Explain your answer. 46 . Is Medicaid (federal government aid to low-income families and individuals) an automatic stabilizer? 47 . What is a potential problem with a temporary tax decrease designed to increase aggregate demand if people know that it is temporary? 48 . If the government gives a $300 tax cut to everyone in the country, explain the mechanism by which this will cause interest rates to rise. 49 . Do you agree or disagree with this statement: “It is in the best interest of our economy for Congress and the President to run a balanced budget each year.” Explain your answer. 50 . During the Great Recession of 2008–2009, what actions would have been required of Congress and the President had a balanced budget amendment to the Constitution been ratified? What impact would that have had on the unemployment rate?

Problems

51 . A government starts off with a total debt of $3.5 billion. In year one, the government runs a deficit of $400 million. In year two, the government runs a deficit of $1 billion. In year three, the government runs a surplus of $200 million. What is the total debt of the government at the end of year three? 52 . If a government runs a budget deficit of $10 billion each year for five years, then a surplus of $1 billion for ten years, and then a balanced budget for another ten years, what is the government debt? 53 . Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and sketch a diagram using aggregate demand and aggregate supply curves to illustrate your answer: a. A recession. b. A stock market collapse that hurts consumer and business confidence. c. Extremely rapid growth of exports. d. Rising inflation. e. A rise in the natural rate of unemployment. f. A rise in oil prices.