Problems

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.

FIGURE 18.1President Lyndon B. Johnson President Lyndon Johnson played a pivotal role in financing higher education. (Credit: modification of "Lyndon Johnson in 1970” by LBJ Museum & Library, Public Domain)

In this chapter, you will learn about:

• How Government Borrowing Affects Investment and the Trade Balance
• Fiscal Policy, Investment, and Economic Growth
• How Government Borrowing Affects Private Saving
• Fiscal Policy and the Trade Balance

BRING IT HOME Financing Higher Education On November 8, 1965, President Lyndon B. Johnson signed The Higher Education Act of 1965 into law. With a stroke of the pen, he implemented what we know as the financial aid, work study, and student loan programs to help Americans pay for a college education. In his remarks, the President said: Here the seeds were planted from which grew my firm conviction that for the individual, education is the path to achievement and fulfillment; for the Nation, it is a path to a society that is not only free but civilized; and for the world, it is the path to peace—for it is education that places reason over force. This Act, he said, "is responsible for funding higher education for millions of Americans. It is the embodiment of the United States’ investment in ‘human capital’." Since Johnson signed the Act into law, the government has renewed it several times.