QUESTIONS AND PROBLEMS

QUESTIONS

1. 1. Give some examples of changes in federal spending and taxes by the government that would be fiscal policy and some that would not.
   2. Have the spending and taxes of the U.S. federal government generally had an upward or a downward trend in the last few decades?
   3. What are the main categories of U.S. federal government spending?
   4. What is the difference between a budget deficit, a balanced budget, and a budget surplus?
   5. 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?
   6. Why is government spending typically measured as a percentage of GDP rather than in nominal dollars?
   7. Why are expenditures such as crime prevention and education typically done at the state and local level rather than at the federal level?
   8. 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 each of the three years?
   9. What are the main categories of U.S. federal government taxes?
   10. What is the difference between a progressive tax, a proportional tax, and a regressive tax?
   11. Excise taxes on tobacco and alcohol as well as state sales taxes are often criticized for being regressive. Although everyone pays the same rate regardless of income, why might this be so?
   12. What has been the general pattern of U.S. budget deficits in recent decades?
   13. What is the difference between a budget deficit and the national debt?
   14. In a booming economy, is the federal government more likely to run surpluses or deficits? What are the various factors at play?
   15. What is the difference between expansionary fiscal policy and contractionary fiscal policy?
   16. Under what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy?
   17. Is expansionary fiscal policy more attractive to politicians who believe in larger government or to politicians who believe in smaller government? Explain your answer.
   18. What is the difference between discretionary fiscal policy and automatic stabilizers?
   19. What are some practical weaknesses of discretionary fiscal policy?
   20. What is a potential problem with a temporary tax decrease designed to increase aggregate demand if people know that it is temporary?
   21. 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. (think crowding out!)
   22. What are some of the arguments for and against a requirement that the federal government budget be balanced every year?
   23. 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?
   24. For each of the following, indicate which type of government spending would justify a budget deficit and which would not.
       1. Increased federal spending on Medicare
       2. Increased spending on education
       3. Increased spending on the space program
       4. Increased spending on airports and air traffic control
   25. 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:
       1. A recession.
       2. A stock market collapse that hurts consumer and business confidence.
       3. Extremely rapid growth of exports.
       4. Rising inflation.
       5. A rise in the natural rate of unemployment.
       6. A rise in oil prices.