Chapter 13: Types of Fiscal Policy (page 264)
What happens to the taxation and government spending rates during an expansionary fiscal policy?
Reduction of taxes and increased government spending
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Some politicians have suggested that the United States enact a constitutional amendment requiring that the federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experiences a severe recession.
Trace the cause-and-effect chain through which financing and refinancing of the public debt might affect real interest rates, private investment, the capital stock, and economic growth. How might investment in public capital and public-private complementarities alter the outcome of the cause-effect chain?
True or false? If false, explain why.
The total public debt is more relevant to an economy than the public debt as a percentage of GDP.
An internally held public debt is like a debt of the left hand owed to the right hand.
The Federal Reserve and federal government agencies hold more than three-fourths of the public debt.
As a percentage of GDP, the total US public debt is the highest such debt among the world’s advanced industrial nations.
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
No
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 no crowding-out effect because the government’s increase in borrowing exceeds firms’ decrease in borrowing.
There is a crowding-out effect of \(20 billion.
There is no crowding-out effect because both the government and firms are still borrowing a lot.
There is a crowding-out effect of \)25 billion.
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