Chapter 13 Questions PDF

Preview

Summary

Professor Lifson Textbook answers for Chapter 13 Assignment....

Description

Roman Vai Smith Prof. Lifson Macroeconomics

Chapter 13 - Fiscal Policy, Deficits, and Debt Please answer the following questions: 1. What are government’s fiscal policy options for ending severe demand-pull inflation? Which of these fiscal options do you think might be favored by a person who wants to preserve the size of government? A person who thinks the public sector is too large? How does the “ratchet effect” affect anti-inflationary fiscal policy? LO1

When the aggregate demand curve moves to the right, it causes a demand-pull inflation. The government’s fiscal policies in ending this type of inflation include a mix of government spending and tax changes. A person who wants to preserve the size of the government would favor government spending. A person who thinks the public sector is too large would favor reducing taxes. 2. 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 experienced a severe recession. LO1

If the government balanced its budget- meaning it would spend the same amount as it receives- then it would have to act in a contractionary fiscal manner. This means the government would need to reduce its spending and focus on increasing taxes as a way to shift the massive government deficit and raise capital for a balanced budget. 3. Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy’s built-in stability? LO2

Built-in stabilizers help the economy without intervention. This includes the concept of tax progressivity: when taxes are progressive, they rise with GDP, when they are proportional, they remain constant, and when they are regressive, they fall with GDP. This stability reacts with the changes in GDP from cyclical unemployment or recession. 4. What do economists mean when they say Social Security and Medicare are "pay-as-you-go" plans? What are the Social Security and Medicare trust funds, and how long will they have money left in them? What is the key long-run problem of both Social Security and Medicare? Do you favor increasing taxes or do you prefer reducing benefits to fix the problem?

The Social Security and Medicare programs pay the user throughout its use as a monthly sum. These accounts are slated to be depleted within the next 20 years. The problem with these accounts is that they will soon have to be supplemented by the public when funds run out. I would prefer to have a private service for Social Security (like investments) or private health insurance (instead of Medicare) to fix the problem. If not, then increasing taxes over time would be gradual....