...following: 1. How is the government purchases multiplier calculated? (Review) How is the taxation multiplier calculated? Why is it lower than the government purchases multiplier? How is the transfers multiplier calculated? 2. Given some gaps and marginal propensities to consume, calculate how much government purchases, taxes, or transfers should be changed. 3. Explain why an equal increase (decrease) in government purchases and net taxes (taxes minus transfers) has an expansionary (contractionary) effect. 4. What is the balanced budget multiplier? 5. Explain why discretionary fiscal policy has not been very effective in reducing recessions in the United States. 6. What are the “time lags”? 7. What is meant by "automatic stabilization"? What are the main automatic stabilizers? 8. What is meant by "official budget deficit"? by "structural deficit"? Why is the structural budget deficit a better measure of the intent of fiscal policy? 9. What does it mean that "fiscal policy is expansionary (or contractionary)"? How does one determine whether fiscal policy is expansionary or contractionary? 10. In what ways might budget deficits be bad for an economy? In what ways might they be good for an economy? 11. What is meant by “crowding-out”? 12. Explain the relation between the budget deficits and the trade deficits. 13. What is meant by the "national debt"? What is the difference...
Words: 9913 - Pages: 40
...Summary A budget deficit occurs when government expenditures exceed the amount of revenue coming into the economy through income and taxes. Since World War II, the United States government has run a large deficit, instead of a surplus. Depending on the particular condition of the economy, a deficit can be right or wrong. The goal is to improve the economy when the government runs a budget deficit. The government will spend money to help stimulate economic growth when the economy is not progressing at a rate the country expects. Both the government and society benefits from the added debt when the government spends money to improve revenue for the long-term. A budget deficit can help businesses create more jobs to limit the amount of unemployment and enhance consumer income. The debts accumulated may be the result of spending on worthwhile projects like road repair or necessary services like education. The government is also spending to establish programs for the longevity of the nation. A budget deficit can have an adverse effect on the economy. A budget deficit can result in increased debt. As the debt increases, the government increases taxes. When taxes are higher than business owners can afford, the result is an increase in unemployment. A budget deficit can also lead to an increase in printed money, which decreases the dollar value and increases inflation. Budget surplus is the opposite of the budget deficit. A budget surplus occurs when government expenditures...
Words: 1242 - Pages: 5
...consultant to help the economy move to potential output, YP. Aggregate price level LRAS SRAS P1 E1 AD1 Y1 YP Potential output Real GDP a. Is Albernia facing a recessionary or inflationary gap? b. Which type of fiscal policy—expansionary or contractionary—would move the economy of Albernia to potential output, YP ? What are some examples of such policies? c. Illustrate the macroeconomic situation in Albernia with a diagram after the successful fiscal policy has been implemented. 1. Solution a. Albernia is facing a recessionary gap; Y1 is less than YP. b. Albernia could use expansionary fiscal policies to move the economy to potential output. Such policies include increasing government purchases of goods and services, increasing government transfers, and reducing taxes. c. Aggregate price level LRAS SRAS P2 P1 E2 E1 AD2 AD1 Y1 YP Real GDP Potential output Recessionary gap S-169 MACROECONOMICS 29 13 ECONOMICS chapter: S169-S182_Krug2e_Macro_PS_Ch13.qxp 2/25/09 8:02 PM Page S-170 S-170 MACROECONOMICS, CHAPTER 13 ECONOMICS, CHAPTER 29 2. The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y1, and the aggregate price level is P1. You have been hired as an economic consultant to help the economy move to potential output, YP. Aggregate price level P1 LRAS SRAS E1 AD1 Potential output YP Y1 Real GDP a. Is Brittania...
Words: 5634 - Pages: 23
...about deficits, surpluses, and debt in relation to the macroeconomic health of the United States. The group as a was very comfortable with the discussion of the week while learning new information about the health of the economy. The following is a summary of what the team learned in regard to deficits, surpluses, debt, and the health of the economy. Budget Deficits Budget deficits occur when government expenditures exceed the amount of revenue coming into the economy through income and taxes. A deficit is a summary of how the economy measures the state of using and accounting procedures. Since World War II, the United States government has run a large amount of deficits, as opposed to surpluses. A deficit can be good or bad, depending on the specific condition of the economy. When the government runs a budget deficit, the goal is to improve the economy. When the economy is not progressing at a rate the country expects, the government will spend money to help stimulate economic growth. If the government spends money to improve revenue for the long-term, both the government and society benefit by the added debt. A budget deficit can help businesses create more jobs to limit the amount of unemployment and improve consumer income. The debts accumulated may be the result of spending on worthwhile projects like road repair or important services like education. The government is also spending to establish programs for the longevity of the nation. On the other hand, a budget deficit...
Words: 918 - Pages: 4
...chapter 1 2 >> Fiscal Policy A BRIDGE TO PROSPERITY? I n 1998 the Japanese government though on a smaller scale. Indeed, many completed the longest suspension countries attempt to manage aggregate de- bridge in the world. The 6,500-foot mand by using discretionary fiscal policy. span linking Awaji Island to the city of Governments also adjust taxes in an at- Kobe cost $7.3 billion to build. Yet as skep- tempt to manage aggregate demand. They tics had predicted, it currently carries very may reduce taxes to try to stimulate the little traffic—about 4,000 cars a day. By economy or raise taxes when they believe comparison, America’s longest suspension that aggregate demand is too high. bridge, the Verrazano Bridge that links New In this chapter, we will learn how discre- York City’s Staten Island to the borough of tionary fiscal policy fits into the model of Brooklyn, carries more than 300,000 cars short-run fluctuations we developed in each day. Chapter 10. We’ll see how deliberate In Japan, stories like this are common. During the 1990s the Japanese government What you will learn in this chapter: changes in government spending and tax policy affect real GDP. We’ll also see how ® What fiscal policy is and why it is an important tool in managing economic fluctuations ® Which policies constitute an expansionary fiscal policy and which constitute a contractionary fiscal policy ...
Words: 15653 - Pages: 63
...how deficits, surpluses, and debt in relation to the macroeconomic health of the United States. A government deficit is when federal spending is greater that the tax revenue received for that year. Each year the deficit is added to the current debt, the Treasury must sell bonds to raise the money to cover deficit. At first, the deficit spending does boost economic growth. As we have read in the previous weeks, government spending does have a positive effect on the economy; it lowers interest rates, increasing the money supply available, and creates jobs, which lowers the unemployment rate. However, if the deficit is added to the national debt this is very damaging to the economy because the government can let the value of the U.S. dollar fall, this would make the debt repayment cheaper and less expensive. This will have a negative effect on foreign government and how investors view the strength of our Treasury bonds, and they will be reluctant to purchase Treasury bonds, this will cause an increase in the interest rates. When creditors become concerned about a country's ability to repay its debt, they demand a higher interest rate to provide a greater return on this higher risk investment. Treasury bills, notes and bonds are used to finance budget deficits, if foreign government and investors do not purchase them, the U.S. will have difficulty raising money to continue to finance the deficit On the other hand, a budget surplus is the opposite of a budget deficit. A...
Words: 403 - Pages: 2
...Assignment DEFICIT FINANCING: TEORY AND PRACTICE IN BANGLADESH Submitted By Zahirul Islam [pic] DEFICIT FINANCING: TEORY AND PRACTICE IN BANGLADESH INTRODUCTION In the past as today, the deficit budget policy is famous instrument of fiscal policy used to increase the rate of economic growth of the country. That way of financing was establish after the two world wars, oil crises and current financial and economic crises. The objective in seeking deficit financing is to finance the shortfall between government expenditures and tax receipts. Tax increases are not politically palatable. Governments often resort to deficit financing when other components of GDP such as private consumption decline during recessionary periods. Such deficits, if undertaken for a short period with an action plan to create equivalent surplus in near future, could reverse decline in real GDP and stimulate growth in real GDP for the benefit of citizens of the nation. Structural deficits are indicative of inability to reduce entrenched government expenses. The sustainable level of accumulated deficits can also be determined with reference to both the deficit servicing requirements and deficit servicing sources. This analysis will entail identification of cause and effect relationships that determine the factors influencing each of these two areas. As shown by other researchers, the explanatory variables leading to deficits include domestic budgetary receipts;...
Words: 5493 - Pages: 22
...Week five Fiscal Policy Paper * Depending on the time, the economy can have many financial stages. There are times when the economy is facing a budget deficit, which means the tax revenues in the government are lower than the government expenditures. The economy can also experience a surplus and high debt, which can also drain an economy. The state of our government can affect people from taxpayers, to the elderly who are collecting social security, to children needing medical and governmental benefits for their well-being. The government debt situation can be either an advantage to the population by lowering taxes, or a disadvantage by making taxes higher. * To know how taxpayers, future Social Security and Medicare users, and unemployed individuals are affected by the U S.’s deficit, surplus, and debt. It is important to understand the definitions of deficit, surplus and debt. Surplus occurs when there is more supply than demand, as in extra resources. Deficits occur when a government's expenditures exceed the revenue that it generates. Debt is an amount owed to another person or government in economics. * Taxpayers can benefit from a budget surplus. A surplus can create a reduction in the tax rate which leads to a higher consumer’s savings rate. The less taxes that consumers have to pay allows spending or savings in other areas. An increase in national savings (reduction in tax rate) also creates additional money that can be available for banks to...
Words: 1805 - Pages: 8
...mmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmdddddddddddddddddddddddddddddddddddddddddd.ddddddddddddddddddddddgfyufyddrasdgfghkjlkhytewasdghjhjkjkjkjnkhjbjhvhgcgxcgvhbnkmmnbvhvghhcfgxdcbn.sdcgvjnjknbvhgccgj.dxsdvgghbjb.gftsrsrtsdgihufdtrstygukjnhjkk.drdcggk.upply of money is economic constant, government expenditures must be financed by either taxes or borrowing. Fiscal policy involves the use of the government’s spending, taxing and borrowing policies. The government’s budget deficit is used to evaluate the direction of fiscal policy. When the government increases its spending and/or reduces taxes, this will shift the government budget toward a deficit. If the government runs a deficit, it will have to borrow...
Words: 570 - Pages: 3
...Implications of Budget Deficit in India When a government plans to spend more than its income, it resorts to financing the additional spending through a budgetary deficit. So, traditional definition of a budget deficit is the difference between total government outlays and the revenue receipts. But a complete and technical definition of deficit would be 'the difference between size of the government debt at the end of the year and the corresponding size of the debt a year later. Thus, the budget deficit is funded by a national debt. A healthy practice for any government is to have a balanced budget, but Keynesian economists propose deficit budgeting to overcome a financial crisis. Even with deficit budgeting, the healthy way is to have revenues exceeding non-interest outlays and this excess must be good enough to pay for the interest on government debt to avoid a rising ratio of debt to GDP. In case of India with a 210 billion dollar budget, its deficit pegs at about 6.8 percent of GDP, and when combined with those of state governments, it reaches a hefty figure of 10 percent of the GDP. Comparatively, leading countries of the world work with an average budget deficit of 4 percent of their respective GDPs. India borrows about 10 percent of its GDP every year. With current debt on India being about 75 percent of its GDP, it is required to pay a heavy interest on the borrowings. Implications of heavily deficit budgets in India are - Economic growth in impeded...
Words: 401 - Pages: 2
...Student’s Name Institution Instructor Date Budget Deficit Budget Deficit Budget is an estimate of the income and expenditure for some country for some set period of time say one year. Budgeting is vital in an economic perspective for the economy that desires to meet the needs of its people. Budgeting also aids an economy to hypothesise and attain the best output and revenue from the dealings in the production process. As such budgeting and forecasting serve the basic role of the economic progress of the economy based on the operations of the countries to attain the millennium development goals. Basically, the budgeting approaches used by the economy may create the deficit or at some point result in the surplus. Reduction in tax payments, increased unemployment, poor planning, increased military spending and poor projection and underestimations result in the budget deficit. During periods of economic recession in some country budget deficit is also likely to be experienced. Expansionary fiscal policy may lead to budget deficit since it involves increase in government spending. Such condition is very challenging to the economic growth and development and may also increase the rate of borrowing of a country to surpass its budget (Aaron, 2014, pp. 1). Budget deficit can be explained as the difference between the government revenue and the government expenditure calculated over some set period (one year). It occurs when the expenditure has exceeded the income for some set...
Words: 1957 - Pages: 8
...The role of government in the U.S economy extends far beyond its activities as a regulator of specific industries or gatekeeping. The government is also responsible for managing the overall pace of economic activity, with its objective of maintaining high levels of employment and controlling price stability (inflation). It has two main tools for achieving these goals: fiscal policies, which is done through taxes and spending and monetary policies, through which it manages the supply of money. In this paper, I will discuss the why high deficits of today will reduce growth rate of the economy in the future, look at the history of our nation’s debt and deficits, different elements that causes of deficit and why the cause actually matters, what role the fiscal and monetary policies have to lead to higher or lower budget deficits and how deficits affect the overall long-term economic growth and debt of the U.S. Let us first begin by learning the difference between the terms debt and deficit. In economics, the term deficit means a shortfall in revenue of a fiscal year. It is when the government’s revenue called receipts, which are collected taxes (payroll, corporate, excise, income and social insurance), fee revenues and tariffs that are called receipts are lower that what is spent called outlays. In other words, the federal budget deficit is the yearly amount by which spending exceeds revenue. The term debt is described as an accumulation of deficits so the national debt is the total...
Words: 2451 - Pages: 10
...Depending on whether a country is running a deficit, a surplus, or a debt, businesses and individuals are affected differently. “The most important budget in the world is that of the United States government. The U.S. budget impacts not only the United States of America but foreign investment, trade, and the economies of nations throughout the world.” (Boothe, 2003) The objective of this paper is to provide examples of how the United State’s deficits, surpluses, and debt affect individuals and business both domestically and internationally. Deficits, Surpluses and Debt; an Overview Summary measures of a budget are denoted by deficits and surpluses. Whereas a deficit is a shortfall of revenues under payments, a surplus is an excess of revenues over payments. Debt is accumulated deficits less accumulated surpluses (Colander, 2010). These summary measures indicate the health of an economy. This indicator helps both domestic and foreign companies determine if it is beneficial to invest in United States assets. Heading into the year 2000, the United States was running a surplus. This quickly changed as the government invested in The War on Terrorism, consumers changed spending habits, unemployment rose, and growth decreased. To increase the money supply, government implemented monetary policy and to get the economy moving again, implemented fiscal policies. These policies have wiped out the surpluses and created large deficits. Effects on Domestic Automotive Manufacturers ...
Words: 1065 - Pages: 5
...DQ 1. How does a government budget deficit and surplus affect the economy? During what periods in recent history has the U.S. run budget deficits and budget surpluses? What were the reasons for the deficits/surpluses during those time periods? When the government runs a budget deficit, it is essentially spending more money than it is taking in. The caveat to this is the accounting method used to measure expenditures. For example, the Social Security fund creates an expense for the future expense. A deficit is not a bad thing though. A deficit means the government is pending money and that spending can be as investment in the future (assets) or to help the economy grow out of a recession. The internet is an amazing source to locate data. I found a site with tons of spreadsheets you can download to see the history of the US budgets, spending, and debt. The government has almost always run deficits so it was quite easy to locate two of them. The first one I chose was the largest the deficit had been since the recording had started. From 1982 to 1986 when Reagan was President the deficit hit $1 and $2 billion dollars for the first time in history. This was also a time of recession in the economy. This was still only between 4% and 6% of GDP. The next period of deficits started in 2002 and have continually increased since that time. The percentage to GDP from 2002 to 2008 was between 1.5% and 3.2% though. In 2010, the percentage of the deficit to GDP spiked at 10.7%, the highest...
Words: 663 - Pages: 3
...How is public debt related to economic growth and unemployment? Public debt as a factor will influence economic growth and unemployment. Economic growth is usually presented as gross domestic product (GDP) growth. There are some data including GDP of countries in 2010 and 2009, budget surplus or, total central government debt and unemployment and government debt in U.S.A. Those data have units and definitions below. Definitions: GDP 2010: GDP 2009: Budget surplus/deficit: GovtDebt: Unemployment Debt Gross Domestic Product in 2010 (millions constant 2000 US$) Gross Domestic Product in 2009 (millions constant 2000 US$) Budget surplus/deficit as % of GDP in 2010 Total central government debt as % of GDP in 2010 Total unemployment in USA (% of total labor force) Real government debt in USA (billion constant 2000 US $) First, according to the GDP in 2009 and 2010, GDP growth can be calculated by this way: using the difference between GDP in 2010 mines GDP in 2009 over GDP in 2009. Then, calculate the mean, median standard deviation maximum and minimum by Excel, we can get the results, the mean of GDP in 2010 is 288366.5 million U.S. dollars. The mean id GDP in 2009 is 277225.5 million U.S. dollars, so the average GDP in 2010 is increased. Also, the median of GDP in 2010 is 14141.0 million U.S. dollars, greater than the median of GDP in 2009. However, the standard deviation and difference between maximum and minimum in 2010 is greater than which in 2009, which means in...
Words: 891 - Pages: 4
