...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 between "budget deficit" and "national debt"? What is the difference between "gross national debt" and "net national debt"? 14. What is the difference between a Treasury bill, a Treasury note, and a...
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...Supplemental Unit 5: Fiscal Policy and Budget Deficits Fiscal and monetary policies are the two major tools available to policy makers to alter total demand, output, and employment. This feature will focus on fiscal policy, what it is and its potential and limitations as a tool with which to promote economic stability and strong growth. What is Fiscal Policy? When the supply 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 funds to cover the excess of its spending relative to revenue. Larger budget deficits and increased borrowing are indicative of expansionary fiscal policy. In contrast, if the government reduces its spending and/or increases taxes, this would shift the budget toward a surplus. The budget surplus would reduce the government’s outstanding debt. Shifts toward budget surpluses and less borrowing are indicative of restrictive fiscal policy. It is important to note that a budget deficit is different from the national debt. A deficit occurs when government spending exceeds revenue over a year, quarter or month. A deficit will increase the size of the national...
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...Budget Deficits, National Saving, and Interest Rates William G. Gale and Peter R. Orszag September 2004 Brookings Institution and Tax Policy Center. This paper was prepared for the Brookings Panel on Economic Activity, September 9-10, 2004. We thank Emil Apostolov, Matt Hall, Brennan Kelly, and Melody Keung for outstanding research assistance; Alan Auerbach, William Brainard, Robert Cumby, Bill Dickens, Doug Elmendorf, Eric Engen, Laurence Kotlikoff, Thomas Laubach, Maria Perozek, George Perry, Frank Russek, Matthew Shapiro, and David Wilcox for helpful discussions; and Eric Engen, Jane Gravelle, and Thomas Laubach for sharing data. ABSTRACT This paper provides new evidence that sustained budget deficits reduce national saving and raise interest rates by economically and statistically significant quantities. Using a series of econometric specifications that nest Ricardian and non-Ricardian models, we obtain evidence of strong non-Ricardian behavior in aggregate consumption. Consistent with several recent studies, we find that projected future deficits affect longterm interest rates, but current deficits do not. Our estimates suggest that each percent-ofGDP in current deficits reduces national saving by 0.5 to 0.8 percent of GDP. Each percent-of-GDP in projected future unified deficits raises forward long-term interest rates by 25 to 35 basis points, and each percent-of-GDP in projected future primary deficits raises interest rates by 40 to 70 basis points...
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...Security Policy During the 1990s Douglas W. Elmendorf Federal Reserve Board Jeffrey B. Liebman Harvard University and NBER David W. Wilcox Federal Reserve Board Revised July 2001 This paper was presented at a conference on “American Economic Policy in the 1990s” held June 27 to 30, 2001 at the John F. Kennedy School of Government, Harvard University. The views expressed in this paper are those of the authors and are not necessarily shared by any of the institutions with which they are affiliated. We thank Al Davis, Peter Diamond, Edward Gramlich, Peter Orszag, Gene Sperling, and Lawrence Summers for comments on an earlier draft. Elmendorf was formerly Deputy Assistant Secretary of the Treasury in the Office of Economic Policy, and prior to that Senior Economist at the Council of Economic Advisers; Liebman was formerly Special Assistant to the President for Economic Policy at the National Economic Council; and Wilcox was formerly Assistant Secretary of the Treasury for Economic Policy. Table of Contents Page 1. Introduction 2. Budget Outcomes and Projections Improved Budget Picture Sources of Improvement 3. Budget Deficit Reduction: 1990 through 1997 OBRA90 OBRA93 What Did Deficit Reduction Ultimately Accomplish? The Republican-Controlled Congress BBA97 4. Entitlement Reform and Saving Social Security First Entitlement Commissions Social Security Saving Social Security First 5. Social Security Reform Options Using Projected Budget Surpluses as Part of Social Security Reform Investments...
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...Although many people do not see much difference in micro and macroeconomics, there is in fact a huge difference. Microeconomics is the study from a specific firm’s point of view, as macroeconomics is the study from the full economies point of view. So, what does this all mean? In this paper we will discuss the many factors that make up key elements of macroeconomics. What is economics all about? Is it the study of money? Is it about trade-offs and scarce resources? Is it about inflation, unemployment, and government budget deficits? Is it about eliminating poverty? All of the above are important topics in the study of economics. The main objective of economic research is its ability to explain how we can most optimally achieve the highest standard of living. Thus: Economics is the study of how we can best increase a nation's wealth with the resources that we have available to us. In our country and other relatively free-market economies, the decision as to what and how much to produce is made primarily by the buyers and sellers of the products. The government exerts relatively little control over prices of products. Some say that this is the nation’s wealth, but is it? Wealth by definition includes tangible products, such as cars and houses, as well as intangible products, such as more leisure time and cleaner air. The biggest question associated with wealth, is how to increase it. Some economists support government involvement, price controls, and government rules and regulations...
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...Economics- Market and the Economy Explain how an increased federal budget deficit resulting from a recession can actually help stable an economy? Deficits and debt will rise to unparalleled levels in coming decades without major changes in federal budget policies, so legislators should set a goal of alleviating the debt as a share of gross domestic product over the next decade. Reducing deficits in the short term, however, would undercut the insubstantial economic recovery. Representatives should tolerate large deficits over the next several years in order to preserve a strong aggregate demand until the economy is back on its feet. Moreover, they can take contentment in the fact that momentary measures intended to aid recovery add very little to the long-term deficit problem. The increase in deficits for several years recedes in comparison to the size of the economy over the long run. As the economy recovers, however, politicians will need to demonstrate to the public and the lenders who finance our borrowing needs that they are prepared to move the budget toward a sustainable long-run path. President Obama’s initial budget proposal and the health reform packages that the House and Senate have passed represent first steps toward putting the federal budget on a sounder footing. Health reform is crucial because rising spending for health care is the major force driving the projected future growth in federal deficits and debt. There are, however, only first steps. Much will need...
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...2744 Government Spending & Budget As many Federal departments and agencies lurch into an era of running without funds, the leaders of both parties of Congress are spending less and less time searching for a compromise to balance the budget, and more and more time deciding how to use it to their advantage on the campaign trail. Meanwhile money is easily borrowed to pay for government overhead. In an attempt to change this, on June 29, Congress voted in favor of HConRes67 that called for a 7 year plan to balance the Federal Budget by the year 2002 (Hager 1899). This would be done by incorporating $894 billion in spending cuts by 2002, with a projected 7 year tax cut of $245 billion. If this plan were implemented, in the year 2002, the U.S. Government would have the first balanced budget since 1969. There is doubt by citizens that a balanced budget will become reality. A recent Gallop Poll from January, 1996 showed the budget as the #1 concern among taxpayers, but 4/5 of those interviewed said they doubt the GOP will do the job (Holding 14). Meanwhile, an ABC poll from November reported that over 70% of those polled disapprove of the current performance by Congress, and most blamed politicians for failure to take action (Cloud 3709). These accusations of failure to follow through come with historical proof that Congress and Clinton have failed to compromise and resolve the issue. After all, current budget plans are dependent on somewhat unrealistic predictions of avoiding such catastrophes...
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...financial system is to bring savers and borrowers together. Businesses are never deficit spending units (DSUs). A financial claim is an “IOU” from a deficit spending unit. Investment bankers help deficit spending units (DSUs) bring new primary security issues to market. Deposits in a credit union by a household are an example of direct finance. When a surplus spending units (SSU) owns a financial claim created by financial intermediation, its residual claim is against a deficit spending units (DSU). Assets of financial intermediaries include direct financial claims only. Finance companies take small consumer deposits and make large consumer loans. Liabilities of financial intermediaries are indirect financial claims. Direct finance requires a more or less exact match of preferences. There must be an equal number of DSUs and surplus spending units ( SSUs) in a period. Every financial claim appears on two balance sheets. Without a financial sector, real investment must be financed internally by the deficit spending unit. Depository intermediaries issue claims that are for the most part highly liquid. A household is a surplus spending units when income for the period exceeds spending. A surplus spending units surplus spending unit (SSU) must hold a claim until its scheduled maturity. Financial claims or securities are written for the mutual benefit of both SSU and DSU. Deficit spending units (DSUs) and surplus spending units (SSUs) always have some contact with each other in financial...
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...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 ® Why fiscal policy has a multiplier effect and how this effect is influenced by automatic stabilizers ® How to measure the government budget balance and how it is affected by economic fluctuations ® Why a large public debt may be a cause for concern ® Why implicit liabilities of the government are also a cause for concern spent around $1.4 trillion on...
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...* THE CLINTON ADMINISTRATON’S OWN VIEW Whatever we might think of the reasoning Greenspan used in convincing Clinton that deficit reduction was an essential policy goal, it still remains a fact that deficits were reduced and (briefly) turned into surpluses over the eight years of the Clinton Presidency. In January of 2001, the Council of Economic Advisers made the following argument: The Omnibus Budget and Reconciliation Act of 1993 was the right policy package at the right time … long-term interest rates remained stubbornly high. … Bond yields were being predictably affected by the forces of supply and demand: the Federal Government was set to run a deficit of almost $300 billion … With an oversupply of government bonds and the prospect of even more to come, bond and stock prices were depressed, and yields were correspondingly high… In 1992, the new Administration was elected on a promise to turn the deficits around. After a tough political battle in 1993, the Administration was able to deliver on that promise … The markets responded quickly to this serious effort to address the deficit by lowering expectations of future inflation, and long-term interest rates accordingly fell…. As economic growth and further restraints on spending … turned the huge deficits into surpluses, a new fiscal environment emerged. The 10-year Treasury rate fell below 6 percent in 1998 and 1999… that rate stood at only 5.7 percent in November 2000. … Ultimately, the combination of falling...
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...an increased federal budget deficit resulting from a recession can actually help stabilize an economy. Before I can explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy, I most first explain what a budget deficit is. Arthur O’Sullivan, Steven M. Sheffrin and Stephen J. Perez (2011), authors of Survey of Economics: Principles, Applications, and Tools explain that the federal government runs into a budget deficit “when it spends more than it receives in tax revenues in a given year.” A government’s deficit can be measured with or without including the interest it pays on its debt. So “the total deficit is spending, plus interest payments on the debt, minus tax revenues” (Wikipedia, 2011, para. 2). To better understand budget deficit, let’s look at an example. If the government puts a budget together wishing to spend $150 billion that year but only receives $140 billion from revenues, they must make up the difference. They make up the difference by selling public government bonds, which is an IOU from the government promising to pay the money back at a later date with interest. Budget deficits can help to stabilize the economy because the government must maintain normal operations even though its income has decreased. Government’s expenses have to increase to cover the increase in welfare and unemployment payments. Such automatic fluctuations in revenue and expenditures work to increase the deficit because the...
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...True False Question 5 Laissez-faire is a policy of no government intervention in the economic activities of individuals and businesses. True False Question 6 In a partnership, each partner’s liability is limited to his or her contribution to the partnership. True False Question 7 There are no government-regulated markets in the U.S. economy. True False Question 8 Which of the following is not among the United States’ economic goals? full employment stable prices healthy economic growth equal distribution of income Question 9 Under the U.S. market system, land and capital goods are owned mainly by the federal government individuals and firms local governments state governments Question 10 The biggest disadvantage of a sole proprietorship is the lack of distinction between the business and the owner. True False Question 11 In the United States, marketing cooperatives are most commonly found in the agriculture industry. True False Question 12 Self-interest is a major tenet of economic liberalism. True False Question 13 Which of the following is considered a command economy? communism socialism fascism...
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...for more than 80% of its exports. With the drop in global demand, prices of those commodities began to decline. This resulted in an impact on its foreign exchange reserves since Russia had a fixed exchange rate regime during this period of time, where the ruble was only allowed to move within a narrow band. With the speculative attacks caused by the Asian financial crisis along with the decline in global demand, the Central Bank of Russia stepped in to defend the ruble in the markets. Russia was also experiencing fiscal deficits and declining productivity in its economy. Foreign capital was initially attracted to the Russian market due to the high interest rates, which was then used to provide internal loans in the country. The Gosudarstvennoe Kratkosrochnoe Obyazatelstvo (GKO) bond interest rates soared to 150% in an effort to prop up the currency and to stop capital flight. Internally, debt on wages continued to grow and financing for major big budget items were impacted as debt grew. The Chechnya War from several years earlier further compounded these problems. Russia also suffered from a political crisis where the entire government was fired in 1998, causing for investor confidence to be further eroded. On July 13, 1998, a $22.6 billion financial package from the International Monetary Fund and the World Bank was approved. The purpose of the package was to swap maturing GKO short-term bonds into long-term Eurobonds. This was somewhat successful, however...
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...expansion, prices and wages are increasing, a potentially noxious mix for a Federal Reserve will try to contain inflation without triggering a recession. According to an advance estimate made by the commerce department economic activity slowed as a result of builders putting up fewer homes and consumers cutting on spending. Economists explain that slowing growth and rising prices will continue to complicate Fed’s task of deciding what level of interest rates is high enough to contain inflation. However, it’s not so high to slay out economic growth. Between April and June inflation grew at a rate of 2.5% whereas the core personal consumption index rose at an annualized rate of 2.9% in the second quarter. More so the level of worker’s wages and benefits rose at 3.6%. Once the Friday report was released investors took up the vision that Fed would be more likely give the economy a break by holding the interests steadily at 5.25%. This report confirmed the predictions of the economists that cooling house market as well as the consumer spending will take a bite out of economic growth. However, some economists had the hopes that business investment as well as improving the foreign trade would offset declines in spending and construction. This only came partially. A different report indicated that people may not be inclined to cut spending sharply. Another economist noted that the gap that existed between the wealthiest third and the poorest third consumers reached its widest pint...
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...S169-S182_Krug2e_Macro_PS_Ch13.qxp 2/25/09 8:02 PM Page S-169 Fiscal Policy 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic 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...
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