30.1 What
is the role of the Council of Economic Advisers (CEA) as it relates to
fiscal policy? Use an Internet search to find the names and university
affiliations of the present members of the CEA.
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30.2 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?
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30.3 (For
students who were assigned Chapter 28) Use the aggregate expenditures
model to show how government fiscal policy could eliminate either a
recessionary expenditure gap or an inflationary expenditure gap (Figure
28.7). Explain how equal-size increases in G and T could eliminate a recessionary gap and how equal-size decreases in G and T could eliminate an inflationary gap. L01
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30.4 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 server recession.
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30.5 Briefly
state and evaluate the problem of time lags in enacting and applying
fiscal policy. Explain the idea of a political business cycle. How might
expectations of a near-term policy reversal weaken fiscal policy based
on changes in tax rates? What is the crowding-out effect, and why might
it be relevant to fiscal policy? In view of your answers, explain the
following statement: “Although fiscal policy clearly is useful in
combating the extremes of severe recession and demand-pull inflation, it
is impossible to use fiscal policy to fine-tune the economy to the
full-employment, noninflationary level of real GDP and keep the economy
there indefinitely.”
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30.6 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?
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30.7 Define
the cyclically adjusted budget, explain its significance, and state why
it may differ from the actual budget. Suppose the full-employment,
noninflationary level of real output is GDP3 (not GDP2) in the economy depicted in Figure 30.3. If the economy is operating at GDP2, instead of GDP3,
what is the status of its cyclically adjusted budget? The status of its
current fiscal policy? What change in fiscal policy would you
recommend? How would you accomplish that in terms of the G and T lines in the figure?
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30.8 How
do economists distinguish between the absolute and relative sizes of
the public debt? Why is the distinction important? Distinguish between
refinancing the debt and retiring the debt. How does an internally held
public debt differ from an externally held public debt? Contrast the
effects of retiring an internally held debt and retiring an externally
held debt.
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30.9 True or false? If false, explain why.a. The total public debt is more relevant to an economy than the public debt as a percentage of GDP.b. An internally held public debt is like a debt of the left hand owed to the right hand.c. The Federal Reserve and Federal government agencies hold more than three-fourths of the public debt.d.
The portion of the U.S. debt held by the public (and not by government
entities) was larger as a percentage of GDP in 2009 than it was in 2000.e. As a percentage of GDP, the total U.S. public debt is the highest such debt among the world’s advanced industrial nations.
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30.10 Why
might economists be quite concerned if the annual interest payments on
the U.S. public debt sharply increased as a percentage of GDP? L04
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30.11 Trace
the cause-and-effect chain through which financing and refinancing of
the public debt might affect real interest rates, private investment,
the stock of capital, and economic growth. How might investment in
public capital and complementarities between public capital and private
capital alter the outcome of the cause-effect chain?
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30.12 LAST WORD
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?
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