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Chapter 13: Types of fiscal policy (page 264)
What happens between the public and private sectors during a "crowding out" effect?
The public sector displaces the private sector
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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.
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鈥檚 advanced industrial nations.
Explain how built-in (automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy鈥檚 built-in stability?
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.
Refer back to the table in Figure 12.7 in the previous chapter. Suppose that aggregate demand increases such that the amount of real output demanded rises by \(7 billion at each price level. By what percentage will the price level increase? Will this inflation be demand-pull inflation, or will it be cost-push inflation? If potential real GDP (that is, full-employment GDP) is \)510 billion, what will be the size of the positive GDP gap after the change in aggregate demand? If government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it?
| Real Output Demanded (Billions) | Price Level (Index Number) | Real Output Supplied (Billions) |
| \(506 | 108 | \)513 |
| 508 | 104 | 512 |
| 510 | 100 | 510 |
| 512 | 96 | 507 |
| 514 | 92 | 502 |
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