Download Ch 11 Debt & Deficit [2nd half] [AP]

Deficits, Surpluses, and the National Debt
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Tax his land,
Tax his bed,
Tax the table
At which he's fed.
Tax his tractor,
Tax his mule,
Teach him taxes
Are the rule.
Tax his cow,
Tax his goat,
Tax his pants,
Tax his coat.
Tax his ties,
Tax his shirt,
Tax his work,
Tax his dirt.
Tax his tobacco,
Tax his drink,
Tax him if he
Tries to think.
Tax his cigars,
Tax his beers,
If he cries, then
Tax his tears.
Telephone State &
Local Tax
Telephone Usage
Charge Tax
Utility Taxes
•
•
Tax his car,
•
Accounts
Receivable Tax
Tax his gas,
•
Building Permit
•
Find other ways
Tax
•
To tax his ass
•
CDL license Tax
•
Tax all he has
•
Cigarette Tax
•
Then let him know
Corporate Income
•
That you won't be done •
Tax
•
Till he has no dough.
•
Dog License Tax
•
When he screams and hollers, •
Excise Taxes
•
Then tax him some more, •
Federal Income Tax
•
Tax him till
•
Federal
•
He's good and sore.
Unemployment Tax
•
Then tax his coffin ,
(FUTA)
•
Tax his grave,
•
Fishing License
Tax
•
Tax the sod in
•
Food License Tax
•
Which he's laid.
•
Fuel Permit Tax
•
Put these words
•
Gasoline Tax (42
•
upon his tomb,
cents
per gallon)
•
" Taxes drove me to my doom..."
•
Hunting License
•
When he's gone,
Tax
•
Do not relax,
•
Inheritance Tax
•
Its time to apply
•
Gross Receipts Tax
•
The inheritance tax.
•
Inventory Tax
•
Utility Taxes
•
IRS Interest
•
Vehicle License
Charges IRS
Registration tax
Penalties (tax on
top of tax)
Vehicle Sales Tax
•
Liquor Tax
Watercraft
•
Luxury Taxes
Registration Tax
•
Workers Comp Tax
Well Permit Tax
•
Marriage License
Tax
•
Medicare Tax
•
Personal Property
Tax
•
Property Tax
•
Real Estate Tax
•
Service Charge Tax
•
Social Security Tax
•
Road Usage Tax
•
Sales Tax
•
Recreational
Vehicle Tax
•
School Tax
•
State Income Tax
•
State
Unemployment Tax
(SUTA)
•
Telephone Federal
Excise Tax
•
Telephone Federal
Universal Service
Fee Tax
•
Telephone Federal,
State and Local
Surcharge Taxes
•
Telephone
Minimum Usage
Surcharge Tax
•
Telephone
Recurring and
Non-recurring
Charges Tax
Chapter Objectives:
1. Explain the difference between the budget deficit and public debt.
2. Explain each of the three budget philosophies.
A. Annually balanced budget
B. Cyclically balanced budget, and
C. Functional Finance
3. Identify the principal causes of the public debt.
A. Wartime financing
B. Fighting recessions
And the concept of “crowding-in”
C. Tax cuts
D. Lack of political will
4. Describe the annual interest charges on the debt, who holds the debt
and the impact of accounting and inflation on the debt.
5. State the absolute size of the debt and the relative size as a % of GDP.
6. Explain why the debt can also be considered public credit.
7. Identify and explain two widely held myths about the public debt.
A. Going bankrupt B. Burden on our grandchildren
8. Explain the effect of the debt on income distribution and Ig.
9. Explain how the debt [& higher interest rates] might decrease net exports.
10. Explain 3 proposed remedies to reduce or to eliminate budget deficits.
[Incr G
AD1 AD2
4%
2%
AS
G
Market
D1 D2
10%
6%
IG
YR Y*
s
F1 F2
Quantity of LF
DI
Decr Ig]
10%
Real interest rate
PL
Real I.R.
Loanable Funds
incr I.R.
8%
6%
4%
2%
Crowding
Out Effect
0
15
20
25
15
Investment (billions of
dollars)
5
10
In this case, it would be 100% “crowding out”.
G can finance a deficit by:
Friedman
Just follow the
“monetary rule.”
1. Borrowing - this raises interest rates
in the LFM and “crowds out” investment.
2. Money Creation - no “crowding out”
so is more expansionary than borrowing.
AD2
AS 16
AD1
DI1
DI2
14
G
YR Y*
Real interest rate (%)
12
10
8
6
4
2
0
5
25 30 35
Investment (billions of dollars)
10
15
20
40
But … if the economy is operating well below its potential, increased government spending
could result in more jobs, more positive profit expectations, and a “crowding in” of Ig.
How “Crowding In” Might Work
“Crowding In” – potential for G spending to stimulate
private investment in an otherwise sluggish economy.
“Crowding Out” represents argument for passive fiscal policy.
“Crowding In” would be an argument for active fiscal policy.
If the economy is operating well below its potential, the additional
fiscal stimulus provided by deficit spending could encourage firms to
invest more. A G deficit could stimulate a weak economy, increasing
AD & putting a “sunny face on business expectations.” As business
expectations grow more favorable, firms could become more willing
to invest. [thus, “crowding in” of investment]
If you have ever approached a crowded restaurant, you may not
have wanted to put up with the hassle of a long wait and were thus
“crowded out.” Similarly, large G deficits may drive up interest rates
and crowd out some investment.
As Yoga Berra would say, “No one
On the other hand, did you ever pass up a restaurant because the place
goes there
more.
It’s too
crowded.”
seemed
dead-it any
had few
customers.
Perhaps
you wondered why so few
people
chose
to eatsaid,
there. “If
With you
just acome
few more
Yoga
also
to customers,
a fork you might have
been willing to “crowd in.” Businesses may be reluctant to invest in a lifeless
in the road, take it.”
economy. Economic stimulus could encourage them to “crowd in.”
1.Annually Balanced Budget
2.Cyclically Balanced Budget
3.Functional Finance
[A. Annually Balanced; B. Cyclically Balanced; C. Functional Finance]
“Earth Orbits Sun” “G” Economy
Annually Balanced Budget – each time the earth orbits the sun we
should balance the budget.
This would put the G in an economic straitjacket as we couldn’t fight
recessions with deficit spending. This would be like pouring water on
a drowning man. We used to worship at the alter of a balanced
budget prior to the Great Depression. 49 states require this.
Balancing the budget during a recession would not be counter-cyclical,
but pro-cyclical. Increasing taxes during a recession would worsen the
recession. Running a surplus during boom times and giving the
money back would be inflationary.
Balancing the Budget – during Recession
[Increase T or Decrease G - Procyclical
AD1
AD2
PL1
Cut
AD3
AS
So, the fiscal actions
to balance the budget
decreases, rather than
increases AD, and is
PL2
PL3
procyclical, not counter.
YRYR Y*
Balancing the Budget - during Inflation
[Decrease T or Increase G - Procyclical]
PL3
AD1
AD2
AD3 AS
PL2
PL1
So, the fiscal actions
to balance the budget
increase, rather
than decrease AD,
& is also procyclical,
rather than counter.
Y* YI YI
Inflation
“Raise taxes”
Recession
“Tax cut”
“Deficit Spending”
Tax
Cuts
Raise
Taxes
“Balanced”
Cyclically Balanced Budget – run deficits during recessions &
surpluses during expansions so the budget is balanced not each year
but over the course of the business cycle. Economic wisdom tells us we
should have deficits in lean years and surpluses in fat years. There is
nothing “sacred about 12 months as an accounting period.”
The government could conduct counter-cyclical fiscal policy and balance
its budget over a period of years. The basic problem of this philosophy is
that fluctuations are not usually symmetrical enough to ensure that the
surplus will offset the deficit.
U.S.
Economy
“Balance the economy, not the budget.”
Functional Finance – balance the economy not the budget.
The annual or cyclically balanced budget is of secondary importance. The
important thing is to provide for non-inflationary, FE & ensure the economy
produces its potential GDP. If there are chronic deficits or surpluses, so be it.
Deficits are minor problems, compared to inflation or recessions.
The “Debt” and the “Deficit”
Flow
Reasons for Debt
1.
2.
3.
4.
Lack of political will
Tax cuts
Recessions (transfers)
Wartime financing
[ADD] Attention
Deficit Disorder
Congressmen have
trouble focusing
attention on the deficit.
($162 bil.)
Stock
($9.4 trillion)
$9.4 tril.
$33,000
3 3,
Per Capita
9, 4
1 4 0,
The Debt is increasing by $1 million per minute.
$1.58 billion per day is being added to the debt.
Yea! We don’t have
to pay any federal
income or SS taxes.
7%
$179 B
37%
$884 bil. 11%
$261 B
45%
Deficit
$248 bil.
$1,096
We are paying about
$1 trillion in taxes.
Three major sources
of federal taxes(90%)
a. Individual income
taxes
b. Social Insurance
c. Corporate income
taxes
2008 Federal Budget Proposal-$2.9 Tril.
Agriculture
90.9 Interest [$243]
Commerce
6.7
Defense
527.6
Education, job train. 62.6
Energy, Environment 21.6
Health/Human SVC 699.0
Homeland Security
34.6
Housing/Urban Dev.
36.2
Interior
10.1
Justice, Law enforce 23.3
$67.3
Labor
50.4
NASA
17.3
SEC & Exchange Com.
8.5
Corp Engineers
4.8
State
37.4
Social Security 655.5
Transportation
67.3
Legislative Branch 4.8
Treasury
525.5
Judiciary
6.7
Veteran’s Affairs
84.4
Other agencies 148.7
Federal Spending in 2007, by Function
DEFICITS, SURPLUSES, AND DEBT
Definitions:
Budget Deficit [G > T]
Budget Surplus [T > G]
National or Public Debt
U.S. Securities
1. Progressive
2. Proportional
3. Regressive
Flat Tax on Income: same % of income, different amounts, so Proportional
Flat Tax on Products: same amount, different % of income, so Regressive
Marginal Tax Rates
35%
33%
28%
25%
15%
10%
Single - no
tax on 1st
I only have
to pay the
FICA tax.
$7,825
0
Standard Deduction
[$5,350-dependent]
10% 15%
28%
25%
33% 35%
$7,825 $32,550 $78,850 $164,550 $357,700 $357,700+
[7,825-single]
[$11,200-HH]
[$15,650-married filing jointly]
Our Progressive Tax System Is Like A Layered Cake
35% over $357,700
33% up to 357,700
28% up to $164,550
25% up to $78,850
15% up to $29,700
10% up to $16,050
No tax on 1st $7,825
Proportional & Regressive Taxes
Proportional – takes same 20% [not amount] from all income groups
20%
Example: Medicare – 1.45% on all income earned.
$30,000 $40,000
$50,000
$100,000
Pay $10,000
Pay $20,000
[So, not same amount but same %, 20%]
Take that, you
“low incomer.”
30%
20%
Example: Sales Tax
I’m a “low
incomer.”
10%
$30,000
$40,000
$50,000
Flat Tax on Income: same % of income, different amounts, so proportional.
Flat Tax on Product: same amount, different % of income, so regressive.
Toll Road($1 per day)
$10,000
$50,000
$200
$200
2%
.4%
Flat Tax on Cigarettes [Excise][$1.41 cents pack]
[1 pack day]
$10,000
$515
5%
[1 pack day]
$100,000
$515
.5%
Addicted
State 6.25% Excise Tax on Two Identical $20,000 Autos
BO
MO
$10,000
$100,000
$1,250
$1,250
12.5%
1.25%
Flat Tax on Income: same % of income, different amounts, so Proportional
Flat Tax on Products: same amount, different % of income, so Regressive
Property Tax of 2.5% on $100,000 Houses
$25,000
$50,000
[100,000 house]
$2,500
10%
[$100,000 house]
$2,500
5%
$100 Spent On The Lottery
$20,000
$100,000
[$100 Lottery]
[$100 Lottery]
5%
.1%
I played
the lottery.”
“The lottery tax is a voluntary
regressive tax on morons.”
What about the .20 a gallon gasoline tax?
So – all of these taxes were regressive.
TAX RATE
TAX RATE
State Excise Tax on Cigarettes
State
(Cents per pack) Rank
State
(Cents per pack) Rank
Alabama(1)
16.5
47
Nebraska
64
24
Alaska
200
4
Nevada
35
39
Arizona
200
4
New Hampshire
52
32
Arkansas(20)
59
26
New Jersey
258
1
California
87
19
New Mexico
91
18
Colorado
20
43
New York (1)
150
5
Connecticut
200
3
North Carolina
30
45
Delaware (3)
24
41
North Dakota
44
34
Florida
33.9
40
Ohio
55
29
Georgia
37
36
Oklahoma
23
42
Hawaii (30
130
7
Oregon
128
8
Idaho
57
27
Pennsylvania
100
12
Illinois (1)
98
17
Rhode Island
246
2
Indiana
55.5
28
South Carolina
7
51
Iowa
36
37
South Dakota
53
31
Kansas
29
20
Tennessee (1)(2) 20
48
Counties
may impose
an
additional141
tax on a pack11of
Kentucky
(2) & cities
30
46
Texas
Louisiana
36
37 taxUtah
cigarettes. Also,
the federal
is 39 cents.69.5
NYC has an 23
Maine
200
3
Vermont
119
additional $1.50
for a total
cigarette
pack price
of $7.50.10
Maryland
100
12
Virginia (1)
30
47
Massachusetts
151
4
Washington
203
3
30 states have increased cigarette taxes since January 1, 2002 some twice.
Michigan
200
5
West Virginia
55
29
Minnesota
48
33
Wisconsin
77
21
Every 10%
youth smoking
by
Mississippi
18 increase
49reduces
Wyoming60
25
Missouri
(1)
17
50
Dist.
Of Columbia 100
12
7%
and
adult
smoking
by
2%.
Montana
170
6
U.S. Median
90
If you inherit $2 million dollars this
year, how much do you get to keep?
The Federal Estate Tax is disappearing.
An estate is exempt from federal estate taxes if it’s below the
following thresholds. The Tax will disappear in 2010, only to
reappear in 2011. [tax of 55% on estates after the first million]
2007 $2 M tax free
2008 $2 M tax free
2009 $3.5 M tax free
2010 No estate tax
2011 $1 M tax free
If you live in one of the gold states,
you might owe additional estate or
inheritance taxes, even after the
federal G’s death tax disappears.
Revenues of $2.407
2006
Expenditures of $2.654
[Deficit of $248]
Last Surplus
Facts & Figures:
Causes:
Financial Price Of War
Total
Cost per
Conflict
Cost
Person
WW1
$125 bil. $2,489
WWII
$600 bil. 20,388
Korea
336 bil.
2,266
Vietnam
494 bil.
2,204
306
o political will Gulf War I 76 bil.
Gulf War II 438 bil.*
536
* Cost over $12 billion a month
300,000 from the Afghanistan-Iraq wars suffer from PTSD
[Post-Traumatic Stress Disorder] or major depression that
will cause the nation over $6 billion over two years.
Wars
Recessions
Tax Cuts
N
The War in Iraq has cost $16,000 per family.
91%
91% on income over $200,000
35%
2008
Medicare tax – 1.45% for an individual [2.9% for
self employed] for every dollar earned.
Harrison Ford – received $25 million for 20 days
work on a movie. 1.45% of $25 million = $362,500
x 2 = $725,000 medicare tax. [Over his 35 years
on the Big Screen, his films grossed over $10 bil.
Jim Carrey – gets $20 million per movie, so his tax is
$580,000. [1.45% of $20 million = $290,000 x 2 = $580,000.]
Top Marginal Tax Rates
[91% for dollars over $200,000]
Year
Tax Rate
1900
No Tax
1914
1% [over $3,000]
[Only 1 in 270 paid this tax at all]
1930
30%
1940
81%
[1 in every 32 was now paying taxes]
[1 in every 3 was paying taxes]
1943 *Paycheck withholding
(by
the boss) was launched to stop cheating.
1950
1970
[over $200,000]
91%
70%
[Everyone was paying with taxable Y]
1980
2000
2008
70%
39.6%
35%
Government Finance
GLOBAL PERSPECTIVE
Total Tax Revenue – Selected Nations
Percent of Total Output-2004
10
Sweden
Denmark
Norway
Finland
France
Italy
United Kingdom
Germany
Canada
Australia
United States
Japan
South Korea
20
30
40
50
50.7
49.6
44.9
44.3
43.7
42.2
36.1
34.6
33.0
31.6
25.4
25.3
24.6
Source: Organization for Economic Cooperation and Development
90%
70%
$61,000 and over
80%
$99,000 and over
68%
60%
$137,000 +
57%
37%
$328 000 +
40%
97%
134 million filed tax returns but
only 90 million paid any taxes.
Our average tax rate was 14%. 85%
30%
20%
10%
Top
1%
Top
5%
Top
10%
$30,000 and over
100%
3.3%
Top
25%
Top
50%
Bottom
5%
Suppose that every day, ten men go out for beer and the bill for all ten comes
to $100. If they paid their bill the way we pay our taxes, it would go like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do. The ten men drank in the bar every day and
seemed quite happy with the arrangement, until one day, the owner threw them
a curve. 'Since you are all such good customers, he said, 'I'm going to reduce
the cost of your daily beer by $20. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first
four men were unaffected. They would still drink for free.
But what about the other six men - the paying customers? How could they divide
the $20 windfall so that everyone would get his 'fair share?'
They realized that $20 divided by six is $3.33. But if they subtracted that from
everybody's share, then the fifth man and the sixth man would each end up
being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the
same amount, and he proceeded to work out the amounts each should pay.! And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings)
The ninth now paid $14 instead of $18 (22% savings)
The tenth now paid $49 instead of $59 (16% savings).
Each of the 6 was better off than before. And the first 4 continued to drink for free.
But once outside the restaurant, the men began to compare their savings.
'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth
man,' but he got $10!‘
'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that
he got ten times more than I!‘
'That's true!!' shouted the 7th man. 'Why should he get $10 back when I got only two?
The wealthy get all the breaks!'
'Wait a minute,' yelled the first four men in unison. 'We
didn't get anything. The system exploits the poor!'
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had
beers without him. When it was time to pay the bill, they discovered something important.
They didn't have enough money between all of them for even half of the bill!
And that is how our tax system works.
The people who pay the highest taxes get the most benefit from a tax reduction. Tax them
too much, attack them for being wealthy, and they just may not show up anymore. In
fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
STATE AND LOCAL FINANCE
State Expenditures
Education
Public Welfare
Health and Hospitals
Highways [.20 a gallon]
Public Safety
Education
36%
Health & Hospitals 8%
Highways 8%
Public Safety 5%
Public
Welfare
All Other 25%
18%
Federal Expenditures
Pensions and Income Security
National Defense
Health
Interest on Public Debt
Total Expenditures
$2,654 Billion
Pensions &
Income Security
35%
All Other
15%
Interest
10%
National
Defense
20%
Health
21%
2006 Data
Federal Tax Revenues
Personal Income Tax
Payroll Tax
Corporate Income Taxes
Excise Taxes
Total Tax Revenues
$2,407 billion
Excise Taxes 4%
All Other 4%
Corporate Income Tax 8%
Personal
Income Tax
46%
Payroll
Taxes
38%
2006 Data
STATE AND LOCAL FINANCE
State Revenues
Sales and Excise Tax
Personal Income Tax
Corporate Income Tax
Licenses and Others
Property Taxes & Other Taxes
Sales &
State Excise Taxes
48%
Personal
Income Tax
34%
Property Taxes & Other Taxes 5%
Licenses & Others 6%
Corporate Income Tax 7%
States with No Income Tax (Red)
*They tend to have more regressive tax systems.
State, City, and County Sales Tax
STATE AND LOCAL FINANCE
Local Revenues
Property Taxes
Sales and Excise Taxes
Personal & Corporate Income Taxes
Property Taxes
74%
Sales &
Excise
Taxes
16%
Personal & Corporate Income Taxes 6%
All Other 4%
National Debt History
$9.4 Tril.
National Debt History
[adjusted for inflation in 2000 dollars]
$9.4 Tril.
Except for WWII, the deficit
stayed pretty constant for
about 40 years until 1983
PUBLIC DEBT OWNERSHIP, 2006
[This is held both privately and publicly]
U.S. Banks & Financial
Institutions
Other, Including
State & Local Governments
Federal Reserve
49%
Debt held outside the
Federal Gov and Fed [49%]
Foreigners hold $1.9 Trillion
Japan-$582 B, China-$500 B,
Britain-$266 B, OPEC-$126 B,
S. Korea-$46 B, H. Kong–$56 B,
Taiwan-$53 B, Singapore-$24 B,
Thailand-$13 B, & India-$13 B.
World Total: $2,247
8%
8% 9%
U.S.
Government
Agencies
42%
25%
8%
Foreign Ownership
51%
U.S. Individuals
Debt held by the Fed
& Gov. Agencies [51%]
Economic Implications of the Debt: False Issues
[The “G” doesn’t have to pay the entire debt off because it never “dies.”]
[The “G” will live forever so it will keep “rolling it over in perpetuity”]
Whew! $33,000 each.
I’m not paying no
$33,000.
Going Bankrupt?
The “no” answer entails three points.
1. Refinancing – as portions of the debt fall
due each month, the G does not cut G or
raise T to retire the maturing bonds.
It refinances the debt by selling new bonds
and uses the proceeds to pay off holders of the maturing bonds.
2. Taxation – if bankruptcy were imminent the G could always raise taxes.
3. Creating Money – bankruptcy could be avoided by printing the money (inflationary).
Shifting Burdens
Does every new born get slapped on the backside, then told he owes $33,000?
Not quite. About 82% of the debt is owed to ourselves. Thus the public debt is a
a public credit. It is a liability to the taxpayer but an asset to the people (bondholders).
Therefore, retiring the debt would amount to a large transfer payment from U.S.
citizens to U.S. citizens. The repayment would entail no decrease in the economy’s
wealth or standard of living. So the babies who inherit $33,000 worth of debt will
inherit almost that same amount.
• Pay Down the Public Debt
• Reduce Taxes
• Increase Government Spending
• Bolster Social Security Trust Fund
• Combination of these Policies
Crowding-out
effect in an Open Economy
[Xn are crowded-out, decreasing AD]
3. Decline in
7. U.S.
domestic inv.
1. Federal
Government
deficits
2. High real
(crowding-out)
U.S. interest
rates
4. Increased
foreign demand
for U.S. bonds
5. Increased
U.S. external
debt
6. Increased
international
value of dollar
Exports
decrease
8. U.S.
Imports
10.Trade
deficits
increase
9. Decrease in Xn decr AD
We no longer have to hit our
newborn to get their first cry.
Now we tell them, “You
owe $33,000.” (as their
share of the National Debt)
“Take
That!
We get the same result –
their first cry; no more
of that “Take that.”
The Debt prevents
me from having to
do this.
This is the way we used to get
the first cry out of a baby.
Debt and Deficit NS 1-6
1. The (national debt/federal budget deficit) consists of the
accumulation of all Federal government deficits & surpluses.
2. The (national debt/budget deficit) is found by subtracting
“G” tax revenues from government spending in one year.
3. How much is the National Debt now? $9.4
_________
trillion
4. If “G” adhered strictly to an annually balanced budget, G’s
budget would tend to (stabilize/destabilize) the economy.
5. The idea of increasing T during good times & decreasing
them during bad times [recessions] [over the course of
the business cycle, the budget would be balanced] is the
(annually/cyclical) balanced budget.
6. The philosophy of functional finance is the idea that the
main function of the budget is to (stabilize/destabilize) the
economy & balancing the budget every year is of
(little/extreme) importance.
Debt and Deficit NS 7-11
7. Budget deficits were smaller during the
(1970s/1980s & early 1990s)
8. Between 1980 & 1996 the public debt (grew/did not grow)
absolutely and as a percentage of GDP.
9. The largest proportion of the public debt is held by
(foreigners/American public). Therefore we (can/can not)
say the public debt is a public credit.
10. The “crowding-out effect” suggests that increases in G
spending financed thru borrowing will (increase/decrease)
the interest rate and (increase/decrease) private investment.
11. The most likely way the public debt imposes a burden on
future generations is by reducing the current level of
(employment/capital accumulation), thus giving us a
smaller “national factory.”
Debt and Deficit NS 12-14
12. Large budget deficits (increase/decrease) domestic
interest rates, (increase/decrease) the international value
of the dollar, and (increase/decrease) American net exports
which (enhance/diminishes) expansionary fiscal policy.
13. The line-item veto would have permitted the president to
(add/delete) individual projects and programs from larger
appropriation bills.
14. The (GDP/GNP/GRH) was a program designed to balance
the budget.
Money, Banking, Money Creation,
Monetary Policy, Extending AS,
Macro Disputes, Debt and Deficit
1. What is the monetary rule? Increase the MS 3-5% a year
2. If a household spends $100,000 per year, & on average holds a money balance
5
of $20,000, their velocity of money is ____.
3. An unanticipated increase in PL will lead to
(lower/higher) product prices, (decr/incr) in
profits & a(an) (decr/incr) in unemp. in
PL2[8%]
SR.
AD1
LRAS AS2
AS1
a
b1
2
Higher PL results in higher nominal
wages & shifts SRAS left.
AD2
PL1[3%]
a1
Output & employment increased
in the SR but not the LR.
4.
With the unanticipated increase in
PL - output & employment did (incr/decr)
in the SR but (decreased/increased/
stayed the same) in the LR.
o
Inflat.
Gap
Y1
Y2
5. The two main variants of the natural rate hypothesis are
(RATEX/Keynesian/Adaptive Expectations/Reaganomics).
Keynesian cause-effect chain
Monetarist cause-effect chain
6. According to the Monetarists, the investment demand curve
is more (flat/vertical) and the money demand curve is more
(flat/vertical).
7. Does the economy self-correct if prices are flexible but
no
wages are not? _______
8. An unanticipated increase in AD would result in output
(incr/decr/stay same) in SR, but (incr/decr/stay same) in LR.
9. An anticipated increase in AD would result in Y (incr/decr/
stay the same) in the SR and (incr/decr/stay the same) in the LR.
Price Level
LRAS
SRAS2
SRAS1
AD1
PL2[6%]
PL1[3%]
E3
E2
E1
AD2
Inflati.
Gap
Y & employment increased
o the LR.
in the SR but not
Y1
Y2
RDO
Lower PL reduces nominal wages & shifts SRAS right.
10. In the LR, a decline in inflation
will (incr/decr/not affect) output &
employment.
Y & employment decreased
in the SR but not the LR.
PL1[3%]
LRAS
AS1
AD1
AS3
a1
AD2
PL2[1%]
a3
c1
Recess.
Gap
YR Y/empl.
Y*
11. If decline in inflation
0 is anticipated,
will (increase/decrease/not change) in
SR. [or LR]
Real domestic output
12. An annually balanced budget is pro-cyclical because tax
revenue reductions associated with recession will require
(increases/decreases) in G spending or increases in taxes.
13. Proper monetary policy during inflation is (raise, raise, sell/
lower, lower, buy) Discount Rate, RR, & bonds.
14. An increase in the MS will lead to a(an) (increase/decrease)
in the interest rate & (decrease/increase) AD.
15. “Crowding out” is something the Keynesians/Monetarists)
believe strongly in.
16. Selling bonds by the Fed would result in a (smaller/larger)
MS and (lower/higher) interest rates.
17. If you are estimating your expenses for the prom at $800,
then you are using money as (unit of account/medium exchange/store of value).
18. Foreign individuals and governments (hold/do not hold)
most of the Public Debt.
19. Fiscal policy is thought to work best at fighting (inflation/
depressions) and monetary policy is thought to work best
at fighting (inflations/depressions).
20. The Laffer curve was a cornerstone of
(RATEX/Supply-side/ Keynesians) economics.
21. The tight money cause-effect chain is (incr/decr) the MS,
which would (incr/dec) the interest rate, which would
(incr/decr) Ig, which would (incr/decr) AD and GDP.
22. The easy money cause-effect chain is (incr/decr) the MS,
which would (incr/decr) the interest rate, which would
(incr/decr) Ig, which would (incr/decr) AD and GDP
23. The (Monetarists/New Keynesians) are advocates of
monetary and fiscal policy.
24. An easy money policy will cause the dollar to
(apprec/deprec) and cause American Xn to (incr/decr).
25. A tight money policy will cause the dollar to (apprec/deprec) and
cause American net exports to (increase/decrease).
26. A bank loan from the Fed will (increase/decrease/not affect) RR, but
(increase/decrease/not affect) ER and therefore TR.
27. A bank deposit by the public will (increase/decrease) RR,ER, & TR.
28. RATEX are strong advocates that the public’s expectations
(strongly influence/negate) fiscal and monetary policy.
29. The intellectual roots of monetarism are based on
(Classical/Keynesian) economics.
30. An adherence with an annually balanced budget would
(stabilize/destabilize) the economy.
31. If there is a decrease in AD and prices are not flexible, the resulting
recession will be worse because equilibrium price level will be
(lower/higher) than with flexible prices.
32.In the SRPC, there (is a/is no) tradeoff between inflation & output, and
in the LRPC there (is a/is no) tradeoff between inflation and
unemployment.
33. The (SRPC/LRPC) is consistent with the stable traditional Phillips curve.
Extra Practice MS = Currency + DD of PUBLIC
RR is 25% Assets
DD(Liabilities)
TR[RR+ER]=$100 mil. $400 million
1. How much can this bank loan out? $______
0
$10,000
2. If Christina A. puts _________
in this bank(DD),
7,500
ER will increase by $_______.
30,000
3. Possible Money Creation in the system could be $________.
40,000
4. Potential Total Money Supply could be as much as $_________.
Extra Practice
MS = Currency + DD of PUBLIC
RR is 25% Assets
DD (Liabilities)
TR[RR+ER] = $100 mil.
$400 million
5. How much can Christina’s bank loan out? $______
0
6. If Christina’s Bank borrows $10,000 from the Fed
ER will increase by $10,000
_______.
Christina’s Bank
Fed
40,000
7. Possible Money Creation in the system could be $_________.
40,000
8. Potential Total Money Supply could be as much as $__________.
34. If the RR is 50% and the Fed buys $100 M of bonds from
$100 M
the PUBLIC [Kate], then the MS is increased by _______.
ER are
$100 M TMS would be ______.
$50 M PMC is _______.
$200 M
increased by ______.
35. RR is 40% and the Collins Bank borrows $100 M from the
0
Fed. As a result, RR are increased by ______.
ER is increased
$250 M
$100 M
by _______.
PMC and TMS is increased by ________.
36. Your bank has DD of $200,000 and the RR is 50%. If RR
$200,000
and ER are equal, then TR are _______.
37. The Buzon Bank has ER of $75,000 & DD is $100,000. If the
$95,000
RR is 20%, TR are _________.
38. RR is 10% & the Fed buys $10 million of bonds from the
$10 M
PUBLIC [Mary]. The MS is increased by _______.
ER are increased
$90 M
$100 M
$9 M
by _______.
PMC is _______.
TMS would be _________.
Banks
PUBLIC
Fed
1. If the RR is 40% and the Fed buys $100 M of bonds from
M
the PUBLIC [Ann], then the MS is increased by $100
_______.
ER are
$150 M TMS would be ______.
$60 M PMC is _______.
$250 M
increased by ______.
2. RR is 50% and the Boase Bank borrows $100 M from the
0
Fed. As a result, RR are increased by ______.
ER is increased
$100 M
$200 M
by _______.
PMC and TMS is increased by ________.
3. Your bank has DD of $400,000 and the RR is 25%. If RR
$200,000
and ER are equal, then TR are _______.
4. The Palmer Bank has ER of $60,000 & DD is $200,000. If the
$100,000
RR is 20%, TR are _________.
5. RR is 20% & the Fed buys $50 million of bonds from the
$50 M
PUBLIC [Marie]. The MS is increased by _______.
ER are increased
$200 M
$250 M
$40 M
by _______.
PMC is _______.
TMS would be _________.
Banks
PUBLIC
Fed
Money Creation Formulas
[MS = Currency + DD of public]
Public
RR + ER = TR
TR - RR = ER
TR - ER = RR
Public: Student deposits $1.00 in a bank
1. ER [DD-RR] x MM = PMC
2. PMC + 1st DD =TMS
Fed
No Public: [Fed gives $1.00 loan to a bank]
1. ER x MM = PMC & TMS