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Answers to Worksheet for Fiscal Policy and Budget FY2011
#1. Fiscal policy refers to government spending and taxation.
#2. Fiscal policy in the US is determined by the President and Congress.
#3. An increase in the fiscal deficit will normally be expected to increase real GDP and raise
interest rates.
#4. An increase in the US fiscal deficit will normally lead to an increase in the value of the
US dollar.
#5. Crowding out refers to a fiscal deficit raising interest rates and choking off private
expenditure.
#6. When crowding out occurs, there can be domestic crowding out and international
crowding out.
#7. International crowding out occurs when the fiscal deficit raises interest rates and this
leads to a fall in the foreign exchange rate and less US exports.
#8. US farmers are particularly worried about US fiscal deficits because they can reduce
farm exports due to a higher US dollar.
#9. Domestic crowding out, unlike international crowding out, is defined as a reduction in
investment and consumption due to higher interest rates stemming from higher fiscal
deficits.
#10.
Fiscal deficits are flows, while the national debt is a stock.
#11. The most recent year that the US had a fiscal surplus was 2000. See
http://en.wikipedia.org/wiki/Fiscal_policy_of_the_United_States
#12. The US had a fiscal surplus during three consecutive years 1998, 1999, and 2000. The
President at that time was Bill Clinton.
#13. The fiscal deficit is defined as (government expenditures – government revenues),
where government expenditures includes interest on the debt.
#14. The fiscal deficit is endogenous because it depends on the level of income.
#15,
The three means of financing government are taxes, bonds, and money.
#16. Many people confuse the terms deficit and debt. However, the two are related. The
change is the debt is equal to the deficit.
#17. When the government borrows it issues bonds.
#18. The total amount of bonds outstanding is called the national debt.
#19. If we increase government spending by $1000 and raise taxes by $1000 at the same
time, the IS curve will not shift to the right. True or False? Why? See "balance budget
multiplier".
#20. Higher deficits and government debt affect the economy by increasing aggregate
demand, by raising interest rates and by affecting business confidence.
#21. The nominal GDP of the US in 2009 was about 14 trillion dollars. (1 trillion = 1000
billion)
#22.
The US Federal government fiscal deficit in 2009 was about 1.4 trillion dollars.
#23. The US deficit to GDP ratio in 2009 was about 10%.
#24. Debt in the hands of the public includes debt held by the Social Security trust funds,
True or False.
#25. China’s holdings of US federal government debt is NOT part of the debt held by the
public? True or False?
#26. About 50 % of recent US federal debt held by the public is held by foreigners.
#27. About 30% of recent total outstanding US federal debt is held by foreigners.
#28. According to OMB and CBO in 2009, debt held by the public was $7545 billion while
total outstanding debt was $11,876 billion
#29. In our reading we found that the Federal Reserve in 2009 owned about 10 % of the
debt held by the public. (Fed holdings are part of the "public" holdings...why?) Because the
Fed is not part of the Federal Government.
#30. The Federal Reserve holding of Treasury bonds is included in the debt held by the
public. True or False.
Consider the following chart
#31. The majority of debt instruments that have been issued by the federal government
are bonds, bills, and notes.
#32. Generally speaking, the maturity of a bill is shorter than a note, and the maturity of a
note is shorter than a bond.
#33. Most of the debt issued by the federal government and held in government accounts
is in federal trust funds, such as the federal employees retirement funds.
#34. In 2008, roughly 8.5 % of the debt held by the public was inflation protected...i.e.,
indexed to inflation. (see the chart above $529,622/$6,200,000)
#35.
The US federal fiscal year FY2011 begins Oct1, 2010 and ends Sept30, 2011.
#36. Fiscal years have become popular with governments, instead of calendar years,
because of what reasons? Matching of receipts and expenditures, better planning.
#37. What are the four major revenue sources to the federal government? Individual
income tax, corporate income tax, social security payroll tax, Medicare payroll taxes.
#38. In 2009, individual income taxes and social security payroll taxes constituted
75 % of total federal receipts.
#39. What 1 % of federal revenues are due to tariffs on imports?
#40. What 3 % of federal revenues are due to excise taxes (i.e., cigarette, gasoline and
tobacco taxes) taken together?
#41.
Government spending can be divided into two large categories – non-mandatory or
discretionary spending and non-discretionary or mandatory spending.
#42. Defense spending is considered to be mandatory spending. True or False?
#43.
Interest on the debt is considered to be mandatory spending. True or False?
#44. There are 12 appropriation subcommittees under the Budget Committees in the
House and the Senate.
#45. The President’s point man on the budget is the Director of the Office of Management
and Budget.
#46. The appropriations subcommittee dealing major funding for the fight against
terrorism is the one on Homeland Security. (Some other subcommittees deal with terrorism
also ---e.g. State)
#47. Many people living in farm states are concerned with the leadership of the in the
House and Senate appropriation subcommittees on Agriculture.
#48. The defense budget 2009 outlays as a percentage of total federal government
expenditures is almost exactly equal to 22.2 %.
#49. Non-discretionary spending in the US federal budget as a percentage of total
expenditures is about 60 %.
-----------------------Use “outlay”, ”authorization”, or “appropriation” correctly in the following three short
answers.
#50.
An authorization is an act of congress establishing, changing, or continuing a federal
agency or program and delimiting its powers and structure.
#51. An appropriation is an act of congress providing an agency or program with a
specified amount of budget authority.
#52. An outlay is a payment (usually a check drawn on the Treasury, or in cash) by the
government in fulfillment of an obligation.
-------------------------#53. Discretionary federal spending includes spending on Social Security and Medicare.
True or False?
#54. According to OMB interest on the national debt is expected in 2015 to be equal to
$ 571 billion which will be 13 % of projected total government expenditures. Scary, but still
quite optimistic figures from the president's cheerleaders. .
#55.
Interest on the debt in 2009 was 5.3 % of total federal expenditures.
#56. If the Federal Reserve Bank of New York enters the open market and purchases a
large amount of Treasury debt, then we would expect the money supply would increase.
True or False? They buy the debt by creating new bank reserves to pay for them.
#57.
It is a good thing that the Social Security Trust Funds buy Treasury bonds, This is
because Treasury bonds are high risk and long maturity.
True or False? Treasury bonds
are low risk and long maturities.
Correct the following
#58. Treasury Bills (short maturity) Treasury Bonds (long maturity) Treasury Notes
(medium maturity).
#59. In the Federal budget process, OMB and the President initiate the action of making a
budget for the US government. True or False?
#60. A conference report is used to hammer out the differences between the two budgets
of the House and the Senate.
#61. Since the government's budget is a formal legal object, the President must sign it in
order for it to become law. True or False? It is not a new law or bill before Congress and
therefore does not need to be signed.
#62. Budget reconciliation is a process used to make sure that newly budgeted amounts
agree with existing law. True or False? Reconciliation began under Ford in 1974 with the
Budget Act of 1974 and was meant to help Congress reduce its budget deficits. Any new
laws that are passed can be considered for reconciliation – for example the Obamacare
health legislation that just passed recently. Generally a budget resolution will contain
language that instructs Congress to change existing law in order to bring spending,
revenues, or the debt-limit into conformity with the budget resolution.
#63. 90% of the federal income tax law is fixed. Therefore, it takes an act of Congress to
change the federal tax law.
#64.
The term CBO stands for Congressional Budget Office .
#65. The OMB budget summary shows that the Obama administration is now concerned
with job creation and economic growth.
Fill in the blanks based on OMB summary of the budget -#66. Investing in Job Creation -- $17.5 billion in loan guarantees from the Small Business
Administration to small businesses to help them operate and expand.
#67. Investing in Job Creation – a redirection of Troubled Asset Relief Program(TARP)
funds that are being repaid so as to help small businesses create jobs. (This may be illegal –
the funds were supposed to be for the buying of toxic assets according to the legislation)
#68. Building Infrastructure -- $ 7.2 billion in funds for increased broadband access.
(Political payback to Cisco, Google, Microsoft. Etc. --broadband for cows and horses on
farms)
#69. Building Infrastructure -- $1.14 billion to modernize the Air Traffic Control System.
(Chicago will get some of this money, along with Los Angeles and Atlanta all strongly
Democratic)
#70.
Educating a Workforce – an historic $ 1.6 billion increase in child care funding.
(Designed for poor working mothers, most people pay for their own child care or use
relatives)
#71. Educating a Workforce – new legislation to provide direct student loans to students
from the federal government thus eliminating waste. (Bad idea --direct loans from the
government instead of banks – bad idea, more government involvement in peoples' lives)
#72. Clean Energy Economy – new market based policies that aim to reduce GHG
emissions by more than 80 % by 2050. (infeasible, pipe dream for those who know)
#73. Clean Energy Economy -- $545 million to develop carbon capture and storage
technology. (Interesting technology, but will not replace fossil fuels for next 30 years, global
warming, save the planet, tax and regulate the economy to death)
#74. Lowering the Cost of and Providing More Health Care -- $ 110 million to increase
and strengthen health related IT policy, coordination, and research activities. (chump
change, but a reasonable start at modernizing and harmonizing the health care IT system)
#75. Lowering the Cost of and Providing More Health Care -- $286 million for research
that compares the $286 million of different medical options. (payment to academics and
lawyers to study ways to get health care without seeing a doctor, this one must be very
popular among those who studied the US health care system for Obamacare)
#76. Keeping America Safe – the Administration requests an increase of 3.4 % in the
defense budget; an amount equal to $18.2 billion. (Hard to assess what is the increase in
real defense spending since we do not know how much prices are rising for defense related
items. The $18.2 billion is a nominal figure))
#77. Keeping America Safe – an increase of $ 2.7 billion for the Department of Energy's
Defense Nuclear Nonproliferation program, representing an increase of 26% from the 2010
budget.
(I suspect this item is in the budget to increase spending on clandestine and
satellite surveillance of Iran and North Korea's nuclear program. Very interesting.)
#78. Look at the chart above. Four large mandatory spending items are social security,
Medicare, Medicaid, and net interest on the debt?
#79. Look at the chart above. The dark black part of outlays refers to discretionary
security spending. What is that? US Defense spending, about $550 billion. It can be cut
without an act or law or bill of Congress.
#80. Look at the chart above. By 2015 individual income taxes are expected to be a
much larger % of total revenue to the federal government. Why? The economy recovers,
more people go back to work, more people and companies pay their taxes.
Here are some fiscal questions that require you to use your IS-LM AS-AD analysis to
answer. Assume the typical IS-LM AS-AD curves. (no answer given to these...you are on your
own)
#81. Suppose that government spending increases without an increase in taxes or money.
Will this put pressure on prices to rise? (no answer given)
#82. Suppose that government spending increases without an increase in taxes or money.
Will this put pressure on interest rates to fall? (no answer given)
#83. Suppose that government spending increases without an increase in taxes or money.
Will there be any crowding out effects? If so, explain them. (no answer given)
#84. Suppose that government spending increases without an increase in taxes or money.
If the government spends more will this increase the amount of money in the economy? (no
answer given)
#85. Suppose that tax rates are raised. Will this raise of lower the multiplier? (no answer
given)
#86. Suppose that tax rates are raised. Will this increase the amount of money in the
economy? (no answer given)
#87. Raising income taxes will definitely cause a rise in prices. True or False? (no answer
given)
#88. Cutting taxes will definitely raise interest rates. True or False? (no answer given)
#89. Cutting taxes will cause a rise in the fiscal deficit. True or False? (no answer given)
#90. In the short run, printing money to finance increased government spending will lower
the real wage in the economy. True or False? (no answer given)
#91. Raising taxes will increase or lower real wages in the economy? (no answer given)
#92. Increasing government spending will increase or lower real wages in the economy.
(no answer given)
#93. If workers demand a higher money wage, the effect will be the same as a lowering of
taxes. True or False. (no answer given)
#94. The effect of an increase in government spending can be offset by a rise in the
nominal wage rate. True or False? (no answer given)
#95. If government spending increases, but planned investment decreases at the same
time, the economy may not be affected at all. True or False. (no answer given)
#96. Lower nominal wages can lead to greater private investment. True or False? (no
answer given)
#97. When government spending increases, private consumption will increase also. True
or False? (no answer given)
#98. Fiscal policy is a very rational process. No, we know that the budget process is both a
combination of rational planning and political expediency.
#99. Fiscal policy can help us evaluate fiscal alternatives. Yes, this is true for a number of
reasons.
#100. Taxes = Money = Income No. No. No. Why? Taxes are collected by the
government in the form of individual income taxes, corporate income taxes, Social Security
(old age retirement) payroll taxes, and Medicare payroll taxes, etc. Money is created by
the Fed and the banking system and is what we use to transact our business. The Money is
not the transaction. When you buy something you are paying for other peoples' labor time
using your own labor time. The money is just the medium of exchange that is being used.
The income is the value of the output that is produced when you work. We measure it in
money terms, but it is not income any more than it is output.
Money = Medium of Exchange
Income = Value of Output
Taxes = The Part of Income or Sales Price that is taken by the government.