Principles Of Economics 2nd Edition Steven A. Greenlaw: University Of Mary Washington, David Shapiro: Pennsylvania State University - Solutions

The U.S. government has shut down a number of times in recent history. Explain how a government shutdown will affect the variables in the national investment and savings identity. Could the shutdown affect the government budget deficit?
Explain how decreased domestic investments that occur due to a budget deficit will affect future economic growth.
Assume there is no discretionary increase in government spending. Explain how an improving economy will affect the budget balance and, in turn, investment and the trade balance.
Under what conditions will a larger budget deficit cause a trade deficit?
What does the concept of rationality have to do with Ricardian equivalence?
What is the theory of Ricardian equivalence?
Explain how cuts in funding for programs such as Head Start might affect the development of human capital in the United States.
What are some fiscal policies for improving the technologies that the economy will have to draw upon in the future?
What are some fiscal policies for improving a society’s human capital?
What are some of the ways fiscal policy might encourage economic growth?
How would you expect larger budget deficits to affect private sector investment in physical capital?Why?
Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?
In the late 1990s, the U.S. government moved from a budget deficit to a budget surplus and the trade deficit in the U.S. economy grew substantially. Using the national saving and investment identity, what can you say about the direction in which saving and/or investment must have changed in this
Imagine an economy in which Ricardian equivalence holds. This economy has a budget deficit of 50, a trade deficit of 20, private savings of 130, and investment of 100. If the budget deficit rises to 70, how are the other terms in the national saving and investment identity affected?
What are some steps the government can take to encourage research and development?
Why have many education experts recently placed an emphasis on altering the incentives faced by U.S. schools rather than on increasing their budgets? Without endorsing any of these proposals as especially good or bad, list some of the ways in which incentives for schools might be altered.
Assume an economy has a budget surplus of 1,000, private savings of 4,000, and investment of 5,000.a. Write out a national saving and investment identity for this economy.b. What will be the balance of trade in this economy?c. If the budget surplus changes to a budget deficit of 1000, with private
In a country, private savings equals 600, the government budget surplus equals 200, and the trade surplus equals 100. What is the level of private investment in this economy?
Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and sketch a diagram using aggregate demand and aggregate supply curves to illustrate your answer:a. A recession.b. A stock market collapse that hurts consumer
If a government runs a budget deficit of $10 billion dollars each year for ten years, then a surplus of $1 billion for five years, and then a balanced budget for another ten years, what is the government debt?
A government starts off with a total debt of $3.5 billion. In year one, the government runs a deficit of$400 million. In year two, the government runs a deficit of $1 billion. In year three, the government runs a surplus of $200 million. What is the total debt of the government at the end of year
During the Great Recession of 2008–2009, what actions would have been required of Congress and the President had a balanced budget amendment to the Constitution been ratified? What impact would that have had on the unemployment rate?
Do you agree or disagree with this statement: “It is in the best interest of our economy for Congress and the President to run a balanced budget each year.” Explain your answer.
If the government gives a $300 tax cut to everyone in the country, explain the mechanism by which this will cause interest rates to rise.
What is a potential problem with a temporary tax increase designed to increase aggregate demand if people know that it is temporary?
Is Medicaid (federal government aid to low-income families and individuals) an automatic stabilizer?
Is expansionary fiscal policy more attractive to politicians who believe in larger government or to politicians who believe in smaller government? Explain your answer.
How will cuts in state budget spending affect federal expansionary policy?
Is it possible for a nation to run budget deficits and still have its debt/GDP ratio fall? Explain your answer.Is it possible for a nation to run budget surpluses and still have its debt/GDP ratio rise? Explain your answer.
Economist Arthur Laffer famously pointed out that, in some cases, income tax revenue can actually go up when tax rates go down. Why might this be the case?
In a booming economy, is the federal government more likely to run surpluses or deficits? What are the various factors at play?
What is the benefit of having state and local taxes on income instead of collecting all such taxes at the federal level?
Excise taxes on tobacco and alcohol and state sales taxes are often criticized for being regressive. Although everyone pays the same rate regardless of income, why might this be so?
Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy whereas a cut in a state income tax is not fiscal policy?
Why are expenditures such as crime prevention and education typically done at the state and local level rather than at the federal level?
Why is government spending typically measured as a percentage of GDP rather than in nominal dollars?
What are some of the arguments for and against a requirement that the federal government budget be balanced every year?
What are some practical weaknesses of discretionary fiscal policy?
What is the standardized employment budget?
Why do automatic stabilizers function“automatically?”
What is the difference between discretionary fiscal policy and automatic stabilizers?
Under what general macroeconomic circumstances might a government use expansionary fiscal policy?When might it use contractionary fiscal policy?
What is the difference between expansionary fiscal policy and contractionary fiscal policy?
What is the difference between a budget deficit and the national debt?
What has been the general pattern of U.S. budget deficits in recent decades?
What is the difference between a progressive tax, a proportional tax, and a regressive tax?
What are the main categories of U.S. federal government taxes?
Have spending and taxes by state and local governments in the United States had a generally upward or downward trend in the last few decades?
What is the difference between a budget deficit, a balanced budget, and a budget surplus?
What are the main categories of U.S. federal government spending?
Have the spending and taxes of the U.S. federal government generally had an upward or a downward trend in the last few decades?
Give some examples of changes in federal spending and taxes by the government that would be fiscal policy and some that would not.
How would a balanced budget amendment change the effect of automatic stabilizer programs?
How would a balanced budget amendment affect a decision by Congress to grant a tax cut during a recession?
Do you think the typical time lag for fiscal policy is likely to be longer or shorter than the time lag for monetary policy? Explain your answer?
What would happen if contractionary fiscal policy were implemented during an economic boom but, due to lag, it did not take effect until the economy slipped into recession?
What would happen if expansionary fiscal policy was implemented in a recession but, due to lag, did not actually take effect until after the economy was back to potential GDP?
Explain how automatic stabilizers work, both on the taxation side and on the spending side, first in a situation where the economy is producing less than potential GDP and then in a situation where the economy is producing more than potential GDP.
What is the main advantage of automatic stabilizers over discretionary fiscal policy?
In a recession, does the actual budget surplus or deficit fall above or below the standardized employment budget?
What is the main reason for employing expansionary fiscal policy during a recession?
What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?
True or False:a. Federal spending has grown substantially in recent decades.b. By world standards, the U.S. government controls a relatively large share of the U.S. economy.c. A majority of the federal government’s revenue is collected through personal income taxes.d. Education spending is
Debt has a certain self-reinforcing quality to it. There is one category of government spending that automatically increases along with the federal debt. What is it?
The social security tax is 6.2% on employees’ income earned below $113,000. Is this tax progressive, regressive or proportional?
What taxes would an individual pay if he were self-employed and the business is not incorporated?
If an individual owns a corporation for which he is the only employee, which different types of federal tax will he have to pay?
Suppose that gifts were taxed at a rate of 10% for amounts up to $100,000 and 20% for anything over that amount.Would this tax be regressive or progressive?
Is it possible for a nation to run budget deficits and still have its debt/GDP ratio fall? Explain your answer. Is it possible for a nation to run budget surpluses and still have its debt/GDP ratio rise? Explain your answer.
When governments run budget surpluses, what is done with the extra funds?
When governments run budget deficits, how do they make up the differences between tax revenue and spending?
In Exercise 29.32 calculate the cost of a U.S.dollar in terms of British pounds in 1996 and 1998.
A British pound cost $1.56 in U.S. dollars in 1996, but $1.66 in U.S. dollars in 1998. Was the pound weaker or stronger against the dollar? Did the dollar appreciate or depreciate versus the pound?
What would make a country decide to change from a common currency, like the euro, back to its own currency?
Many developing countries, like Mexico, have moderate to high rates of inflation. At the same time, international trade plays an important role in their economies. What type of exchange rate regime would be best for such a country’s currency vis à vis the U.S.dollar?
If a developing country needs foreign capital inflows, management expertise, and technology, how can it encourage foreign investors while at the same time protect itself against capital flight and banking system collapse, as happened during the Asian financial crisis?
We learned that monetary policy is amplified by changes in exchange rates and the corresponding changes in the balance of trade. From the perspective of a nation’s central bank, is this a good thing or a bad thing?
Suppose a country has an overall balance of trade so that exports of goods and services equal imports of goods and services. Does that imply that the country has balanced trade with each of its trading partners?
Do you think that a country experiencing hyperinflation is more or less likely to have an exchange rate equal to its purchasing power parity value when compared to a country with a low inflation rate?
If a country’s currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the interest rate paid on government bonds) in that country? Hint: Think about how expected exchange rate changes and interest rates affect demand and
Can you think of any major disadvantages to dollarization? How would a central bank work in a country that has dollarized?
Why would a nation “dollarize”—that is, adopt another country’s currency instead of having its own?
List some advantages and disadvantages of the different exchange rate policies.
What is the difference between a floating exchange rate, a soft peg, a hard peg, and dollarization?
How can an unexpected fall in exchange rates injure the financial health of a nation’s banks?
What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?
What is the purchasing power parity exchange rate?
Does a higher inflation rate in an economy, other things being equal, affect the exchange rate of its currency? If so, how?
Does a higher rate of return in a nation’s economy, all other things being equal, affect the exchange rate of its currency? If so, how?
Does an expectation of a stronger exchange rate in the future affect the exchange rate in the present? If so, how?
What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?
What does it mean to hedge a financial transaction?
What is the difference between foreign direct investment and portfolio investment?
Describe some buyers and some sellers in the market for U.S. dollars.
What is the foreign exchange market?
Is a country for which imports and exports make up a large fraction of the GDP more likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rate?
A central bank can allow its currency to fall indefinitely, but it cannot allow its currency to rise indefinitely. Why not?
How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?
A booming economy can attract financial capital inflows, which promote further growth. But capital can just as easily flow out of the country, leading to economic recession. Is a country whose economy is booming because it decided to stimulate consumer spending more or less likely to experience
This chapter has explained that “one of the most economically destructive effects of exchange rate fluctuations can happen through the banking system,” if banks borrow from abroad to lend domestically. Why is this less likely to be a problem for the U.S. banking system?

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Principles Of Economics 2nd Edition Steven A. Greenlaw: University Of Mary Washington, David Shapiro: Pennsylvania State University - Solutions

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