Many Things

CHAPTER 18

Deficits, Surpluses, and the Public Debt

A. Short-Answer, Essays, and Problems

1. Differentiate between the Federal deficit and the Federal debt.

2. The following table shows government spending and tax revenue for a hypothetical economy over a five-year period. All figures are in billions.

Year Government Spending Tax Revenues

1 $ 800 $825

2 850 850

3 900 875

4 950 900

5 1,000 925

(a) In what years were there budget deficits and what were the amounts?

(b) In what year was there a budget surplus and what was the amount?

(c) What is the public debt in this economy over the five years?

3. Compare and contrast the three budget philosophies: annually balanced budget, cyclically balanced budget, and functional finance.

4. What is the problem with a cyclically balanced budget?

New 5. Why is an annually balanced budget not compatible with government fiscal activity viewed as a countercyclical, stabilizing force in the economy?

New 6. What is the cyclically balanced budget? What is its major problem?

New 7. Briefly explain functional finance.

8. State three causes of the public debt.

9. What information would be important for assessing the size of the public debt beside the absolute amount of the public debt?

10. In 2000 the public debt was $5.6 trillion. Put this number in perspective by relating the debt to GDP, to other countries’ debt, to the amount of interest payments on the debt, and to ownership of the debt.

New 11. What is the relationship between social security and the public debt?

12. Can the large public debt cause the nation to go bankrupt? Explain.

13. Adam Smith once wrote: “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” Evaluate in terms of the national debt.

14. If we as individuals would continue to spend more than we made, we would sooner or later have...