1) Would each of the following cause an increase, decrease or no change in the b
ID: 1115853 • Letter: 1
Question
1) Would each of the following cause an increase, decrease or no change in the budget deficit?
a) a decrease in the unemployment rate
b) an increase in government funding of the arts
c) an increase in the number of retired persons collecting Social Security
d) a downward revision of the natural rate of unemployment
e) an increase in GDP
f) an increase in the income tax rate
Explanation / Answer
Answer 1 - We have been given some cases, taking into account these cases we have to tell that would it increase budget deficit or not. Budget deficit may remain constant as well if it does not increase or decrease. Budget deficit is the shortfall between government spending and tax revenue.
(a) A decrease in the unemployment rate would not affect budget deficit directly. There will be having no change in budget deficit.
(b) An increase in government funding of the arts will increase government spending and result higher budget deficit. Thus government funding of the arts will increase BD.
(c) An increase in the number of retired persons collecting social security will have extra burden on government budget. Thus budget deficit will increase because government spending would be increased.
(d) A downward revision of the natural rate of unemployment through policy will increase budget deficit. Government must spend more to reduce natural level of unemployment in the economy.
(e) An increase in GDP will reduce budget deficit because tax revenue would increase. The difference government spending and tax revenue shrinks as GDP increase.
(f) An increase in the income tax rate would increase tax revenue in the starting. According to Laffer Curve, tax revenue eventually falls as tax rate increase. Thus we can say budget deficit will decrease.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.