#1.In an expansion, holding everything else constant, a previously existing budg
ID: 1215846 • Letter: #
Question
#1.In an expansion, holding everything else constant, a previously existing budget deficit will automatically (Decrease / Increase), partly because taxes (Decrease / Increase)
#2.
There are several important philosophies regarding budget balances. One way in which they differ is in terms of the time span over which the budget should be balanced. Another difference among budget philosophies involves whether the budget balance is as important as other economic goals.
Which of the following budget philosophies advocates keeping the budget in balance every year, except during wartime?
1. cyclically balanced budget
2. Functional finance
3. Annually balanced budget
A major problem with the implementation of this philosophy is that it
1. Relies upon government officials to budget for surpluses during boom times in order to cover deficits during recessions
2. Magnifies business cycle fluctuations
3. Can allow the national debt to burgeon with chronic deficits
Which of the following is a correct description of the crowding-out effect of deficit spending? O The selling of government bonds leads to higher interest rates, thereby reducing private investment The selling of government bonds leads to lower interest rates, thereby reducing private investment. The buying of government bonds leads to higher interest rates, thereby reducing private investment O The buying of government bonds leads to lower interest rates, thereby reducing private investment The following graph shows the demand for private investment. PoinAlong l) ID INVESTMENTExplanation / Answer
Expansion refers to the expansionary fiscal policy which aims at increasing the aggregate demand in the economy. This can be done by increasing the govenment spending or by lowering the taxes. Increased government spending will increase the aggregate demand and therefore will lead to increased economic growth, whereas redcued taxes will increase the disposable income of the consumer. This will also lead to increased aggregate demand and thus higher economic growth.
Now as taxes decrease in an expansion, the current deficit will rise as the income of the government ( in the form of tax revenue) will fall.
Therefore budget deficit will increase as taxes decrease during an expansionary fiscal policy.
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