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7 Nov 2018

In view of persistent government debt and deficit problems, some of economists propose cyclically-adjusted balanced budget rule for government. Compare this proposal to a strict balanced budget rule.Which is perferable? what problems do you see with a rule requiring cyclically-adjusted balanced budget rule? explain?

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Beverley Smith
Beverley SmithLv2
8 Nov 2018
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Related questions

For various reasons, fiscal policy changes automatically when output and employment fluctuate.

a. explain why tax revenue changes when the economy goes into a recession.

b. explain why government spending changes when the economy goes into a recession.

c. if the government were to operate under a strict balanced-budget rule, what would it have to do in a recession? Would that make the recession more or less severe?

Several organizations and individuals รขย€ย“ usually advocates of a balanced budget รขย€ย“ maintain National Debt Clock. Is national debt a worry for the economy? Economists do not agree on the answer to this question. The American Prospect offers a brief article, "Debt Ceiling 101" in response to the 2011 political stalemate about raising the debt ceiling.

How did the 1974 Congressional Budget Act change the dynamics between the government budget and the debt ceiling? Most countries don't require elected officials to determine how much government can borrow apart from setting the budget. Do you think the U.S. should get rid of the debt ceiling? Why or why not?

Balanced Budgets: Suppose that the government passes a balanced budget law.

This law - known in popular media as pay-as-you-go - requires the government to

meet any increase in government spending with an increase in taxes i.e. G "= T ".

This question will analyze the consequences of this law on the macro economy

under classical assumptions.

Consider the following Economy

Y = C + I + G

C = c0 + c1(Y - T)

I = I0 - I1r

G = _G

T = _ T





a) An increase in government spending and taxes represent a change in the demand for output. Under classical assumptions supply creates its own demand. Therefore, what is the impact of a change in taxes and government speding on output?


b) What market do you expect to be affected by a change in government speding under a balanced budget rule?


c) Assume that government increases spending to fund social security, which implies that taxes go up by an equal amount, what effect will this have on the real interest rate?


d) How does your answer depend on the marginal propensity to consume?

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