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Author Question: What is the formula for the government budget deficit? Why might it be appropriate for most ... (Read 13 times)

a0266361136

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on: Jun 30, 2018
What is the formula for the government budget deficit? Why might it be appropriate for most governments, most of the time, to have a deficit (rather than surplus)?
 
  What will be an ideal response?

Question 2

If velocity is highly unstable, then targeting the money supply
 
  a. will be effective in stabilizing the LM curve and interest rates.
  b. has the same effects as targeting interest rates.
  c. will be ineffective in stabilizing aggregate demand.
  d. none of the above.


Anonymous

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Reply #1 on: Jun 30, 2018
Answer to Question 1

Deficit = spending - tax revenues. Presuming that government spending in some way serves the public interest, it is reasonable to maintain such spending, even when revenue has fallen. Indeed, the economic circumstances that lead to revenue shortfalls are likely the worst time to decrease spending. Because long-run growth rates tend to be positive, several years of deficit spending can be repaid with fewer, later years of surplus. Government investment contributes to long-run growth, and justifies the spreading of the cost over long periods. Since a continuously balanced budget is infeasible, it makes sense to err on the side of deficit, to minimize the current tax burden and avoid accumulation of an unproductive surplus.

Answer to Question 2

C


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