Question

Congress’ Economic Council recommends avoiding budget deficits to avoid crowding out private investment. The council appears to follow

  

the Keynesian approach to fiscal policy.

  

the neoclassical approach to fiscal policy.

   

conservative principles to avoid debt.

   

the supply side approach to fiscal policy.

Besides education, what other areas within its borders is a state responsible for funding?

  

housing developments and media outlets

  

roads, parks, police and fire protection, libraries

   

federal highways and parks and religious organizations.

   

banks, weather mitigation equipment, stadiums and their security.

Assuming that income tax is the only source of revenue for the government, with tax revenue of $50 billion and government spending totaling $70 billion, which of the following is true of the government’s budget?

  

The government has a budget surplus of $20 billion.

   

The government has a balanced budget of $70 billion.

   

The government has a budget deficit of $120 billion.

  

The government has a budget deficit of $20 billion.

Answer 1

1) Option B - the neoclassical approach to fiscal policy
A higher government expenditure results in a higher fiscal deficit and that means the government will have to borrow more from the market. This creates a 'crowding out' effect and private investment takes a hit. Keynesian fiscal policy has suggested incurring a higher fiscal deficit.
Neo-Classical fiscal policy recommends a lower government spending so that the private investment will not be affected as there will be enough loanable funds in the market.

2) Option B - roads, parks, police and fire protection, libraries
The construction of roads and parks at the district level is the responsibility of the local government such as municipalities and they are governed by the state. Fire protection department, police and libraries are also funded by the local government.

3) Option D - The government has a budget deficit of $20 billion.
The tax is the revenue generated by the government and it has to incur expenditure to provide services to the public.
If the expenditure of the government is less than its revenue then it is said to have a surplus but if the expenditure is higher than the revenue then it is in the deficit.
Revenue - Expenditure = (Surplus) / (-Deficit)