Question

Choose the correct answer:

1)) An annually balanced budget

a		is the surest path to economic stability
b		is required by the U.S. Constitution
c		dampens cyclical swings by decreasing government spending during expansions and increasing it during recessions
d		accentuates cyclical swings by increasing government spending during expansions and reducing it during recessions
e		is a goal that has only been achieved twice in the past 5 years

2)) Approximately what percentage of the U.S. federal budget was used for Medicare payments (on the national debt) in 2010?

a		5 percent
b		10 percent
c		12 percent
d		20 percent
e		40 percent

3)) Deficits that arise from discretionary fiscal policy lead to

	a	increased private demand for money, which is offset by the sale of more government securities
	b	decreased private demand for money, which is offset by the sale of more government securities and higher interest rates
	c	increases in the number of government securities sold to the public and higher interest rates
	d	decreases in the number of government securities sold to the public and higher interest rates
	e	increases in the public's demand for money and increases in the number of government securities sold to the public, leading to lower interest rates

Answer 1

1) An annually balanced budget
Answer - (d) accentuates cyclical swings by increasing government spending during expansions and reducing it during recessions
Reason - The balanced budget would imply that the economy has grown from its long term trend. Hence, it tends to accentuate cyclical fluctiations in economic activity such as increasing government spending during expansions and reducing it during recessions

2)Approximately what percentage of the U.S. federal budget was used for Medicare payments (on the national debt) in 2010?
Answer - (c) 12 %
Reason - Medicare accounted for around $451 Billion from the total expenditure of arond $3.5 Trillion. That turns out to be approximately 12% of the total US Federal budget.

3) Deficits that arise from discretionary fiscal policy lead to
Answer - (d) decreases in the number of government securities sold to the public and higher interest rates
Reason - Deficits from discretionary fiscal policy happens when the government uses an expansionary policy. Generally , the government increases its spending(i.e. it buys more rather than selling more securities). Hence, relative to the taxes collected, spending is more, which drives up interest rates.