Question

Macro Economics Web Activity

Go to the Congressional Budget Office’s (CBO) Budget and Economic Information page (http://www.cbo.gov/topics/budget/budget-and-economic-outlook). Use the historical budget link on this page to answer the questions below.

A. Identify all periods where the government ran a budget surplus in the past 40 years. (Refer to the “on-budget” deficits and surpluses.)

B. Who was president during these budget surpluses? Is your answer consistent with the characterization of Republicans as favoring small government (less spending) and Democrats as favoring large government (more spending)? What other factors—besides presidential politics—contribute to budget surpluses?

C. Refer to the Bureau of Labor Statistics website (http://www.bls.gov/) for data on inflation during the periods of budget surplus that you identified in part a. Was inflation relatively high (over 3%) or low (under 2%) during these budget surpluses? Were the budget surpluses you identified in part a consistent with the inflation at the time? Why or why not?

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Answer 1

Answer :--
a. Filter the data to analyze it easily.

If we run the data to show the results for "On-Budget" deficits and surpluses to be greater than zero, we see that there are only two periods, namely, 1999 and 2000 for which we get budget surpluses.

b. The period of budget surplus is 1999 and 2000 only.

Basically the percentage change in the overall price level of the economy is known as the inflation level of that economy. So, if we use the Bureau of Labor Statistics website, choose Inflation & Prices category, and then go to the chart of CPI data of percentage change in prices over the last 20 years, we get that for the year 1999, the average inflation level is approximately 2.19% and for the year 2000, the average inflation level is approximately 3.38%.

Therefore, we could say that the inflation level is moderate for the year 1999 and relatively high for the year 2000.

The On-Budget surplus for the year 1999 is 1.9 and for the year 2000 is 86.4 billion of dollars. As there arises more surplus for the government and it increases by a very high amount from 1999 to 2000, we could say that the government cut back their expenditures, which sometimes include various subsidies, which certainly would results in increase in prices and hence higher inflation. So, we could say that the budget surpluses is the reason for high inflation.