Question

1. Assume the US is currently running a current account deficit (??0 < 0) and government budget deficit (? > ? ), and Donald Trump wins re-election in the upcoming presidential election. He then delivers on

his promise to cut the payroll tax to stimulate economic recovery.

a) What is the result of this fiscal policy response on the government budget deficit and public debt level of the US?

b) Use the definition of the current account to explain how the changing government budget deficit will also impact the trade balance. How do you know?

Answer 1

Economics that have both a fiscal defict and a current account deficit are oftern refered to as having "twin deficits.," The US states has been in this category for years. The opposite scenario a fiscal surplus and a current account surplus is generally viewed as preferable, but much depends on the circumstances. China is often cited as an example of a nation that has enjoyed long term fiscsal and current account surpluses

Fiscal Deficit:- A fiscal deficit, or budget deficit, orccurs whena nation's spending exceeds its revenurs. The US has run fiscal deficits almost every year for decades.

Current account dificit:-A country with a current account deficit is spending more overseas than it is taking in. A current account is measure of a country's trade and financial transactions with the rest of the world.

.Payraoll tax to stimulate economic recovery.:The US has been promoting the idea of a payroll tax cut to help boost the economy as part of whatever stimulus package comes next.

At the moment, both major parties in cdongress have balked at the idea. Some of the concerns indlude the idea that the payroll tax mostly benefits people who already have a job and that such acut would take away mobey needed to fund social security and Medicare.

Howver,some conservative economists have said the payroll tax cut could reduce the cost of employing someone and increase mone workers take home. They also say it could make hiring and job seeking more attractive. While the payroll tax cut might not make it into this latest stimulus bill, it doesn't seem likely to go anywhere,given that president has been pushing the idea since March.

A) Result of this fiscal policy response on the government budget deficit and public debt level of the US:- Fiscal policy refers to the use of the government budget to affect the economy. This inlcudes govenment spending and levied taxes. The policy is said to be expansionary when the government spends more on budget items such as infrastructure or when taxes are lowerd. Such poliecies are tupically used to boost productivity and the economy.

The accounting for government budgets is similar to a personal or houseshold budget. A government runs a surplus when it spend less money then it earns through taxes, and it runs a deficit when it spends more than it receives in taxes.Until the early 20th century, most economists and government advisers favoured balanced budgets or budget surpluses. Government could borrow money and increase spending as part of a targeted fisscal policy.

Expansionary policy:-Government can spend beyound their tax based bydgetary constraints by borrowing money from the private secstor. The US government issues Treasury Bonds to raise funds, for example. To meet its future obligations as a debtor, the govrnment must eventually increase tax receipts, sscsut spending, borrow additional funds or print more dollars.

Contractinary Policy:-Contractionary policy is the opposite of expansionary policy. A $200 million tax cut is expansionary because i means that people will have more money to spend, which should boost demand for products and stimulate the economy. A $ 200 million tax increase is contractionary because poeple have less to spend, which contractionary policies, deficits will shrink, or surpluses will grow.

United States Deficit and public debt level

The US federal budget defict for fiscal year 2020 is $1.103 trillion. The deficit has occurred because the US government currently spends more than it earns. According to AP News, the FY 2019 budget created a $ 1.09 treillion deficit. Spending of $4.529 trillion was more than the estimated $ 3.38 trillion in recenue, according to FY budget 2020

The debt is the total the US govenment owes the sums it boorowed t cover last year's deficit and all the dificits in years past. Each day that the govenment spends more than it takes in, it adds to the federal debt. When the fiscal year ended on Septemeber 30,2019, the federal govenment owed $16.8 trillion todomestic and foreign investors. (This measure of debt, known as "debt held by the public," includes the Treasury securites held by the Federal Reserve, but not those held by thesocial security trust,funds.) By the middle of june 2020, this measure of the debt was up to $20.3 trillion.

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B) Current account and how the changing government budget deficit will also impact the trade balance:-The current account on the balance of payments measures the inflow and outflow of goods, services, investment incomes and transfer payments. A current account is measure of a country's trade and financial transactions with the rest of the world. This ssisnscludes the difference between the value of its expots of goods and services and its imports as well as net payments on foreign investments and other transfers from abroad.

A country with a current account deficit is spending more oversease than it is taking in. Again, intuition suggests this isn't good. Thoses countries must coneinually borrow money to make up the shorfall, and interest;must be paid to service that debt. For smaler, developing scosuntries, especially, this can leave them exposed to international investors and markets.

A sustained deficit of exports versus imports may indicate a country has lost its competitiveness, or reflect an unsusainably low savings rate among the deficit running country's people.