Question

1. The government accounts directly for about 20% of the GDP. Why is government such a major factor in our economy?

2. Is the government debt (over 20 trillion dollars) a problem for future generations? Explain.

3. How do the roles of government affect your daily life? Would your life be better without government?

4. People want tax breaks. To cut taxes, spending must be cut (at least in theory). Why are spending cuts so tough to make?

5. What is the difference between the federal deficit and the national debt?

6. When can deficits actually help the economy?

7. "Entitlement and mandatory" spending is part of the Budget. Why are the terms entitlement and mandatory misleadung?

8. Why do deficits rise during recessions?

9. Why is there always so much debate and anger about the role of government in providing a safety net (welfare)?

10.What is the main advantage of automatic stabilizers over discretionary fiscal policy?

11. Explain how automatic stabilizers work.

12. What would happen if expansionary fiscal policy was implemented in a recession but, due to lag, did not actually take effect until after the economy was back to potential GDP?

13. What would happen if contractionary fiscal policy were implemented during an economic boom but, due to lag, it did not take effect until the economy slipped into recession?

14. Why are sales taxes regressive?

15. Why would the tax incidence mostly fall on smokers if the taxes on cigarettes went up?

Answer 1

1.

Government is a major factor in the economy, because it does fiscal spending that has multiplier effect in boosting the aggregate demand (AD) in the economy. It leads to increase in supply and creation of new jobs. Now, more people get the job and spend money that further boosts the AD and economy now functions properly. It is due to the government spending done in the economy, to the tune of 20% of the GDP. Besides, government makes regulations to  protect interests of the consumers and regulate the predatory tendencies of the big companies. So, government plays a major role in the economy.

===

2.

It is a problem up to a certain level, as debt creates interests and it makes government to pay back to the creditors. So, if government does not get enough funds on its own, then it cuts spending on development programs, meant for future generation, applies new taxes and deductibles to be paid by the future generation and reducing the social security benefits that had to be received by the future generation. So, it stems problems for them, as they have to pay more taxes and get less benefits in the future.

===

3.

Roles of the government involve setting up taxation policies that can affect the price of goods and services, making up pay more in daily lives. It also affects our disposable income, affecting day to day purchase of goods and services. At the same time, government forms, regulations that make us comply with and regulate our day to day activities. It can also cause a, rise in price of essential commodities such as gasoline. So, government plays different roles that affect our daily lives.

No, it is the government that also runs welfare and development programs that directly affect in our benefits. Government ensures that there is a free and fair competition, proper quality and no any market power in the market, that can harm the consumers. So, the presence of the government favors us in different ways.

===

4.

Spending cuts are tough to make, because it directly affects aggregate demand (AD) in the economy. If spending cuts happen, then AD will decrease. It will cause firms to decrease supply and layoff people. It will further decrease AD in the economy and economy can move in the direction of recession. Besides, there is a big segment of people under poverty who need government supports in terms of welfare programs. If spending cuts happen, then, these welfare programs will be stopped. It will cause, a rise in crime rate, undercover economy, and other anti-social activities. So, there is a chance of social anarchy in the society. So, it makes spending cut to be very difficult.

===

5.

Federal deficit is on a yearly basis, but national debt is the accumulation of federal deficits over the past years.  Federal deficit happens when government spends more than its revenue, in one year. In contrast to it, national debt occurs when funds are borrowed to compensate the federal deficit and get it accumulated over the years.

===

Pl. repost other unanswered questions for their proper answers!