Question

TOPIC: Fiscal Policy. Economic implications of government budget deficits, surpluses, tax reforms, social security reforms, government bailouts, and other aspects. A) How is government debt related to government deficit? B) What factors contribute to a large change in the Debt/GDP ratio? C) What are the three main channels through which fiscal policy affects the macroeconomy? D) Explain how each policy channel works. E) In what way is the government debt a potential burden on future generations?

Answer 1

If the agreement is not reached then it might happen the debt limit of the United States economy might be breached because of tremendous rise in the level of national debt in all these years. This might impact the investor confidence and thus lead to fall in the level of investments in the country. Thus, owing to the excessive expenditure due to natural disaster in the country, the debt ceiling should be raised. Taxes cannot be increased at this time as it is not possible to increase taxes at the time of recession in the economy.

Considering the fiscal year 2014-15, it is very difficult for the government to balance the budget. This is because the economy is on the path of recovery but has not yet been able to recover fully from recession. Thus, constitutional amendment requiring balancing of budget should be postponed for some time till the economy is fully able to recover form the crisis situation.