Question

Investopedia defines, “Monetary policy and fiscal policy refer to the two most widely recognized "tools" used to influence a nation's economic activity. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the Federal Reserve. Fiscal policy is the collective term for the taxing and spending actions of governments. In the United States, the national fiscal policy is determined by the Executive and Legislative Branches.”

This task will have you explore fiscal policy.

1. How did the national debt get to be so big?
2. Is there a limit on the national debt?
3. Why can't the government just print more money to get out of debt?
4. If you had a chance to speak to legislators, what would your recommendation be?

Answer 1

Answer 1:

The national debt has get to be so big because of expansionary fiscal policy followed by the government. Under the policy, government has increased spending and reduced tax rate which has increased debt of the government as revenue has fallen and spending of the government has increased. This has increased the national debt and made it so big.

Answer 2:

Yes, there is a limit on the national debt of the country. The government cannot increase its spending at a tremendous rate. The policy makers have set a limit within which the debt of the country can be increased.

Answer 3:

Printing of money by the government leads to an increase in the rate of inflation in the economy. It can also lead to hyper inflation in the economy. This can impact the targeted inflation rate set by the government and cause instability in the economy. Thus, printing of money is not a reliable option for the government to reduce debt.

Answer 4:

Reducing spending in the first phase and then slowly increasing tax rate can be the option for the legislators to prevent accumulation of debt by the government.