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21 Feb 2018

Some states are required to balance their budgets. Is this measure stabilizing or destabilizing? Suppose all states were committed to a balanced budget philosophy and the economy moved into a recession. What effects would this philosophy have on the size of the federal deficit?

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Related questions

Some states are required to balance their budgets. Is this measure stabilizing or destabilizing? Please explain your answer.

In the United States, there are only a few laws for the states to obey. Therefore, in contrast to the federal budget, the budgets of the individual states:

A. have no effect on aggregate demand.

B. are mandated that Unemployment can be cured by expansionary monetary and fiscal policy on a long-run basis in the individual state but not in all the states.

C. are required by law to stay in balance, or fairly close to balance.

D. can be kept in balance during a recession even without cuts in services or tax increases.

WILL PICK BEST ANSWER

1. The federal government calculates the budget on a fiscal year that begins each year on October 1 and ends the following September 30. At the beginning of the 2005 fiscal year, the Congressional Budget Office [CBO] forecast that the federal budget deficit would be $368 billion. The actual budget deficit for fiscal 2005 was only $319 billion. Federal expenditures were $37 billion less than the CBO had forecast, and federal revenue was $12 billion more than the CBO had forecast.

a. Is it likely that the economy grew faster or more slowly during fiscal 2005 than the CBO has expected? Explain your reasoning.

b. Suppose that Congress and the president were committed to balancing the budget each year. Does what happened during 2005 provide any insights into difficulties they might run into in trying to balance the budget every year?

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