Chapter 15 - Fiscal Policy
1. What is the difference between a deficit and a debt?
2. When did the deficit exceed 25% of GDP?
3. Draw the Budget Surplus Graph, label the axes. What determines whether the budget is in
surplus or in deficit?
4. What is the difference between structural versus cyclical deficits? Indicate a Structural
surplus on the Budget Surplus Graph.
5. Draw the Laffer Curve – label the axes and explain the shape of the curve.
6. Give examples of contractionary and expansionary fiscal policy.
7. Why is a Balanced Budget Amendment not a good idea? What is the difference between an
amendment and a law?
1 8. What is the difficulty with requiring the Government to balance the budget over the business
9. Define “Crowding In” and “Crowding Out”
10. Why does the Ricardo-Barro view of debt financing predict no crowding out?
11. Why does the traditional view of debt financing predict crowding out and net exports down?
How does the existence of foreign lenders affect the predictions of the traditional view?
13. Explain why both conservatives and liberals voted for the Reagan Tax Cuts. Why were they
not able to do anything about the resulting deficits?
15. What is the primary burden of the national debt?
16. Contrast the burden when the debt is owed to American citizens versus foreign citizens
17. Approximately what percent of the U.S. Government debt is owed to U.S. citizens, foreign
citizens, the Federal Reserve, and U.S. Government agencies?
18. What are four limitations on using debt to finance a government?
2 19. Why not just print money (monetize the debt) to pay off the national debt?
Chapter 16 – Inflation, Unemployment, and Federal Reserve Policy
1. Who was A.W. Phillips? Who is Paul Samuelson and Robert Solow? What did these
economists discover with regard to the relationship between inflation and unemployment?
2. Draw the traditional Phillips Curve and label the axes.
3. What happened to the Phillips Curve during the 1970s?
4. Define “Stagflation”
5. Explain how the “Profit Effect” and the Classical argument that real wages adjust to move the
economy to full employment explain stagflation.
3 6. Why do most economists today believe that the Long Run Phillips Curve is vertical? What
does a vertical Phillips Curve say about the policy of trying to reduce unemployment by accepting
an increase in inflation?
Chapters 2 and 6
1. Compared to the economies of Japan, Europe, and Canada – are exports and imports
a larger or smaller part of the U.S. economy?
2. What is the definition of absolute advantage?
3. What is the definition of comparati