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Chapter 14: Q. 2 CTQ (page 316)

Why might nations' governments earn lower-than-anticipated revenues from asset sales if all governments offered similar assets for sale simultaneously? (Hint: What would happen to asset supplies and market clearing prices if all governments sought to sell substantial numbers of the same types of assets?)

Short Answer

Expert verified

As a result, work effort will be discouraged. Similarly, the government cannot decrease a significant amount of its spending immediately.

Step by step solution

01

Introduction

The austerity budget entails a tax increase and a cut in government spending at the same time.

When a country's debt-to-GDP ratio is high, there are concerns about its ability to repay.

This is a long-term threat, thus the government can implement austerity measures to reduce the ratio.

02

Explanation

The government's deficit was alarmingly high, at 107percent of GDP. To get it down to a level that is sustainable (about $30percent of GDP), taxation must be increased gradually rather than all at once.

Work effort will be discouraged as a result of this. Similarly, the government cannot immediately cut a major portion of its spending.

This is why an austerity budget must be implemented over a long period of time.

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Most popular questions from this chapter

In each of the past few years, the federal government has regularly borrowed funds to pay for at least one-third of expenditures that tax revenues were insufficient to cover. More than60percent

of all federal expenditures now go for entitlement spending. What does this fact imply about how the government is paying for most of its discretionary expenditures?

Refer back to Problem 14-11. If the politician defines "the rich" as people with annual taxable incomes exceeding \(1 million per year, what is another difficulty with the politician's reasoning, given that "the rich" rarely earn a combined taxable income exceeding \)1 trillion, yet the federal deficit has regularly exceeded $1 trillion in recent years?

In 2019, government spending is\(4.3trillion, and taxes collected are\)3.9 trillion. What is the federal government deficit in that year?

What is the relationship between the gross public debt and the net public debt?

Suppose that the share of U.S. GDP going to domestic consumption remains constant. Initially, the federal government was operating with a balanced budget, but this year it has increased its spending well above its collections of taxes and other sources of revenues. To fund its deficit spending, the government has issued bonds. So far, very few foreign residents have shown any interest in purchasing the bonds.

a. What must happen to induce foreign residents to buy the bonds?

b. If foreign residents desire to purchase the bonds, what is the most important source of dollars to buy them?
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