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Chapter 13: Q9. (page 283)

True or false? If false, explain why.

  1. The total public debt is more relevant to an economy than the public debt as a percentage of GDP.

  2. An internally held public debt is like a debt of the left hand owed to the right hand.

  3. The Federal Reserve and federal government agencies hold more than three-fourths of the public debt.

  4. As a percentage of GDP, the total US public debt is the highest such debt among the world’s advanced industrial nations.

Short Answer

Expert verified

  1. False; The public debt as a percentage of GDP shows the economy’s capacity to return the debt while Total debt does not indicate any such thing.

  2. True

  3. False; In 2018, the US federal agencies and federal reserve held only 38% of the total public debt.

  4. False; according to 2017 data, Japan and Italy had a higher debt-to-GDP ratio than the US

Step by step solution

01

Explanation for part (a)

The total public debt gives only the exact figure of public debt.While the public debt as a percentage of GDP gives its comparison with GDP and indicates the capacity to return the debt.The public debt as a percentage may also help determine the time required to repay the debt if the entire GDP is used for repayment purposes.

Therefore, public debt as a percentage of GDP is more useful. Hence, the statement is false.

02

Explanation for part (b)

An internally held public debt occurs when the government borrows funds from internal authorities such as public, commercial banks, financial institutions, the central bank, and others in the domestic country itself.Since the lender and borrower both belong to the domestic country, the public debts switch hands internally.

Hence, the statement is true.

03

Explanation for part (c)

In 2018, Out of total public debt in the US, the federal government and federal reserve held only 38% of public debt, which is way less than three-fourth of the total public debt.

Hence, the statement is false.

04

Explanation for part (d)

In 2017, the total public debt as a percentage of GDP for Japan was 240%, and that for Italy was 130%. In comparison, the US had the public debt for only 80% of its annual GDP. Therefore, other advanced industrial nations have a higher debt-to-GDP ratio than the US. Thus, the statement is false.

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Most popular questions from this chapter

Last year, while a hypothetical economy was in a recession, government spending was \(595 billion, and government revenue was \)505 billion. Economists estimate that if the economy had been at its full employment level of GDP last year, government spending would have been \(555 billion and government revenue would have been \)550 billion. Which of the following statements about this government’s fiscal situation are true?

  1. The government has a non–cyclically adjusted budget deficit of \(595 billion.

  2. The government has a non–cyclically adjusted budget deficit of \)90 billion.

  3. The government has a non–cyclically adjusted budget surplus of \(90 billion.

  4. The government has a cyclically adjusted budget deficit of \)555 billion.

  5. The government has a cyclically adjusted budget deficit of \(5 billion.

  6. The government has a cyclically adjusted budget surplus of \)5 billion.

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag.

  1. To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.

  2. Distracted by a war that is going badly, politicians take no notice until inflation reaches 8 percent.

  3. Politicians recognize a sudden recession, but it takes many months of political deal making before they finally approve a stimulus bill.

  4. To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses—but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

(For students who were assigned Chapter 11) Assume that, without taxes, the consumption schedule for an economy is as shown below:

GDP, Billions

Consumption, Billions
\(100120
200200
300280
400360
500440
600520
700600

  1. Graph this consumption schedule. What is the size of the MPC?

  2. Assume that a lump-sum (regressive) tax of \)10 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.

  3. Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule, and calculate the MPC and the multiplier.

  4. Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is \(100, 5 percent at \)200, 10 percent at \(300, 15 percent at \)400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and the multiplier.

  5. Use a graph similar to Figure 13.3 to show why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not.

During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about \(2.6 trillion down to about \)2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?

  1. Yes

  2. No

Some politicians have suggested that the United States enact a constitutional amendment requiring that the federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experiences a severe recession.
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