Unit V Assessment Questions

UnitV Assessment Questions

Q1:It is often said that we are passing our national debts on to ourchildren and grandchildren. Is this true? Explain.

Itis true that we are passing our national debts to our children andgrandchildren. When a nation spends more money than it earns, itcreates a debt. Therefore, the nation end up borrowing more in thepresent, which it promises to pay back in the future. However, in thefuture, most present working people will no longer be working hence,they will not be paying taxes. As a result, it will be their childrenand grandchildren who will work and pay taxes to reimburse the debts.McEachern (2012), argues thatif people create and benefit from adebt, and later fail to pay it and create more debt, it is their nextgeneration that suffers the consequences and carries the burden ofrepaying them.

Q2.In what ways can fiscal policy affect aggregate supply?

Accordingto McEachern (2012), fiscal policy affects aggregate supply (AS) lessthan aggregate demand (AD). Nevertheless, fiscal policy affectsaggregate supply through government spending and tax policy.Government spending affects aggregate whenever the government spendmore money on investments. For instance, the government can conduct aresearch on clean energy, and it end up spending more money.Eventually, it increases clean infrastructure hence, increasesaggregate supply.

Further,tax policy also affects aggregate supply. According to McEachern(2012) and supply side economists, people should pay low taxes. Theyreasons that low taxes increases investment and employment. This isbecause people are likely to work for more hours and invest to savemore on the money they make. Hence, this will increase aggregatesupply.

Q3.How do automatic stabilisers differ from discretionary fiscal policytools?

Automaticstabilisers are different from discretionary fiscal policy tools inthat the congress does not have to vote for automatic stabilisers.Automatic stabilisers occur automatically under a special economiccondition. On the other hand, the congress explicitly votes fordiscretionary fiscal policy. Unemployment insurance is a good exampleof automatic stabiliser. The congress has some preapproved federalunemployment insurance benefits whereby anyone who meets the criteriaautomatically qualifies for the benefits (McEachern, 2012). When theeconomy is down, the automatic stabiliser stabilises thing and doesnot require congress to vote them. Stimulus package is adiscretionary fiscal policy, and it does not come automatically. Nopolicy states that the government will pay some of its citizens’needs if the economy goes down. Alternatively, the congress must comeup with a bill to lay out the stimulus spending.

Q4.What problems are associated with the US federal budget process? Whatsolutions have been offered to these problems?

Thereare several problems associated with US federal budget process.Firstly, the congress often fails to pass the actual budgets andpushes the real decisions in the future (McEachern, 2012). In theend, they end up passing continuing resolutions hence, they do notcome up with decisions on the program to cut down or continue withthem. Secondly, the budget problem takes much time. This complicatesthe usage of the budget to respond instantly to issues affecting theeconomy. For instance, in case of a recession, the congress may taketime before they act. Thirdly, lack of separate capital budget isanother problem. The federal budget does not differentiate dailyoperating expenses and spending on capital goods. The possiblesolutions to these problems are to have a biennial budget and ageneral budget that does not concentrate on much detail. This wouldensure there is enough time to deal with the budget. In addition, itwould be possible to separate operating budget and capital budget.

Q5.Distinguish between crowding out and crowing in

Crowdingout refers to the situation whereby increased public sector spendingreplaces private sector spending. Crowding out situation forces thegovernment to borrow money to cater for its spending. In essence, thegovernment does not have sufficient funds to finance its programs andpay bills hence, it has to use money that it borrows. According toMcEachern (2012), this increases the interest rates for normalcitizens, who in return, do not borrow money. As a result, thisdecrease the amount of money the private sector puts in the economy.On the other hand, crowding in the situation whereby the governmentencourages investment. In this case, the government works hard toincrease the demand for goods. As a result, the high demand for goodsincreases the private sector spending.


McEachern,W. A. (2012). ECON Macro 3 (3rd ed.). Mason, OH: South-Western.