1. Explain why government spending theoretically gives a bigger boost to the economy than tax cuts.

2. Explain why increasing government purchases of goods and services is expansionary fiscal policy. Would increasing taxes or reducing transfer payments be contractionary or expansionary? Why?

3. Changes in tax rates affect both aggregate demand and aggregate supply. Explain why this is true.

4. What is one benefit to businesses when the government budget is in surplus?

5. How might interest paid on the national debt lead to greater income inequality?

6. Is the absolute size of the national debt or the national debt as a percent of GDP the best measure of its importance to our economy? Explain.

7. One argument often heard against using fiscal policy to tame the business cycle is that the lags associated with getting a fiscal policy implemented are so long that when the program is finally passed and implemented, the business cycle has moved on to the next phase and the new program may not be necessary and may even be potentially destabilizing at that point. Does this argument seem reasonable? What counterarguments can you make in support of using fiscal policy?

8. As mandatory federal spending becomes increasingly a larger share of the budget, should we worry that the economic stabilization aspects of fiscal policy are becoming so limited as to be ineffective?

9. Our current personal income tax system is progressive: Income tax rates rise with rising incomes and are lower for low-income individuals. Some policymakers have favored a “flat tax” as a replacement for our modestly progressive income tax system. Most exemptions and deductions would be eliminated, and a single low tax rate would be applied to personal income. Would such a change in the tax laws alter the automatic stabilization characteristics of the personal income tax?

10. In 1962 in a speech before the Economic Club of New York, President Kennedy argued that “it is a paradoxical truth that taxes are too high today and tax revenues are too low—and the soundest way to raise revenues in the long run is to cut rates now.” Is President Kennedy’s argument consistent with supply-side economics? Why or why not?

11. A balanced budget amendment to the Constitution requiring Congress to balance the budget every year is introduced in Congress every so often. What sort of problems would the passage of such an amendment introduce for policymakers and the economy? What would be the benefit of the passage of such an amendment?

12. If the economy (gross domestic product) is growing faster than the growth of the national debt held by the public (both domestic and foreign), how does that affect the ability of the government to manage the national debt? What arguments can you make to rebut the common assertion that the national debt is bankrupting the country?

13. In recent years, a growing number of states have legalized marijuana for recreational purposes. Sales of marijuana are subject to various state sales and excise taxes that add between 25% and 44% to the price. Previously, sales of marijuana in these states took place in the informal or underground economy, where taxes are avoided and crime runs high. What are some fiscal policy justifications for legalizing marijuana?

14. In the aftermath of the 2007–2009 recession, the U.S. national debt rose to record levels as the federal government used expansionary fiscal policy to speed up the economic recovery. This led some politicians to propose a significant reduction in the size of government in order to balance the budget. Would such a policy be expansionary or contractionary in nature? What factors would determine whether or not such a policy would harm economic growth?

15. Suppose a small economy has two income tax rates: 15% for all income up to $50,000 and 30% for any income earned above $50,000. Suppose that prior to the recession, the economy had five workers earning the following salaries:

16. Suppose an economy has a GDP of $40 billion and a national debt of $20 billion, and the average interest rate on this debt is currently 3%.

17. According to By the Numbers, approximately what percent of total external debt is held by China? What does this suggest about the importance of U.S. relations with China?

18. According to By the Numbers, in which year between 1990 and 2016 did the United States have the biggest budget surplus and what was that value? In which year did it have the biggest budget deficit and what was that value?