Check Your Understanding

1. Question

   Why is the cyclically adjusted budget balance a better measure of the long-run sustainability of government policies than the actual budget balance?

2. Question

   Explain why states required by their constitutions to balance their budgets are likely to experience more severe economic fluctuations than states that are not held to that requirement.

3. Question

   Explain how each of the following events would affect the public debt or implicit liabilities of the U.S. government, other things equal. Would the public debt or implicit liabilities be larger or smaller if they occurred?

   1. The growth rate of real GDP increases.

   2. Retirees live longer.

   3. Tax revenue decreases.

   4. The government borrows to pay interest on its current public debt.

4. Question

   Suppose the economy is in a slump and the current public debt is quite large. Explain the trade-off of short-run versus long-run objectives that policy makers face when deciding whether or not to engage in deficit spending.