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Honors Economics Chapter 30 Government Budgets and Fiscal Policy 1. When governments run budget deficits, how do they make up the differences between tax revenue and spending? 2. What is the main reason for employing contractionary fiscal policy in a time of strong economic growth? 3. What is the main reason for employing expansionary fiscal policy during a recession? 4. What is the main advantage of automatic stabilizers over discretionary fiscal policy? 5. A government starts off with a total debt of $3.5 billion. In year one, the government runs a deficit of $400 million. In year two, the government runs a deficit of $1 billion. in year three, the government runs a surplus of $200 million. What is the total debt of the government at the end of year three? 6. If a government runs a budget deficit of $10 billion dollars each year for ten years, then a surplus of $1 billion for five years, and then a balanced budget for another ten years, what is the government debt? 7. Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and sketch a diagram using aggregate demand and aggregate supply curves to illustrate your answer: a. A recession. b. A stock market collapse that hurts consumer and business confidence. c. Extremely rapid growth of exports. d. Rising inflation. e. A rise in the natural rate of unemployment. f. A rise in oil prices