Coronavirus ·June 9, 2020 The Issue:U.S. Federal government debt in the hands of the public amounted to 79 percent of Gross Domestic Product (GDP) at the end of 2019, but it could exceed 100 percent of GDP by the end of this year and rise even higher in 2021 and beyond. Debt levels this high were last seen at the end of World War II, which left the U.S. public debt at 106 percent of GDP. Other advanced economies will similarly exit the current global recession with sharply higher public debts. Will it be important for the United States to reduce its high debt burden rapidly through sharp cuts to government spending or big tax increases? Low interest rates and a return to economic growth at levels slightly below what was expected before the crisis could make public debt less costly. The Facts:
The prospect of even a big increase in the ratio of debt to GDP does not imply that the U.S. government should tighten fiscal policy before the economy fully recovers. Moreover, policymakers should recognize the danger that too little support could leave the economy on a lower GDP growth path and facing stronger deflationary pressures. If this is the outcome, then too little fiscal stimulus will ultimately be more costly than too much. Penny wise would be pound (or dollar) foolish. In addition, the Fed should keep interest rates low to guard against deflation and to ease the Treasury’s interest burden, increasing rates only when there is a clear danger of destabilizing expectations of higher inflation. Indeed, some amount of inflation above the Fed’s 2 percent target (which the Fed has consistently undershot over the past decade) would help reduce the burden of debt. Given projected growth in nominal GDP, we will not see the debt-GDP ratio fall as rapidly as it did in the three decades after World War II. But once the current recession is past, the United States may nonetheless be able to place debt on a declining path without a rapid transition to primary budget surpluses. Which of the following involves changing the government revenues or expenditures to change the growth rate of the economy?Discretionary fiscal policy is the purposeful change of government expenditures and tax collections by government to promote full employment, price stability, and economic growth.
What is the purpose of expansionary fiscal policy?Expansionary policy is intended to boost business investment and consumer spending by injecting money into the economy either through direct government deficit spending or increased lending to businesses and consumers.
Which of the following would involve reducing government expenditures and increasing tax rates during a recession?help stabilize the economy during recessions and depressions. Which of the following would require reducing government expenditures and increasing tax rates during a recession? full-employment taxation.
Which term refers to the taxation expenditures and debt management of the federal government?Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty.
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