Global Economy: Fiscal Policy and Government Debt

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Questions and Answers

What happens to government spending and tax revenues during a recession when the unemployment rate increases?

Both government spending increases and tax revenues decrease. (correct)

Government spending decreases while tax revenues increase.

Government spending increases while tax revenues remain constant.

Government spending remains the same and tax revenues decrease.

How does the increase in budget deficit affect economic expansion?

A higher deficit always indicates economic contraction.

A higher deficit resulting from increased tax cuts can stimulate the economy. (correct)

A higher deficit indicates that the government is borrowing excessively.

A higher deficit is irrelevant to economic conditions.

What is a cyclical deficit primarily caused by?

Permanent budget policies.

Changes in tax legislation.

Long-term shifts in government investment strategies.

Economic downturns leading to increased spending and decreased revenues. (correct)

In what way does overseas borrowing help poorer countries?

It fills the savings gap for necessary investments. (B) Signup and view all the answers

What does an increase in the deficit indicate if it is a result of higher defense spending?

A potential increase in aggregate demand. (A) Signup and view all the answers

What causes many developing countries to rely on overseas borrowing?

Insufficient domestic savings to support necessary investments. (D) Signup and view all the answers

What fundamental issue is indicated by the savings gap in poorer countries?

They cannot generate sufficient domestic savings for investment. (A) Signup and view all the answers

What is the primary difference between a deficit and debt?

Debt is accumulated over time, whereas a deficit refers to money spent beyond revenue in a specific period. (B) Signup and view all the answers

What occurs if a country does not generate enough foreign exchange to finance necessary investments?

It may have to resort to overseas borrowing. (A) Signup and view all the answers

Which example best illustrates an automatic stabilizer?

Unemployment insurance payments to laid-off workers (A) Signup and view all the answers

In which scenario would a government typically experience a budget surplus?

During periods of economic growth with high tax receipts (C) Signup and view all the answers

What distinguishes discretionary policy from automatic stabilizers?

Discretionary policy requires government action to be activated. (D) Signup and view all the answers

What is the structural budget primarily used to assess?

Long-term fiscal sustainability (D) Signup and view all the answers

Which of the following is a characteristic of a cyclical budget?

It considers the effects of economic fluctuations on the budget. (C) Signup and view all the answers

A deficit indicates that the government is:

Increasing its liabilities within a specific timeframe. (A) Signup and view all the answers

Which of the following strategies would likely be classified as a discretionary policy aimed at combating recession?

Cutting taxes to stimulate spending (B) Signup and view all the answers

What was allocated a significant portion of rising government expenditures in Greece before the crisis?

Public sector wages and benefits (A) Signup and view all the answers

What percentage of GDP did Greek government expenditures account for as recently as 2009?

50% (D) Signup and view all the answers

What was the revised estimate of the Greek budget deficit in 2009?

12.7% of GDP (B) Signup and view all the answers

What was the primary consequence of the government’s debt being perceived as too high?

Higher interest rates on Greek bonds (A) Signup and view all the answers

What was notable about the three-year package of loans announced in May 2010?

It amounted to €110 billion (A) Signup and view all the answers

What was one of the immediate objectives of the austerity program introduced in May 2010?

Achieve a significant cut in public spending (A) Signup and view all the answers

By what percentage points aimed the austerity program to reduce the budget deficit by 2013?

11 percentage points (D) Signup and view all the answers

What was one of the major drivers of Greece's increased borrowing costs during the debt crisis?

Demand for higher interest rates by investors (B) Signup and view all the answers

What was a major cause of the Russian financial crisis in 1998?

Non-payment of taxes by the state (C) Signup and view all the answers

Which country experienced a dramatic increase in food prices during its financial crisis in the late 1990s?

Russia (C) Signup and view all the answers

What was one effect of the Argentine economic crisis that began in 1999?

Severe decrease in GDP rates (B) Signup and view all the answers

What was a consequence of the IMF's refusal to grant a loan to Argentina?

Violent protests (D) Signup and view all the answers

What action helped to stabilize the Russian economy after the 1998 crisis?

Rise in oil prices on the international market (C) Signup and view all the answers

Which factor contributed to Argentina's economic instability in the late 1990s?

Political instability and corruption (A) Signup and view all the answers

By 2008, what percentage of business assets in Greece was controlled by the state?

50% (A) Signup and view all the answers

What triggered the peso crisis in Mexico during the 1990s?

Depreciation of the Mexican peso (A) Signup and view all the answers

What was the inflation rate in Russia during the financial crisis of 1998?

84% (B) Signup and view all the answers

Which event is specifically associated with the 'Tequila effect'?

The peso crisis in Mexico (D) Signup and view all the answers

What percentage of GDP did the external debt of ASEAN economies increase to between 1993 and 1996?

180% (B) Signup and view all the answers

What was a primary consequence of the oil price increase in the 1970s for emerging countries?

Severe liquidity crisis (A) Signup and view all the answers

What strategy did most states adopt in response to the liquidity crisis in the 1970s?

Industrialization focused on exports (C) Signup and view all the answers

Which country received financial assistance from the US during the peso crisis?

Mexico (A) Signup and view all the answers

What role did the International Monetary Fund (IMF) play during the Asian financial crisis?

Allocating 40 billion USD for stabilization (A) Signup and view all the answers

What was a significant factor leading to the depreciation of the Thai baht in 1997?

High levels of external debt linked to real estate (D) Signup and view all the answers

What is primarily measured when analyzing the impact of the business cycle on the economy?

Actual revenues, expenditures, and deficits (D) Signup and view all the answers

Which of the following best describes cyclical deficits?

Deficits resulting from temporary changes in economic activity (B) Signup and view all the answers

What effect does an increase in exports generally have on the actual deficit?

It often reduces the actual deficit over time (A) Signup and view all the answers

How does a permanent tax cut typically influence the structural deficit?

It may increase the structural deficit over time (D) Signup and view all the answers

What is a potential consequence of tightening monetary policy?

Reduced spending, potentially lowering deficits (C) Signup and view all the answers

What is a potential issue with financing government spending through borrowing?

It is perceived as allowing for tax increases later (D) Signup and view all the answers

Why is structural deficit considered more concerning than cyclical deficit?

It reflects fundamental economic weaknesses (D) Signup and view all the answers

Which of the following is an implication of a government deciding to 'borrow now, tax later'?

Future obligations that may increase tax burdens (B) Signup and view all the answers

Study Notes

Global Economy Mechanisms: Fiscal Policy, Deficits, and Government Debt

Fiscal policy encompasses budgets and government spending, taxation, and influencing the economy.
Government debt is the accumulated amount of borrowed money to finance budget deficits.
Internal debt is owed to a nation's citizens, whereas external debt is owed to foreigners.
Fiscal policy and debt influence aggregate demand, and the interaction of aggregate supply and aggregate demand affects output, employment, and inflation.
Deficits signify government spending exceeding revenue; debt is the buildup of these deficits.
Discretionary policy involves policymakers adjusting policies based on economic trends.
Automatic stabilizers adjust tax rates and benefit programs automatically in response to economic fluctuations (e.g., unemployment insurance).
Budgets can be categorized as actual, cyclical, and structural, each providing different perspectives.
The structural budget accounts for the budget if the economy performed at its potential.
The cyclical budget compares the actual and structural budgets to assess the effects of cyclical business fluctuations on the budget.
There are various causes of debt, including a savings gap (where countries can't invest enough from their own resources) and a forex gap (when exports are insufficient to finance needed goods).
External debt financing options include bond financing (pre-1939), bank loans (during the 1970s), and official loans from multilateral development banks like the World Bank.
Debt crises, like the 1980 Latin American crisis, 1994 Mexican crisis, 1997-1998 Asian crisis, 1998 Russian crisis, and the 1999-2002 Argentine crisis, and 2009-2011 Greek crisis, often stem from various factors, including currency depreciation, economic downturns, and high levels of national debt.

Activities

Activities involve assessing the effects of various economic scenarios (tax cuts, export increases, monetary policy tightening) on various budget types (actual, structural, cyclical).
Questions analyze differences between automatic vs. discretionary stabilizers, discussing preferred choices for inflation and recession, and assessing the usefulness of discretionary stabilizers.

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Description

This quiz explores the mechanisms of fiscal policy, including government spending, taxation, and their impact on deficits and debt. Dive into the concepts of internal and external debt, automatic stabilizers, and different budget categories. Test your understanding of how these factors interact with aggregate demand and overall economic health.