Cause of large increase in government debt.
Answer to Problem 1QQ
Option ‘c’ is the correct answer.
Explanation of Solution
Option (c):
The wars and the related expenditure are the most common reasons which increase the government expenditure. The defense expenditure of any government is priority expenditure. During war period and the subsequent years, the rate of output, production, employment, and consumption would be low. This implies that the revenue of the government would be much less than the Government spending. Thus, the government incurs debts to finance the defense on wars throughout the U.S history. Thus, option (c) is correct.
Option (a):
The recessions are periods of economic downturns which would lead to a decline in the revenue from tax. However, they are not the most common cause of government debt.
Thus, option (a) is incorrect.
Option (b):
The supply side policies of a government which promotes growth along with tax cuts will induce more investment, production, and employment in the economy. Though the immediate revenue cannot be obtained, these policies will ultimately move the economy to a period of progress. The debt incurred due to these policy regulations is also less compared to other causes. Thus, option (b) is incorrect.
Option (d):
The entitlement programs which aim at helping the elderly are part of social security measures adopted by the government. Though this spending is unproductive, it is important for the welfare of the society. However, the spending of the government in this sector is less than the expenditure on other areas. Thus, option (d) is incorrect.
Want to see more full solutions like this?
- During the Great Recession of 20082009, what actions would have been required of Congress and the President had a balanced budget amendment to the Constitution been ratified? What impact would that have had on the unemployment rate?arrow_forwardA 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?arrow_forwardUnder what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy?arrow_forward
- Brief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage LearningPrinciples of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningPrinciples of Macroeconomics (MindTap Course List)EconomicsISBN:9781285165912Author:N. Gregory MankiwPublisher:Cengage Learning
- Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781305971509Author:N. Gregory MankiwPublisher:Cengage LearningPrinciples of Economics, 7th Edition (MindTap Cou...EconomicsISBN:9781285165875Author:N. Gregory MankiwPublisher:Cengage Learning