Question 1

Suppose you are hired by the Federal Reserve Bank of Chicago as a financial analyst and your starting salary is $75,000. Use the following table to calculate your total income tax burden. Show your work.

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Question 2

Why has "entitlement reform" become such a major national issue?

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Question 3

Which country faces the most severe fiscal challenges-in terms of debt-to-GDP ratio-according to the accompanying table?

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Question 4

What are the advantages and disadvantages of indexing Social Security benefits to the consumer price index (CPI) rather than to the average wage index?

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Question 5

The number of workers per retiree is a common feature in discussions of how to improve the sustainability of the Social Security program. What was the approximate number of workers per retiree when Social Security was first instituted? What is that number today? Discuss the challenges this poses for the federal government budget.

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Question 6

Why is it important to distinguish between deficits and debt?

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Question 7

Why may a budget surplus be considered undesirable?

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Question 8

Which country holds the most U.S. debt?

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...

Question 9

Why are marginal tax rates the most relevant to consider when making financial decisions?

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Question 10

Prior to the 1980s, the top marginal tax rates in the United States were very high (i.e., greater than 70% during the Great Depression and afterward). Why is it unlikely that tax rates will ever reach that level again?

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Question 11

Use the following table to answer the next  questions: 
-According to the table, which country appeared to be in the best fiscal shape in 2012?

Accepted Answer

Australia had a surplus of 2.1% of GDP in 2012, which was the highest among the listed countries. The other countries had deficits ranging from -3.9% (United States) to -0.2% (Belgium).

Question 12

Why was the world so concerned about Greece defaulting on its debt?

Accepted Answer

Countries in the European Union held a large quantity of Greek debt, so there was a concern that a Greek default would cause other European countries to default. The fear was that a Greek default could trigger a domino effect, leading to a larger economic crisis in Europe. This was a major concern for the global economy as well, as Europe is a significant contributor to global trade and finance.

Question 13

Why is means-testing not likely to be a long-term solution for the rising costs associated with Medicare and Social Security benefits? Fully explain your answer.

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Question 14

The austerity measures imposed on Greece in 2011:

Accepted Answer

The austerity measures imposed on Greece in 2011 required reforms to Greece's large public sector in an attempt to decrease its debt and help the country avoid default. These measures included tax increases, cuts to government spending, and privatization of state-owned enterprises. They were not received well by Greek citizens and were imposed by other European governments and institutions, not forced onto Greece by the United States.

Question 15

Why is foreign government ownership of U.S. debt not currently a huge concern among many economists?

Accepted Answer

While foreign ownership of U.S. debt is significant, the amount is still less than what the United States owes itself. Therefore, it is not currently a huge concern among many economists.

Question 16

One commonly proposed solution to the growing spending challenges faced by Social Security and Medicare is to increase payroll taxes. What are some potential downfalls associated with this solution? Explain.

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Question 17

How is it possible for some people to pay "negative" taxes?

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Question 18

In recent years, the growth in foreign-owned debt has:

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The growth in foreign-owned debt has helped the U.S. economy by increasing the supply of loanable funds available to borrowers. This has led to lower interest rates and encouraged borrowing, which in turn has stimulated economic growth. While there may be concerns about the potential risks and disadvantages of being heavily indebted to foreign entities, overall the impact on the economy has been positive in terms of expanding access to capital.

Question 19

Why may a budget deficit be considered undesirable?

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Question 20

What would happen if a country defaulted on its sovereign debt?

Accepted Answer

If a country defaults on its sovereign debt, it could lead to a deep recession that could affect not only the defaulting country but also spill over into other countries. This is because the defaulting country may be forced to cut back on spending, which could lead to decreased demand for goods and services and ultimately lower economic growth. Additionally, investors may become wary about investing in other countries considered high-risk, which could lead to reduced investment and slower economic growth globally.

Quiz 15: Federal Budgets: the Tools of Fiscal Policy