Trump’s Economic Agenda: Tax Cuts Exceed Spending Cuts

Answer the following questions to check your understanding of the story.

What is the effect on a budget deficit of tax cuts that exceed spending cuts?

When tax cuts exceed spending cuts, the budget deficit __________.

a) increases

b) decreases

c) increases or decreases but we don’t know for sure

d) stays the same

Wrong! - When does a budget deficit arise? What will happen to the budget deficit if tax cuts exceed spending cuts?

Good Job! - When outlays exceed receipts, a budget deficit exists. So when additional tax cuts exceed spending cuts, the budget deficit increases.

The price elasticity of demand for goods sold at Walmart is 0.8, so demand is inelastic.

How does a budget deficit change government debt?

A budget deficit ___________ government debt.

a) doesn’t change

b) increases

c) decreases

d) might increase or decrease

Wrong! - Government debt is the amount that the government has borrowed—the sum of past budget deficits minus the sum of past budget surpluses. How does a budget deficit change the government debt?

Well Done! - Government debt is the amount that the government has borrowed—the sum of past budget deficits minus the sum of past budget surpluses.

When the government has a deficit, government debt increases.

How does an increase in the U.S. budget deficit influence the loanable funds market?

An increase in the U.S. budget deficit ________________.

a) increases the demand for loanable funds and the real interest rate rises

b) decreases the demand for loanable funds and the real interest rate falls

c) decreases the supply of loanable funds and the real interest rate rises

d) increases the supply of loanable funds and the real interest rate falls

Wrong! - Is the U.S. government a lender (supplier) or borrower (demander) in the loanable funds market? How does an increase in the U.S. budget deficit change the loanable funds market?

That's Right! - The real interest rate is determined in the loanable funds markets.

The government borrows in the loanable funds market when it has a budget deficit so an increase in the budget deficit increases the demand for loanable funds. When the demand for loanable funds increases, the real interest rate rises.

Why might an increase in the U.S. budget deficit slow economic growth?

The __________ effect tells us that an increase in the budget deficit _________ investment, which slows economic growth.

a) crowding-out; increases

b) Ricardo-Barro; increases

c) crowding-out; decreases

d) Ricardo-Barro; decreases

Wrong! - What is the crowding out effect? Does the crowding-out effect tell us that an increase in the budget deficit increases investment? What is the Ricardo-Barro effect? What does it say about the effect of the budget deficit on the real interest rate and investment?

Correct! - The crowding-out effect is the tendency for a government budget deficit to raise the real interest rate and decrease investment.

The decrease in investment slows economic growth.

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