1. At the end of 2004, the gross federal debt was approximately $7,500 billion, and it is highly likely that it will grow much larger during the coming decade. Many people are concerned that the government could go bankrupt and that the U.S. economy could face severe consequences. Under what conditions can a government go bankrupt? Is it possible for the U.S. government to go bankrupt?
2. Is the U.S. government debt a burden on future generations? Does the U.S. government eventually have to pay off its debt?
3. The Brazilian budget deficit has grown to become a large portion of GDP. Explain how it was possible for Brazil's actual budget deficit to grow at the same time that former President Fernando Henrique Cardoso was discretionarily cutting government spending and raising tax rates.
4. What are "automatic stabilizers"? What effect do they have on the economy? In other words, what do they automatically stabilize, and how do they automatically do it?
5. To answer these questions, refer to the sheet entitled Economic Information: Switzerland: 1990 - 1994
a. Was Switzerland's fiscal policy loose or tight?
6. What fiscal policy would you have recommended to the Swiss authorities if they wanted to improve Swiss economic performance? Please explain using AS/AD analysis.
What fiscal policy would you have recommended to the Swiss authorities if they wanted to improve Swiss economic performance? Please explain using AS/AD analysis.