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gross federal debt

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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.

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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.

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Explaining the National Debt

A) Assume that the gross national debt initially is equal to $3 trillion and the federal goverment then runs a deficit of $300 billion.
1) What is the new level of gross national debt?
2) If 100% of the deficit is financed by the sale of securities to federal agencies, what happens to the amount of debt held by the public? What happens to the level of gross debt?
3) If GDP increased by 5 percent in the same year that the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?

B) Now suppose that the gross national debt initially is equal to $2.5 trillion and the federal goverment then runs a deficit of $100 billion.
1) What is the new level of gross national debt?
2) If 100% of this deficit is financed by the sale of securities to the public, what happens to the level of debt held by the public? What happens to the level of gross debt?
3) If GDP increases by 6% in the same year as the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?

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