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Assignment 1 Public Finance

1631 words - 7 pages

Assignment 1



1. How has the composition of federal, state, and local government spending changed over the past 40 years? What social and economic factors might have contributed to this change in how governments spend their funds?

In the 1960’s 49.5% of federal spending was on national defense. The shift from then until 2007 was mostly comprised of decreasing spending on national defense and an increase on spending of healthcare from 2.9% to 24.9%, also an increase of social security spending from 13.4% to 20.3%. Which is a very large increase in healthcare spending, almost a 100% increase from the year 1960 to 2007; also a very ...view middle of the document...

People may respond in a way, which the redistribution system put in place may not have accounted for. These people have some type of behavioral response that moves the market economy from efficiency.
Society might choose to redistribute from one group in society to another even if there are efficiency losses because it may be for the betterment of society overall. A reduction in the size of the economics pie may benefit society in a larger form. Consider Medicare taxes, it may reduce your income. Which will also reduce your drive to work as much; this is an efficiency loss. That Medicare tax is used to provide medical aid to someone with an illness. Since that individual was provide with healthcare they cannot get other individuals unhealthy. Thus an overall benefit to society.

3. Consider the four basic questions of public finance listed in the chapter. Which of these questions are positive – that is, questions that can be proved or disproved - and which are normative – that is, and questions of opinion? Explain your answer.

Below is a list of the four questions surrounding public finance:
1) When should the government intervene in the economy?

This is a question of someone’s opinion. Therefore it is normative. People may differ in opinion on the timing of when to implement policies on the market economy that we live in. Someone may want to implement a tax cut before they feel a recession is about to occur to spur consumer spending or someone may want to wait until the recession to implement a tax cut to charge the economy back up.

2) How might the government intervene?

This would be considered a normative question. There are numerous channels for a government to intervene, but ultimately the choice is made by people and not made by statistics. You can achieve the same goal through different policies. So this is a normative question.

3) What are the effects of alternative interventions?

This is a positive economic question. The question is asking us to quantify what a policy decision did to the economy. This is a question of quantification.

4) Why do government do what they do?

This is a question for after the fact. This is a positive economic question. We will in detail collect data over periods of time to answer why a government implemented a certain policy to achieve a goal. We want to examine a decision after it was made.


4. What is the role of the Congressional Budget Office? Why is independence and impartiality important when conducting empirical analyses?

The CBO was created to provide the government with impartial economic analysis and important budget decisions. The CBO is a separate organization that has one goal in mind efficiency for the implementation of a policy of budget decision. In order for a budget to pass as law it must be analyzed by the CBO. It plays a crucial role in our government policy-making decisions.
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