### Deficits Versus Debt, Transfer Payment, Social Security, Principles of Macroeconomics

The key words in this Macroeconomics course include Deficits Versus Debt, Transfer Payment, Government, Social Security, Retirement Age, Politician – Principles of Macroeconomics.

Which of the following statements are true about deficits versus debt?

The current year deficit can be subtracted from the current year debt to find the previous year’s deficit.

The sum of all debts equal the deficit.

The sum of all deficits equal the debt.

If in year 1 the debt is \$1 million and the deficit in year 2 in \$200,000, the debt in year 2 is \$800,000.

Explanation : A debt is the sum total of accumulated budget deficits.  If in year 3, the debt is \$50 million and in year 4 the deficit is \$2 million, then adding year 4’s deficit to year 3’s debt will yield a year 4 debt of \$52 million.

Which of the following would be considered a transfer payment by the government?

The government directly pays the health care expenses of senior citizens.

The government spends money to replace all computers in government offices.

The government hires a construction crew to rebuild a bridge across a river

The government helps senior citizens cover their monthly expenses with a cash payment.

Explanation : Transfer payments are those cash (money) payments made where there are no goods or services received in return.  Transfer payments are payments made to senior citizens to cover their monthly expenses with a cash payment. Transfer payments do not include the purchase of goods (such as computers and bridges) or services (such as health care).

Which of the following would help to fix Social Security problems?

lower the retirement age

increase the retirement age

increase the cost of living adjustment

lowering the payroll tax rate

Explanation : People are living longer and healthier lives than when these retirement programs were implemented. If people were to work three years longer, they would have three more years of saving for retirement and three fewer years of drawing benefits. These benefits payments are adjusted on the basis of an average wage index, which has historically increased faster than the CPI. If, instead, the CPI were used to adjust benefits payments, the payments would not grow as fast and would still account for inflation. If the payroll tax rate is lowered, less funds will be paid into Social Security.

You have been hired as an economic advisor for a politician running for national office.  The politician, at a recent campaign event, said that corporations are paying too much in taxes and are funding most of the federal government’s operations.  When you speak to the politician after the event, what would you say?

“We have a great deal of work to do.  On the news tonight I predict there will be an expert correcting you and questioning why anyone would vote for you.  Individuals, through income tax and social insurance taxes, provide the bulk of government revenue.”

“I can’t believe you said that!  Everyone knows that taxes on cigarettes and alcohol (excise taxes) represent the largest source of tax revenue for the federal government.”

“So close!  Maybe no one will catch your error.  Corporate and estate taxes are about equal and are tied for the largest sources of tax revenue.”

“Good job! You will win this election based on your sound economic knowledge.”

Explanation : The politician was incorrect.  Individuals, through their payment of income and social insurance taxes, provide most of the government’s revenue.