Question

Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy, whenever the economy experienced a severe recession.

Answer 1

Would it be because if they have to balance their budget, they can't spend more than they make. So if there is a severe recession, they would need to make a "contract"....

That is all I have been able to run through my head so far.

Answer 2

you need to slow down the recession by lowering the spending of the country

Answer 3

this is why we don't print more money. we just reallocate current resources

Answer 4

using the term contractionary fiscal policy is a little misleading in addressing recession though

Answer 5

If the government is required to have a balanced budget at the end of each year, if a sever recession hits, they would be contractually required to lower the governments spending? Something like that?

Answer 6

contractionary and contractually are different

Answer 7

contractionary policy involves slowing down the economy by increasing the interest rate, which in effect lowering the supply of money.

Answer 8

Thank you very much ninny. I really appreciate it!

Answer 9

here's the the part we need to analyze - recession by definition a drop in spending. now drop in spending means dropped economic activity. if government were to slowdown the economy further, what do they get? double whammy.

think of the past economic disaster we faced, the FEDS did not increase the interest rate, instead it lowered it and kept it low for a while. the logic behind this is to encourage spending. so institutions would continue to keep employees and so employees would have money to spend. the more money there is, the more spending that occurs. thus getting out of recession (slow activity) in theory.
savings during financial hardship may seem the sensible thing to do, but it is not in macroeconomic sense. it leads to sluggish economy and perhaps depression (long-term recession).

Answer 10

I am going to suggest you email an economist for solid response or anyone who is good at financial engineering.

Answer 11

austinL Best Response 0
If the government is required to have a balanced budget at the end of each year, if a sever recession hits, they would be contractually required to lower the governments spending? Something like that?
they are required to balance the budget so when recession hits, it would not be so severe and it would easy to get out from. you would be able to reallocate funds to things that are more important without putting so much constraint on the overall budget.

it is like having a lot of debt while one is employed, then all of a sudden that person became unemployed. debt is not good when one has no money or means to pay it off. debt is very good (business sense) if one has a means to pay it off, because the money cycles.

Answer 12

Now THAT makes more sense. You deserve more medals!