Reference no: EM131135140

The Clinton deficit reduction package

In 1992, the U.S. deficit was $290 billion. During the presidential campaign, the large deficit emerged as a major issue. When President Clinton won the election, deficit reduction was the first item on the new administration's agenda.

a. What does deficit reduction imply for the medium run and the long run? What are the advantages of reducing the deficit? In the final version passed by Congress in August 1993, the deficit reduction package included a reduction of $20 billion in its first year, increasing gradually to $131 billion four years later.

b. Why was the deficit reduction package back loaded? What are the advantages and disadvantages of this approach to deficit reduction? In February 1993, President Clinton presented the budget in his State of the Union address. He asked Alan Greenspan, the Fed chairman, to sit next to First Lady Hillary Clinton during the delivery of the address.

c. What was the purpose of this symbolic gesture? How can the Fed's decision to use expansionary monetary policy in the future affect the short-run response of the economy?