Download PROBLEMS

PROBLEMS
1.
LO: 2
The 2001 fiscal policy package included roughly $38 billion in tax rebates that
were mailed to taxpayers. By how much would aggregate demand shift (a)
initially and (b) ultimately as a result of these rebates?
AACSB: Analytic
BT: Application
a.
If we assume an MPC of 0.80, AD would initially increase by $30.4
billion.
b.
The ultimate change in equilibrium GDP will depend on the value of the
MPC and the multiplier. Again assuming an MPC of 0.80 then the
multiplied changes in AD will be 5 x $30.4 billion = $152 billion. (This
answer assumes a constant price level.)
2. Suppose the federal budget is balanced but that automatic stabilizers increase tax
revenues by $30 billion per year and decrease transfer payments (e.g., welfare,
unemployment benefits) by $10 billion per year for every 1-percentage point
change in the real GDP growth. Using this information, complete the following
table:
LO: 4
AACSB: Analytic
Change in
GDP Growth Rate
-2%
+1%
+3%
3.
LO: 4
Change in
Tax Revenue
-$60 billion
+$30 billion
+$90 billion
BT: Application
Change in
Transfer Payments
+$20 billion
-$10 billion
-$30 billion
Change in
Budget Balance
-$80 billion
+$20 billion
+$60 billion
Based on the information in the preceding question, what will happen to the
federal budget balance if the economy falls into a recession of –2.0 percent from
a growth path of +2.5 percent?
AACSB: Analytic
BT: Application
The total change in the GDP growth rate is -4.5%, which will result in a decrease
in tax revenue of $135 billion (-4.5*$30 billion=-$135 billion) and an increase in
transfer payments of $45 billion (-4.5*$10 billion=-$45 billion). The total
change in the budget balance will be -$180 billion (increase the deficit/decrease
a surplus by $180 billion).
4.
The following table presents hypothetical data on government expenditure, taxes,
exports, imports, inflation, unemployment, and pollution for three levels of
equilibrium income (GDP). A government decision maker is trying to determine
the optimal level of government expenditures, with each of the three columns
being a possible choice. At the time of the choice the inflation index is 1.0. Dollar
amounts are in billions per year.
Nominal GDP
$8,000 $9,000 $10,000
Government expenditure $700
$800
$900
Taxes collected
$600
$800
$1,000
Exports
$300
$300
$300
Imports
$100
$300
$500
Inflation (index)
1.00
1.04
1.15
Unemployment rate
10%
4%
3.5%
Pollution index
1.00
1.80
2.00
(a)
(b)
(c)
(d)
(e)
LO: 2
Compute the federal budget balance, balance of trade, and real GDP for
each level of nominal GDP.
What government expenditure level would best accomplish each of the
following goals?
Lowest taxes collected, largest trade surplus, lowers pollution, lowest
inflation rate, lowest unemployment rate, highest amount of public goods
and services, highest real income, balancing the federal budget, achieving
a balance of trade, maintaining price stability, achieving full employment.
What government expenditure levels would most flagrantly violate each of
the preceding goals?
Which policy would be in the best interests of the country?
What policies, in addition to changes in government expenditures, might
the government use to attain more of its desired goals?
AACSB: Analytic
(a)
BT: Application
Completing the information from the table in the text:
Nominal GDP
8000
Federal Budget Balance -100
Balance of Trade
200
Real GDP
8000
(b)
9000
0
0
8654
10000
100
-200
8696
The level of expenditures that would best accomplishes each goal, and (c)
the level that would most flagrantly violate each goal.
BEST
EXPENDITURE
700
700
700
700
900
900
900
800
GOAL TO BE ACCOMPLISHED
Lowest taxes
Largest trade surplus
Lowest pollution
Lowest inflation rate
Lowest unemployment rate
Most public goods and services
Highest Real Income
Balanced federal budget
WORST
EXPENDITURE
900
900
900
900
700
700
700
700,900
800
700
800
Balancing balance of trade
Price stability
Full employment
700,900
900
700
(d)
There is no clear best policy because there are competing
macroeconomic goals.
(e)
Monetary policy and supply side policies, as well as changing taxes,
might be used in addition to changes in government spending in the
attempt to attain more desirable goals.