Download Instructions: Part A and B correspond to two different chapters

Instructions:
Part A and B correspond to two different chapters. Choose two questions from Part A and
two from Part B. Please make sure to follow the Homework rubric located in your syllabus
before submitting your assignment.
PART A
1. Explain how you would expect a libertarian, a social democrat, and someone with an organic
conception of the state to react to the following laws:
a. A law prohibiting receiving compensation for organ donation.
b. A law mandating helmet use for motorcyclists.
c. A law mandating child safety seats.
d. A law prohibiting prostitution.
e. A law prohibiting polygamy.
f. A law barring the use of trans fats in restaurants.
2. In each of the following circumstances, decide whether the impact of government on the
economy increases or decreases and why. In each case, how does your answer compare to that
given by standard measures of the size of government?
a. Normally, when employers offer health insurance benefits to their workers, these benefits
extend to the spouses of the workers as well. Several years ago, San Francisco passed a law
requiring firms that do business with the city to offer health and other benefits to both same- and
opposite-sex unwed partners.
b. The federal government bans the use of incandescent light bulbs.
c. The ratio of government purchases of goods and services to Gross Domestic Product falls.
d. The federal budget is brought into balance by reducing grants-in-aid to state and local
governments.
3. In 1996 President Clinton declared that the era of big government is over. Has the size of
government fallen since then? Provide an answer based on the following data: In 1996, federal
government spending was $1.56 trillion and Gross Domestic Product (GDP) was $7.82 trillion.
In 2007, federal spending was $2.73 trillion and GDP was $13.76 trillion. During this period,
prices increased by about 34 percent. What additional data would you seek to provide a more
complete answer to this question?
4. The following table shows the composition of US federal expenditures in 1993, 1997, 2001,
and 2005.
Defense
Health
Medicare
Income security
Social Security
Net interest
Other
Total
Federal Expenditures ($ billions)
1993
1997
2001
2005
308.30
285.70
321.30
529.90
99.40
123.80
172.30
250.60
130.60
190.00
217.40
298.60
210.00
235.00
269.80
345.80
304.60
365.30
433.00
523.30
198.70
244.00
206.20
184.00
158.00
157.40
243.40
339.90
1,409.60 1,601.20 1,863.40 2,472.10
From 1993 to 1997, GDP went from $6.6574 trillion to $8.3043 trillion, the GDP price deflator
(used to calculate inflation) went from 88.381 to 95.414, and the population went from 260.255
million to 272.912 million. From 2001 to 2005, GDP went from $10.128 trillion to $13.1947
trillion, the GDP price deflator went from 102.399 to 113.000, and the population went from
285.454 million to 296.940 million.
a. For the years 1993 to 1997 and 2001 to 2005, calculate the absolute change in federal
expenditures, the change in federal expenditures in real (i.e., inflation-adjusted) terms, the
change in real government expenditures per capita, and the change in expenditures per GDP.
b. Which components of the budget had the largest relative increases from 1993 to 1997 and
from 2001 to 2005? Which had the largest relative decreases?
5. The following table shows the composition of US federal tax revenues in 1993, 1997, 2001,
and 2005.
Individual income
Corporate tax
Social insurance
Excise tax
Total
Federal Taxes ($ billions)
1993
1997
2001
2005
509.70
737.50
994.30
927.20
117.50
182.30
151.10
278.30
428.30
539.40
694.00
794.10
99.00
120.30
152.00
154.20
1,154.5 1,579.5 1,991.4 2,153.8
0
0
0
0
Which components of federal taxes had the largest relative increases from 1993 to 1997 and
from 2001 to 2005? Which had the largest relative decreases?
PART B
1. A government is considering paving a highway with a newly developed "wear-proof" material.
Paving the highway would cost $2 billion today but would save $300 million in maintenance
costs for each of the next ten years. Use the concept of present value to deter mine whether the
project is worth undertaking if the government can borrow at an interest rate of 5%. Is it worth it
if the interest rate is 0%? 10%? A politician says to you, "I don't care what the interest rate is.
The project is clearly a good investment: it more than pays for itself in only 7 years, and all the
rest is money in the bank." What's wrong with this argument, and why does the interest rate
matter?
2. Consider a one-year project that costs $300,000, provides an income of $70,000 a year for five
years, and costs $30,000 to dispose of at the very end of the fifth year. Assume that the first
payment comes at the star t of the year after the project is under taken. Should the project be
under taken at a 0% discount rate? How about 2%? 5%? 10%?
3. Several public interest watchdog groups point out "pork" in the federal budget--spending that
they claim would have little or no national benefit but would benefit a small number of people in
a geographically concentrated area. Why are these types of spending more likely to occur in the
federal budgeting process than they would be if they were each voted on individually?
4. From 1962 to 1965, federal spending on non- defense-related education and training rose from
$9.6 billion to $19.5 billion, while from 2001 to 2004, it rose from $178.4 billion to $217.5
billion. Given that the CPI (in January) was 30.0 in 1962, 31.2 in 1965, 175.1 in 2001, and 185.2
in 2004, which was the larger increase in education and training spending?
5.The BEA of 1990 created a PAYGO system prohibiting any policy changes that increased the
estimated deficit in any year in the subsequent six-year period. Another type of possible PAYGO
system would prohibit any policy changes that increase the present value of the deficit over the
entire six-year period. Discuss the relative advantages and disadvantages of these "annual" and
"cumulative" PAYGO systems.