Download chapter 24 - fiscal policy

CHAPTER 12 - FISCAL POLICY
PROBLEM SET
2.
a. If Government purchases rise by $30 billion and taxes fall by $30 billion and MPC=0.8, the
change in real GDP is:
= $30 billion (1/(1-MPC)) - $30 billion (- MPC/(1-MPC))
= (30 billion x (1/(1-0.8))) - (30 billion x (-0.8/(1-0.8))) = $270
or
$30 billion (1 + MPC)/(1-MPC) = $30 billion x 9 = $270 billion
b. If government spending and taxes both rise by $30 billion, the change in real GDP is $30
billion *1/(1-MPC) + $30 billion *(-MPC)/(1-MPC) = $30 billion.
c. If government spending and taxes both fall by $30 billion, the change in real GDP is $30
billion *MPC/(1-MPC) – $30 billion *1/(1-MPC) = – $30 billion.
4.
If households saved all of the tax cut, there would be no increase in spending. The value of
the multiplier would be zero.
6.
a.
Household Income
Tax per Household Total Tax
A
250,000.00
37,500.00
375,000.00
B
50,000.00
7,500.00
75,000.00
C
20,000.00
3,000.00
30,000.00
Total Tax
480,000.00
b.
Household Income
Tax per Household Total Tax
A
150,000.00
22,500.00
225,000.00
B
30,000.00
4,500.00
45,000.00
C
10,000.00
Total Tax
270,000.00
c.
Government spending = 480,000 zips
Tax Revenue = 270,000 zips
Budget deficit = 210,000 zips
d.
Household Income
Tax per Household Total Tax
A
400,000.00
60,000.00
600,000.00
B
75,000.00
11,250.00
112,500.00
C
30,000.00
4,500.00
45,000.00
Total Tax
757,500.00
Government spending = 480,000 zips
Chapter 24 Spending, Taxes, and the Federal Budget
Tax Revenue = 757,500 zips
Budget deficit = 277,500 zips
e. During recessions the government deficit increases due to declining income taxes, and during
booms it falls. Thus, even when government spending remains the same, the government can
experience a surplus during a boom and a budget deficit during a recession.
8.
a. If the economy is operating at potential output, then the budget deficit would be -$0.2
trillion, which is equivalent to a $0.2 trillion surplus.
b. If real GDP is 5 percent below potential output, then net taxes will fall by 25 percent, i.e.,
$0.55 trillion, to $1.65 trillion. The government is still spending $2 trillion, so the total
budget deficit equals $1.65 trillion – $2 trillion = $0.35 trillion.
10.
Table 3 Revised
Year 1
Year 2
Year 3
Year 4
Nominal
GDP
Nominal
National Debt
$
10,000.00
$
11,000.00
$
12,100.00
$
13,310.00
$
5,000.00
$
5,500.00
$
6,050.00
$
6,655.00
Debt Ratio
Interest
Payments
(10% interest)
50% $
500.00
50% $
550.00
50% $
605.00
50%
665.50
Debt
Burde
n
5%
5%
5%
5%
a. Higher interest rates increase the amount of interest that must be paid on the debt
increasing the debt burden.
b. In this example, the debt burden is higher with 10% interest rates than with 8% interest
rates. However, the debt ratio remains constant as does the debt burden.
MORE CHALLENGING
12.
(1) Δ GDP = Δ G × (1/(1-MPC)) = $X /(1-MPC)
(2) Δ GDP = Δ T × (-MPC/(1-MPC)) = - ($X × MPC) /(1-MPC)
(3) Δ G + Δ T = $X /(1-MPC) - ($X×MPC) /(1-MPC) = $X (1 – MPC)/(1-MPC) = $X
(4) Δ GDP/$X = $X/$X = 1