15 Chapter 11 Fiscal Policy2478 Why do government budget deficits grow duringrecessions?. Taxes can be progressive, regressive, or proportional.Define each, and briefly offer an argument for whyincome taxes are usually progressive.10. What is a value-added tax (VAT), and what is anadvantage of such a tax relative to an income tax?The following exercises are based on the$10 billion, what happens to the equilibrium level ofreal GDP?Use the following equations for exercises 16-18.C = $100 +.8YI = $200G = $250Appendix to this chapter.Answer exercises 11-14 on the basis of thefollowing information. Assume that equilibriumreal GDP is $800 billion, potential real GDP is$950 billion, the MPC is .80, and the MPI is .40.11. What is the size of the GDP gap?12. How much must government spending increase toeliminate the GDP gap?13. How much must taxes fall to eliminate the GDP gap?14. If government spending and taxes both change by thesame amount, how much must they change to eliminatethe recessionary gap?15. Suppose the MPC is .90 and the MPI is .10. If govern-ment expenditures go up $100 billion while taxes fallX = $100 2Y16. What is the equilibrium level of real GDP?17. What is the new equilibrium level of real GDPif government spending increases by $150?18. What is the new equilibrium level of real GDP ifgovernment spending and taxes both increase by $150?19. Make a graph showing the spending and tax revenueof your state government for as many years as you canfind (use the government of your home country if youare not from the United States). What trends do younotice? What spending categories make up the largestshare of the state budget? What are the largest sourcesof revenue?

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Question

Chapter 11 Fiscal Policy
247
8 Why do government budget deficits grow during
recessions?
. Taxes can be progressive, regressive, or proportional.
Define each, and briefly offer an argument for why
income taxes are usually progressive.
10. What is a value-added tax (VAT), and what is an
advantage of such a tax relative to an income tax?
The following exercises are based on the
$10 billion, what happens to the equilibrium level of
real GDP?
Use the following equations for exercises 16-18.
C = $100 +.8Y
I = $200
G = $250
Appendix to this chapter.
Answer exercises 11-14 on the basis of the
following information. Assume that equilibrium
real GDP is $800 billion, potential real GDP is
$950 billion, the MPC is .80, and the MPI is .40.
11. What is the size of the GDP gap?
12. How much must government spending increase to
eliminate the GDP gap?
13. How much must taxes fall to eliminate the GDP gap?
14. If government spending and taxes both change by the
same amount, how much must they change to eliminate
the recessionary gap?
15. Suppose the MPC is .90 and the MPI is .10. If govern-
ment expenditures go up $100 billion while taxes fall
X = $100 2Y
16. What is the equilibrium level of real GDP?
17. What is the new equilibrium level of real GDP
if government spending increases by $150?
18. What is the new equilibrium level of real GDP if
government spending and taxes both increase by $150?
19. Make a graph showing the spending and tax revenue
of your state government for as many years as you can
find (use the government of your home country if you
are not from the United States). What trends do you
notice? What spending categories make up the largest
share of the state budget? What are the largest sources
of revenue?

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