Suppose the following statistics characterize the financial health of the hypothetical economy Spendia at the end of 2017: • Gross domestic product (GDP) is equal to $100 billion. • The national debt is equal to $130 billion. • The government has a budget deficit of $7 billion. • The debt ceiling in Spendia is set at $148 billion. The following calculations help you see how the ratio of debt to GDP changes from one year to the next. Complete the first row of the following table by computing the ratio of national debt to GDP. Suppose that nominal GDP remains at $100 billion in 2018, and again the government runs a budget deficit of $7 billion. For simplicity, assume the nterest rate on the national debt is 0%, and no payments are being made to reduce the debt. Calculate national debt and the debt-to-GDP ratio in 2018. Enter these values in the second row of the following table. GDP National Debt Year (Billions of dollars) (Billions of dollars) Ratio of National Debt to GDP 2017 100 130 2018 100 low that the government's national debt has been growing for several years, investors have become worried that the government might default on its lebt-that is, might refuse to pay back the investors. As a result, the investors are now willing to lend to the government only if they receive an terest rate of 20%. f the government runs a budget deficit of $10 billion in 2019, the national debt will increase by S rue or False: At the end of 2019, the government of Spendia will exceed the legal limit on how much it can borrow. True billion. False

Suppose that the government allocates $1 billion for new roads. It also raises taxes by $1 billion to keep the deficit from growing. The absolute value of the government purchase multiplier is 3.33 and that of the tax multiplier is 2.33. What is the effect on equilibrium GDP? GDP does not change. ● GDP increases by $ 2.33 billion. GDP increases by $3.33 billion ⒸGDP increases by $1 billion.

TOPUC: The federal budget

Question 2: Fill in the blanks. The three different approaches to measuring the GDP are the expenditure approach, the            approach, and the                approach. The expenditure approach aggregates the spending by the four sectors of the economy: (a) the household sector, (b) the              sector, (c) the              sector, and (d) the foreign sector, to yield the total GDP. The largest spending in Canada’s aggregate GDP comes from the                sector. When using the income approach, the first step is to calculate the total national income by adding employee compensation, proprietor’s income,                       , net interest, and rental income. There are six categories of economic exchanges that are omitted from GDP calculations. One such category is government transfer payments (like unemployment insurance payment), because it represents transfers of income without new production. Another category is                 , because because they are unpaid and not…