MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 11.B, Problem 4TY
To determine
To describe:The equilibrium GDP and budget deficit.
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Fiscal Policy) Was fiscal policy effective when the U.S. economy was experiencing stagflation during the 1970s? Why or why not?
Questions:4. what is the government's current budget balance?billions of dollars
COURSE: MACROECONOMICS - FISCAL BALANCE
The government of country X, faced with a fiscal deficit, proposes an increase in public spending (G) but which further increases the country's public debt. To justify this action the president argues that they are seeking to boost the economy which will increase the country's GDP allowing to collect significantly more money than initially spent, finally improving the situation of the fiscal coffers. Is this statement correct? Does the government have knowledge of economics?
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- Text Problem 14-2 Question Help v Suppose that the Office of Management and Budget provides the accompanying estimates of federal budget receipts, federal budget spending, and GDP, all expressed in billions of dollars. Calculate the implied estimates of the federal budget deficit as a percentage of GDP for each year. (Enter each response as a percentage rounded to one decimal place. Do not include a plus or minus sign.) Federal Budget Receipts (2% growth) $2,329.8 Federal GDP Deficit as a % Budget Spending (5% growth) $2,682.6 Year (3% growth) $14,573.2 of GDP 2019 2020 2,376.4 2,816.7 15,010.4 % 2021 2,423.9 2,957.6 15.460.7 2022 2,472.4 3,105.4 15.924.5arrow_forward(Use for a and b)Suppose the interest on the debt was $700 billion. If interest is paid domestically, 90% will be spent domestically (the remainder is spent on foreign goods). If interest is paid to the foreign sector, only 10% is spent here (the remainder is spent in foreign countries). Every dollar collected in taxes to pay the interest causes domestic spending to fall 90 cents. The spending multiplier is 2. a) What is the net impact on GDP if all interest is paid domestically? b) What is the net impact on GDP if 20% of the interest is paid to the foreign sector? c)What are the desirable qualities of an efficient commodity money?arrow_forward(a) The hypothetical information in the following table shows what the situation will be in if the government of Singapore does not use fiscal policy: Year 2020 2021 Potential GDP S$20.1 billion Real GDP S$20.1 billion S$20.1 billion Price Level 110.0 S$20.75 billion 120.5 If the government of Singapore wants to keep its real GDP at its potential level in 2021, determine whether an expansionary or contractionary policy should be applied. i. ii. If government of Singapore is successful in keeping real GDP at its potential level in 2021, discuss what would happen to the level of real GDP, potential real GDP, inflation rate and unemployment rate. iii. Draw an aggregate demand and aggregate supply diagram to illustrate the impacts and changes in (ii). Be certain to include L.RAS curves for 2020 and 2021; SRAS curves for 2020 and 2021; AD curves for 2020 and 2021, with and without fiscal policy action; and equilibrium real GDP and the price level in 2021, with and without fiscal policy.arrow_forward
- An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap - inflationary or recessionary - will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output? How would your recommended fiscal policy shift the aggregate demandcurve? (Note: you do not need to draw anything).(a) A stock market boom increases the value of stocks held by households.(b) Firms come to believe that a recession in the near future is likely.(c) Anticipating the possibility of war, the government increases its purchases of military equipment.(d) The quantity of money in the economy declines and interest rates increase.arrow_forwardAnswer part D) Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $5 trillion while raising only $4 trillion worth of taxes. Instructions: Round your responses to one decimal place. a. What will be the government’s deficit? $____billion b. If the government finances the deficit by issuing bonds, what amount of bonds will it issue? $ ______ billion c. At a 3 percent rate of interest, how much interest will the government pay each year? $ ________ billion d. Add the interest payment to the government’s $5 trillion expenditures for the next year, and assume that tax revenues remain at $4 trillion. In the second year, compute the (i) Deficit. $ _________ billion (ii) Amount of new debt (bonds) issued to finance the deficit in the second year. $ ________ billion (iii) Total debt at the end of the second year. $ __________ billion (iv) Debt service requirement. $ _______billionarrow_forwardTopic: Fiscal Policy 1. A government collects $0.35 on every new dollar of income. Of the remaining $0.65 of disposable income, 20% is spent on imports, and 10% of the disposable income is saved. a. What is the marginal propensity to withdraw?b. How much of each new dollar of income is spent on domestic consumption?c. What is the spending multiplier in this economy?arrow_forward
- What must take place for the government to run deficits without any crowding out?arrow_forwardQuestion: "In a hypothetical economy, the government implements a fiscal stimulus package by increasing public spending on infrastructure projects. At the same time, there is a significant rise in consumer savings rates. Discuss the potential short-term and long- term impacts of these simultaneous events on the economy's aggregate demand, interest rates, and inflation. Consider how these changes might affect the effectiveness of the fiscal stimulus in achieving its intended economic objectives."arrow_forward(b). Suppose an economy is in recession with historically high unemployment. Using the Keynesian income-expenditure model, explain how an expansionary fiscal policy, involving a reduction in the marginal tax rate can reduce the unemployment rate. What does your explanation suggest about using the overall budget balance as an indicator of the stance of fiscal policy?arrow_forward
- Discuss the federal budget of the U.S government. should it always be balanced? when is the most appropriate time economically speaking for the federal budget be in a deficit? as a borrower how is the federal government different from the average U.S adult?arrow_forwardASAParrow_forward3 Fiscal Policy Keynes recommended that when aggregate demand slumped causing a recession or depression in output and a loss of jobs, the government should step in to increase spending. (a) Following the collapse of systemically important banks in 2008, were the G-20 group of countries right in early 2009 to coordinate their fiscal policies and increase government spending? How would you distinguish the effect of such a policy on (i) confidence (ii) cut back in investment spending by companies (iii) averting a global meltdown or severe economic depression such as the 1930Ac€?c? (b)If you were in 2015 for one day the Minister of Finance in Italy, facing deflation, falling output, rising unemployment and a growing national debt relative to income what kind of fiscal polices would you pursue? Would you increase or cut government expenditures or raise taxes? Would you recommend structural reform in the labour market to complement your policies? Would you suggest, as all three of the…arrow_forward
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