Chapter 30, Problem 1FRQ

a)

To determine

Budget balance of Zeta

Explanation of Solution

The budget balance can be calculated as follows:

Budget balance = Tax revenues − Government purchases − Government transfers

Budget balance = 2000 − 1500 − 1000

= -500

Hence, the budget balance of zeta is negative 500.

b)

To determine

The current business cycle of Zeta.

Explanation of Solution

Since the real GDP of Zeta exceeds its potential GDP we can conclude that the nation is expansion.

c)

To determine

Whether the fiscal policy implemented by Zeta is correct or not.

Explanation of Solution

Since the country is evidencing a budget deficit while going through an expansion stage, we can conclude that they are not implementing an appropriate fiscal policy.

d)

To determine

Comparison of nation’s cyclically adjusted budget deficit and actual budget deficit

Explanation of Solution

Since tax collections should really be lower while government expenditure should be higher if real GDP equaled potential production, the cyclically adjusted budget deficit is greater than the actual budget deficit (which in this case they are not)