Prob 15 1a. Is Albernia facing a recessionary or inflationary gap?

Prob 15 1b. Which type of fiscal policy—expansionary or contractionary—would move the economy of Albernia to potential output, Y_P? What are some examples of such policies?

Prob 15 1c. Illustrate the macroeconomic situation in Albernia with a diagram after the successful fiscal policy has been implemented.

Prob 15 2a. Is Brittania facing a recessionary or inflationary gap?

Prob 15 2b. Which type of fiscal policy—expansionary or contractionary—would move the economy of Brittania to potential output, Y_P? What are some examples of such policies?

Prob 15 2c. Illustrate the macroeconomic situation in Brittania with a diagram after the successful fiscal policy has been implemented.

Prob 15 3a. A stock market boom increases the value of stocks held by households.

Prob 15 3b. Firms come to believe that a recession in the near future is likely.

Prob 15 3c.Anticipating the possibility of war, the government increases its purchases of military equipment.

Prob 15 3d. The quantity of money in the economy declines and interest rates increase.

Prob 15 4a. When government purchases decrease by $10 billion, what is the sum of the changes in real GDP after the 10 rounds?

Prob 15 4b. When the government reduces transfers by $10 billion, what is the sum of the changes in real GDP after the 10 rounds?

Prob 15 4c. Using the formula for the multiplier for changes in government purchases and for changes in transfers, calculate the total change in real GDP due to the $10 billion decrease in government purchases and the $10 billion reduction in transfers. What explains the difference? (Hint: The multiplier for government purchases of goods and services is 1/(1 − MPC). But since each $1 change in government transfers only leads to an initial change in real GDP of MPC × $1, the multiplier for government transfers is MPC/(1 − MPC).)

Prob 15 5a. Real GDP equals $100 billion, potential output equals $160 billion, and the marginal propensity to consume is 0.75.

Prob 15 5b. Real GDP equals $250 billion, potential output equals $200 billion, and the marginal propensity to consume is 0.5.

Prob 15 5c. Real GDP equals $180 billion, potential output equals $100 billion, and the marginal propensity to consume is 0.8.

Prob 15 7a. Suppose the government engages in increased purchases of goods and services. For each of the income groups in the table, what is the value of the multiplier—that is, what is the “bang for the buck” from each dollar the government spends on government purchases of goods and services in each income group?

Prob 15 7b. If the government needed to close a recessionary or inflationary gap, at which group should it primarily aim its fiscal policy of changes in government purchases of goods and services?

Prob 15 12a. The government’s debt is relatively low, but the government is running a large budget deficit as it builds a high-speed rail system to connect the major cities of the nation.

Prob 15 12b. The government’s debt is relatively high due to a recently ended deficit-financed war, but the government is now running only a small budget deficit.

Prob 15 12c. The government’s debt is relatively low, but the government is running a budget deficit to finance the interest payments on the debt.

Prob 15 13a. In 2003, Congress passed and President Bush signed the Medicare Modernization Act, which provides seniors and individuals with disabilities with a prescription drug benefit. Some of the benefits under this law took effect immediately, but others will not begin until sometime in the future.

Prob 15 13b. The age at which retired persons can receive full Social Security benefits is raised to age 70 for future retirees.

Prob 15 13c. Social Security benefits for future retirees are limited to those with low incomes.

Prob 15 13d. Because the cost of health care is increasing faster than the overall inflation rate, annual increases in Social Security benefits are increased by the annual increase in health care costs rather than the overall inflation rate.

Prob 15 14a. Complete the accompanying table to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit remains constant at $30 billion over the next 10 years. (Remember that the government’s debt will grow by the previous year’s deficit.)

Prob 15 14b. Redo the table to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit grows by 3% per year over the next 10 years.

Prob 15 14c. Redo the table again to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit grows by 20% per year over the next 10 years.

Prob 15 14d. What happens to the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy over time under the three different scenarios?

Prob 15 15a. Calculate the dollar cost of the annual interest on the government’s total debt assuming the interest rate and debt figures cited above.

Prob 15 15b. If the government operates on a balanced budget before interest payments are taken into account, at what rate must GDP grow in order for the debt–GDP ratio to remain unchanged?

Prob 15 15c. Calculate the total increase in national debt if the government incurs a deficit of $600 billion in 2012.

Prob 15 15d. At what rate would GDP have to grow in order for the debt–GDP ratio to remain unchanged when the deficit in 2012 is $600 billion?

Prob 15 15e. Why is the debt–GDP ratio the preferred measure of a country’s debt rather than the dollar value of the debt? Why is it important for a government to keep this number under control?

Prob 15 16a. What would be the appropriate fiscal policy response to this situation if the primary concern of the government was to maintain economic growth? Illustrate the effect of the policy on the equilibrium point and the aggregate price level using the diagram.

Prob 15 16b. What would be the appropriate fiscal policy response to this situation if the primary concern of the government was to maintain price stability? Illustrate the effect of the policy on the equilibrium point and the aggregate price level using the diagram.

Prob 15 16c. Discuss the effectiveness of the policies in parts a and b in fighting stagflation.