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ANSWERS, SOLUTIONS, AND EXERCISES
PROBLEM SET
1. a. If government purchases rise by $7.5 billion and the MPC is 0.95, then the
2. a. If Government purchases rise by $30 billion and taxes fall by $30 billion and
MPC=0.8, the change in real GDP is:
or
b. If government spending and taxes both rise by $30 billion, the change in real GDP
c. If government spending and taxes both fall by $30 billion, the change in real GDP
3. Information contained in the question:
1990 2000
3
a.
1990 2000
b.
262
263 Instructor’s Manual for Economics: Principles and Applications, 6e
1990 2000
c.
1990 2000
4. If households saved all of the tax cut, there would be no increase in spending. The
5. You should calculate the real national debt for year 1 and year 4, and use these
calculations to explain that the real debt actually fell during your presidency (from
6. a.
Househol
d Income Tax per Household Total Tax
b.
Househol
d Income Tax per Household Total Tax
c. Government spending = 480,000 zips
d.
Househol
d Income Tax per Household Total Tax
Chapter 24 Fiscal Policy 264
Government spending = 480,000 zips
e. During recessions the government deficit increases due to declining income taxes,
and during booms it falls. Thus, even when government spending remains the
7. Country A is in trouble. Between 1999 and 2000, the debt grew by 100% but GDP
only grew by 10%; from 2000 to 2001, the debt grew again by 50%, but GDP grew
8. a. If the economy is operating at potential output, then the budget deficit would be
b. If real GDP is 5 percent below potential output, then net taxes will fall by 25
9.
Year
123456 7
year)
a. The debt ratio rises from year 1 through Year 4.
b. The debt burden rises from year 1 through year 3.
10.
Table 3 Revised
265 Instructor’s Manual for Economics: Principles and Applications, 6e
Nominal GDP Nominal
Na'onal Debt
Debt ratio Interest
Payments (10%
interest)
Debt
Burden
a. Higher interest rates increase the amount of interest that must be paid on the debt
b. In this example, the debt burden is higher with 10% interest rates than with 8%
11.
Table 4 Revised
Nominal GDP Nominal
Na'onal Debt
Debt ratio Interest Payments
(10% interest)
Debt
Burden
b. In this example, the debt ratio is increasing. The debt burden also rises.
MORE CHALLENGING
12. (1) Δ GDP = Δ G × (1/(1-MPC)) = $X /(1-MPC)
EXPERIENTIAL EXERCISE
Chapter 24 Fiscal Policy 266
Find data for the most recent year's budget deficit or surplus, and the projected budget deficit
or surplus for the next year (use either calendar years or fiscal years, which end in
September). A good place to start is the Office of Management and Budgets budget review, at
http://www.whitehouse.gov/omb/budget/index.html . Determine the change in the projected
