Macro Econ chapter 15

Government budget

-pan for spending and raising funds for the government -income or revenues: sources of funds -spending or "outlays": uses of funds Government outlays= gov spending + transfer payments

Allocate the following expense items of the U.S government into the mandatory, discretionary, and interest categories of the government budget

1. $40 earned by Ms.Smith on a $10,000 U.S. Treasury bond a: interest 2. Food stamps received by the Jones family a: mandatory 3. Purchase of F-16 fighter planes by the U.S government a: discretionary 4. An increase in the salary of economists at the Labor Department a: discretionary 5. Government aid to help victims of drought in east Africa a: discretionary Explanation: 1. This is the payment to the bond holder. Thus, it is part of interest payments. 2. Food stamps are an assistance program for the poor. The program is mandated by existing laws and, hence, belongs to mandatory outlays. 3. Defense spending such as the purchase of F-16 fighter planes can be altered when the government is setting its annual budget. Thus, defense spending belongs to discretionary spending. 4. The salaries of economists at the Labor Deparment can be altered in the annual budget and, therefore, are discretionary. 5. Foreign aid is a discretionary spending item because the government can choose how much to spend on such aid each year.

Outlays and revenue

Gov spending vs. transfer payments -spending: gov buys goods or services -transfer: money is moved from one group to another Gov revenues -generally raised through taxes -other small fees as well (national park admittance)

Major categories of national gov spending

Mandatory outlays -determine by ongoing programs -social security - medicare -cannot be altered during the budget process -altering requires long-run changes to existing laws Discretionary outlays -can be altered when the annual budget is set -bridges -roads -payments to gov workers -defense spending

The mayor of your hometown has said she will request that the federal government extend a nearby interstate highway so that it passes by the city, stimulating economic growth. However, the federal government is reluctant to do this because it is currently running a budget deficit.

Q: If the interstate was extended at a cost of $35 million, what would be the impact of this outlay on the federal government's budget? a: an increase in discretionary spending and, if no other changes are made, an increase in the government's deficit -an increase in the governments debt

Suppose that marginal income tax rates are as follows: Income level: $0-$10,000 $10,000-$50,000 Greater than $50,000 Marginal tax rate: 10% 20% 35% Also suppose that the taxes for Social Security and Medicare together are 7.65%, and that they are applied to income up to $100,000.

Q: If your income is $123,000, what is your total income tax bill and how much will you have paid in Social Security and Medicare taxes? a: Total income tax: $34550 Social security and medicare taxes: $7650 Explanation: o solve for your total income tax bill, apply the marginal rates to the appropriate income ranges and then add them together:10% × $10,000 = $1,00020% × ($50,000 - $10,000) = $8,00035% × ($123,000 - $50,000) = $25,550Total income tax = $34,550.You calculate your Social Security and Medicare taxes by multiplying your taxable income (up to $100,000) by 7.65%. Because these taxes apply only to the first $100,000 of your income, the result is:7.65% × $100,000 = $7,650.

The government announced that last year it spent $179 million in mandatory outlays and $416 million in discretionary outlays. It received $612 million in revenue.

Q: Last year the government has a budget____ of $____ million a: surplus, $17 Explanation: To calculate total outlays, add the mandatory outlays of $179 million to $416 million in discretionary outlays. Compare these total outlays of $595 million to the revenue of $612 million. This budget has a surplus of $17 million because revenues are greater than outlays.

Social Security and Medicare are programs that are requiring an ever-increasing share of the federal budget. There are a number of demographic reasons why this statement is true.

Q: Which of the following statements are true? a: A record number of individuals are expected to retire over the next two decades. -Life expectancy has been steadily increasing.

Which of the following statements are true about deficits versus debt?

a: -the sum of all deficits equals the debt -If, in year 4, the deficit is $2 million and in year 3 the debt is $50 million, the debt in year 4 is $52 million. Explanation: A debt is the sum total of accumulated budget deficits. If, in year 3, the debt is $50 million and in year 4 the deficit is $2 million, then adding year 4's deficit to year 3's debt will yield a year 4 debt of $52 million.

Which of the following changes would represent an austerity measure?

a: -a decrease in the number of public workers, to reduce government expenses -a decrease in pension promises to public workers, to reduce government expenses Explanation: An austerity measure is a change in the budget because of a need to reduce public debt levels. Reducing the number of public workers and reducing public-worker pensions in an attempt to reduce debt levels are austerity measures because both reduce public expenditures to reduce public debt.

Which of the following is included in government outlays?

a: -bigger defense budget -food stamps -research into technologies to fight global warming -the interest payment on government 10-year notes -increased benefits Non government outlays -higher tax revenue

You have been hired as an economic advisor for a politician running for national office. At a recent campaign event, the politician said that corporations are paying too much in taxes and are funding most of the federal government's operations. When you speak to the politician after the event, what would you say?

a: "We have a great deal of work to do. On the news tonight, I predict there will be an expert correcting you and questioning why anyone would vote for you. Individuals, through income tax and social insurance taxes, provide the bulk of the federal government's revenue."

Based on the information provided, which statement is true about debt situations of the two countries, Athens and Sparta? Athens: (billions of $) Total debt: 8000 Nominal GDP: 20000 Sparta: (billions of $) Total debt: 12000 Nominal GDP: 40000

a: Athens has more severe dept problems than Sparta Explanation: When comparing debt situations across countries or time, dollar values can be misleading because population and size of the economy matter in terms of the severity of the debt. Thus, to control for both population and economic growth, we consider the debt-to-GDP ratio instead. Debt-to-GDP ratio for Athens is:$8000 ÷ $20000 = 0.40 or 40.00% Debt-to-GDP ratio for Sparta is:$12000 ÷ $40000 = 0.30 or 30.00% Thus, controlling for the size of the economy, we can see that Athens has a higher debt to GDP ratio than Sparta and is thus faring worse.

Which of the following is the defining feature of a progressive income tax system?

a: The marginal tax rate is low at low income levels and gets progressively higher as income levels increase. Explanation: A progressive income tax system is a tax system in which the marginal tax rate starts low at low income levels and progressively increases as the income level increases. In 2014, the U.S. marginal tax rate started at 10% for incomes in the range $0-$9,075, and increased to 39.6% for incomes greater than $406,750.

Which of the following is true regarding the U.S. government's budget since the 1960s?

a: The percentage of mandatory spending in total outlays has increased while that of discretionary spending has decreased.

Which of these statements is true about the U.S. national debt?

a: Two-thirds of the debt is held domestically.

You hear a politician say that she would like to lower the retirement age for receiving Social Security. What would be the impact of such a change over the course of one year?

a: an increase in mandatory spending and, if no other changes are made, an increase in the government's budget deficit

In the country of Econoville, tax revenue collected by the government this year is $32 million, and government outlays are $25 million. This country currently has a

a: budget surplus of $7 million Explanation: When government outlays exceed revenues, there is a budget deficit. In Econoville, outlays are $25 million and revenues are $32 million, so the surplus is $25 million - $32 million, or $7 million.

When the United States decides to go to war, the Congress and the president have to fund the war. The money that is spent to fight the war represents what type of government spending?

a: discretionary outlay Explanation: Discretionary spending includes spending that can be altered when the government is setting its annual budget. Defense spending is set in the annual budget, even during a war, so it represents a discretionary outlay.

If the U.S government raised the retirement age from 67 to 70, how would this change affect government entitlement programs like Social Security and Medicare?

a: it would decrease the government's burden of the entitlement programs Explanation: In general, people are healthier and living longer today than they were in the past. If people were to work three years longer, then they would pay in three more years into the entitlement programs while drawing benefits for three fewer years.Hence, an increase in the retirement age would increase tax revenue while decreasing the mandatory outlays. The result would be a decrease in the government's overall burden of entitlement programs.

The government has a budget surplus when

a: tax revenue exceeds outlays