macro exam 2.5
1. What is the difference between budget deficits and debt? What is the difference between gross debt and debt held by the public?
- Debt = all deficets accumulated - Deficit= T<G - Gross debt= what the government owes itself + the public debt - Debt held by public= government owes this to everyone outside the government
1. C = 100 + .75Yd, T=100, G=100, I=100. No foreign sector. If government spending increases by 50, how much would GDP change and what would new GDP be? If there is a tax cut of 50, how much would GDP change and what would new GDP be?
1. Change in GDP = Stimulus x spending multiplier = 50 x (1/1-0.75)= 200 2. +200 to be $1,100 3. Change in GDP= Tax cut x tax multiplier = -50 x (-0.75/0.25) = 150 4. +150 to be $1,050
1. Using an income-expenditure diagram, illustrate the effects of expansionary and contractionary fiscal policy on GDP.
1. Expansionary policy increases AD and GDP 2. Contractionary policy decreases AD and GDP
1. What are the three lags associated with fiscal policy? Explain. What were the four components of President Obama's Stimulus program in 2009?
1. Recognition lag: it takes time to recognize that we are in a recession 2. Administrative lag: it takes time for the stimulus to pass congress 3. Implementation lag; it takes time to spend the stimulus money Obama's Stimulus in 2009: 1) Infrastructure spending 2) Payroll tax cut 3) Extended unemployment benefits for 2 years 4) Aid to state governments
Explain the four proposals of Simpson-Bowles Commission.
1. Tax cuts for individual income and corporate income tax 2. Eliminate deductions and exemptions so more money is taxable 3. $1.7 trillion cut in discretionary spending 4. Move chained CPI, which will reduce inflation rate and social security paychecks to retirees
1. C = 100 + .75Yd, T=100, G=100, I=100. No foreign sector. Find autonomous consumption, MPC, MPS, equilibrium GDP, consumption and budget balance.
Consumption= 700 Government has a a balanced budget (T-G = 100-100=0) AS=AD Y= C+ I +G +X- IM Y= 100 + .75Yd + 100 + 100 Y-.75Yd= 300 Y = 900 C= 100 + .75Yd = 100 + .75 (900-100)= 700 MPC= .75 MPS= .25 Autonomous consumption = 100
1. Both mathematically and economically, explain why government spending creates more jobs than a tax cut?
Mathematically Spending multiplier: 1/1-MPC = 1/MPS Tax multiplier: -MPC/MPS MPC < 1, lets assume that MPC = 0.5 Then 1/(1-0.5) = 1/0.5= 2 is the spending multiplier Tax multiplier = -MPC/MPS = -0.5/0.5 = -1 Economically: Government spends all of the stimulus, but some of the tax cut does not get spent, T, therefore, stimulus through G is more effective then stimulus through T
How much is our national debt, deficit for FY 2020, and our current GDP?
National debt= $28 trillion Budget deficit= $4.5 trillion (t= 3.5 t, G = 8t, T-G= 3.5 -8 = -4.5) Current GDP = $21.6 t
1. Suppose that the DRI is -0.2, the current level of government spending is $1 trillion, the MPC is .75 and the government budget is balanced. What happens to the budget if the government increases spending to $1.5 trillion?
Primary effect= + 0.5 t increase in deficit Secondary effect= stimulus x spending multiplier x DRI= 0.5 x 1/ (1-0.75) x (-0.2)= -0.4t Total effect- primary effect + secondary effect = 0.5 -0.4 = 0.1 Deficit goes up by $0.1 t
1. What are the formulas for the spending multiplier and the tax multiplier? How are they used to calculate the change in GDP?
Spending multiplier = 1/ (1-MPC) = 1/ MPS Tax multiplier = -MPC/MPS Change in GDP= spending multiplier x stimulus Change in GDP= tax multiplier x tax cuts
1. What are the two types of deficits? Explain each one. What are the two types of government spending? Provide two examples for each one.
Structural= caused by long term trends ( baby boomers retering, and government will have to spend more on their social security and medicare Cyclical= caused by short term recessions ( covid 19 recession exploded our deficets) Entitlement spending= already promised spending(social security, medicare, medicad) Discretionary = optional ( wars, infrastructure, national parks)
