ECN 204 Lecture Notes - Lecture 6: National Debt Of The United States, Government Debt, Aggregate Demand

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2 Apr 2017

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Annual amount of which government revenues exceed government expenditures. Annual amount by which government expenditures exceed taxes. Accumulation of all past deficits and surpluses. Combined government spending increase and tax reductions. Government needs to consider the multiplier in order to decide the government spending. Therefore if they need 20 billion they need only billion (5x4=20) C = 5 billio(cid:374), t (cid:373)ust be equal to di (disposable income = c+s) Tax redu(cid:272)tio(cid:374) (cid:373)ust (cid:271)e greater tha(cid:374) c (cid:894)(cid:272)ha(cid:374)ge i(cid:374) gover(cid:374)(cid:373)e(cid:374)t expe(cid:374)diture(cid:895) Fiscal policy and the ad - as model. If inflation, increase taxes (decrease disposable income, decrease consumption) If recession, then decrease taxes ( increase disposable income, increase consumption) Stabilizer will automatically restrain economic expansion and cushion economic contraction. Reduction in spending are desirable when the economy is developing inflationary pressures. Increases in spending are desirable when the economy. More progressive the tax system, the greater the economy"s built in stability. Evalutation how expansionary or contractionary fiscal policy is determined.

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You hear on the nightly news that the president has vowed to decrease the nation's debt. Both the government and private citizens will have to buckle down and learn to do without, he says.

In order to reduce its debt, a nation must:

A.	run lower deficits.
B.	decrease tax rates.
C.	run lower surpluses.
D.	increase in government spending.

Debt reduction will result in:

A.	more public works projects, higher transfer payments, and more money available for households to spend.
B.	fewer public works projects, higher transfer payments, and more money available for households to spend.
C.	more public works projects, lower transfer payments, and less money available for households to spend.
D.	fewer public works projects, lower transfer payments, and less money available for households to spend.

A friend of yours looks at the state of the U.S. debt in 2011 and tells you, Since the debt is so high, we must be running an incredibly large deficit every year. Your friend's analysis is:

A.	not valid, because the debt is always changing even when deficits are the same.
B.	not valid, because the debt can be high even when the deficit for an individual year is small.
C.	valid, because the debt is always changing even when deficits are the same.
D.	valid, because the public debt is the sum of all deficits and surpluses run by the government over time and can be high even when the deficit for an individual year is small.

Assume that the government in some nations intended to respond to low employment via fiscal policy.

a. What type of policy would this require?

A.	A contractionary fiscal policy designed to decrease the aggregate demand curve.
B.	An expansionary fiscal policy designed to decrease the aggregate demand curve.
C.	An expansionary fiscal policy designed to increase the aggregate demand curve.
D.	A contractionary fiscal policy designed to increase the aggregate demand curve.

b. Assume that this policy ended up having an undesirable outcome. How could this happen in terms of formulation and implementation lags?

A.	This could happen if the implementation lag exceeded the formulation lag.
B.	This could happen if the formulation lag exceeded the implementation lag.
C.	This could happen if the formulation lag and the implementation lag exceeded the expansion.
D.	This could happen if the formulation lag and the implementation lag exceeded the recession.

Econo Nation started 2008 with no national budget debt or surplus. By the end of 2008, it had a budget surplus of $286 million; in 2009, it had a budget deficit of $-425 million; in 2010, it had a budget surplus of $100 million, and the amount of its budget deficit or surplus in 2011 is unknown. If at the end of 2011 Econo Nation's national debt totalled $52 million, determine the deficit or surplus in 2011.

Instructions: Enter your answer as a whole number and include a negative sign if there is a deficit.

Period	Deficit (-) or surplus (+)
Beginning of 2008	$0
End of 2008	$286 million
2009	$-425 million
2010	$100 million
End of 2011	_______ million

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The Modified Keynesian Model

Y = C + I + G + X â IM â¦ equilibrium condition in a 4-sector model where:

C = 150 + 0.9DI â¦ consumption function

I = 50 â¦ autonomous investment

G = 100 â¦ autonomous government spending

X = 200 â¦ autonomous exports

IM = 100 â¦ autonomous imports

And also:

DI = Y â T + Tr T = 0 â¦ autonomous taxes

Tr = 0 â¦ autonomous transfer payments

YF = 5000 â¦ full-employment Y

1. Solve for the equilibrium level of real output/income (Y*) in this economy.

2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?

3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.

4. What is the value of the MPC? â¦ the value of the MPS?

5. Calculate the âoversimplifiedâ expenditure multiplier.

6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?

7. (Refer to question â6â.) How much is the gap equal to?

8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?

9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question â6â. How much would taxes need to fall to achieve the goal of full-employment?

10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?

11. Suppose the national debt equaled $6000 before the tax cut (refer to question â9â). What would be the value of the national debt after this policy action?

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1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?

Answer

	a.	The aggregate demand curve will shift to the right.
	b.	The economy will always approach potential GDP.
	c.	The marginal propensity to consume will increase.
	d.	The average price level will increase.
	e.	The aggregate demand curve will shift to the left.

2. If the government wants to close a GDP gap, it can:

Answer

	a.	lower government spending on social security.
	b.	adopt contractionary fiscal policies to control inflation.
	c.	increase its budget deficit.
	d.	repay its borrowings.
	e.	raise both direct and indirect tax rates.

3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:

Answer

	a.	lowering average tax rates such that aggregate supply is increased.
	b.	increasing government spending such that aggregate expenditures are increased.
	c.	increasing transfer payments such that aggregate expenditures decline.
	d.	raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased.
	e.	decreasing government spending such that aggregate demand is reduced.

4. A drop in investment spending caused by increased government budget deficits is referred to as:

Answer

	a.	the multiplier effect.
	b.	crowding out.
	c.	an expansionary gap.
	d.	the paradox of thrift.
	e.	the Ricardian equivalence.

5. Discretionary fiscal policy is best defined as:

Answer

	a.	the deliberate manipulation of the money supply to expand the economy.
	b.	the deliberate change in tax laws and government spending to change equilibrium income.
	c.	the policy action taken by the Congress to reduce the federal budget deficit.
	d.	the arbitrary fluctuation in tax laws and budget requirements.
	e.	the automatic change in certain fiscal instruments when real GDP changes.

6. Which of the following can be considered as an automatic stabilizer in the economy?

Answer

	a.	Money supply
	b.	Disposable income
	c.	Real exchange rate
	d.	Real interest rate
	e.	Unemployment insurance

7. Which of the following is true about automatic stabilizers?

Answer

	a.	When income rises, automatic stabilizers increase/boost spending.
	b.	Automatic stabilizers are a part of discretionary fiscal policy.
	c.	An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations.
	d.	Any kind of trade policy adopted by the government will be considered as an automatic stabilizer.
	e.	The interest rate is an example of an automatic stabilizer.

8. Increased budget deficits

Answer

	a.	can cause interest rates to increase and hence decrease net exports
	b.	have no effect on net exports
	c.	can cause interest rates to decrease and hence increase net exports
	d.	never impose additional interest costs on the government

9. The Ricadian Equivalence implies that when financing additional government expenditures

Answer

	a.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way.
	b.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will increase either way.
	c.	increasing borrowing is the best option
	d.	increasing current taxes is the best option

10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.

Answer

	a.	right; decrease; increase
	b.	right; decrease; decrease
	c.	left; decrease; decrease
	d.	left; increase; increase
	e.	right; increase; increase

11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?

Answer

	a.	A decrease of $35
	b.	An increase of $105
	c.	An increase of $35
	d.	A decrease of $105
	e.	A decrease of $15

12.12. The term fiscal policy refers to

Answer

	a.	the adjustment of the GDP for inflation.
	b.	the purchase and sale of U.S. government securities to regulate the money supply.
	c.	the use of government spending and taxation to influence the level of economic growth and inflation.
	d.	the use of fines to penalize unfair business practices.
	e.	a policy action by Congress to overrule unpopular budget cuts by the president.

13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will

Answer

	a.	raise the price level and leave real GDP unchanged.
	b.	raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
	c.	raise both real GDP and the price level by a multiple of the initial spending increase.
	d.	have no effect on real GDP or on the price level, because all private investment will be crowded out.
	e.	lower real GDP by an amount equal to the spending increase and reduce inflation.

14. Which of the following is not a means to finance government spending?

Answer

	a.	Government subsidies
	b.	Government debt
	c.	Capital gains taxes
	d.	Personal income taxes
	e.	Money creation

15. An automatic stabilizer is

Answer

	a.	a change in government spending aimed at achieving a policy goal.
	b.	an element of fiscal policy that automatically changes in value as real GDP changes.
	c.	an element of monetary policy that automatically changes in value as real GDP changes.
	d.	a decrease in tax rates as the economy moves into a recession.
	e.	a deliberate change in taxation aimed at increasing real GDP.

16. Budget deficits tend to grow during recessions because

Answer

	a.	real GDP growth is zero, which causes neither tax receipts nor government expenditures to grow.
	b.	real GDP growth is positive, which reduces both tax receipts and transfer payments.
	c.	real GDP growth is negative, which reduces transfer payments in relation to tax receipts.
	d.	real GDP growth is negative, which reduces tax receipts in relation to government expenditures.
	e.	real GDP growth is positive, which increases tax receipts in relation to government expenditures.

ECN 204 Lecture Notes - Lecture 6: National Debt Of The United States, Government Debt, Aggregate Demand

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