Question 1

Answer the questions below:
(A)Suppose real GDP is less than potential GDP. Use a diagram with inflation on the vertical axis and percentage deviation of real GDP from potential GDP on the horizontal axis to show the short-run and long-run effects of a tax cut on the inflation rate and real GDP.
(B)Explain the tradeoff that has been made between unemployment and inflation.
(C)Suppose that, by the time the tax cut was in place, real GDP was again equal to potential GDP. Trace the short-run and long-run results on the same diagram.

Accepted Answer

The answer of Answer the questions below:
(A)Suppose real GDP is...

Question 2

Supporters of policy rules argue that automatic stabilizers are sufficient to reduce the effects of recessions and expansions and have the added advantage of avoiding the lags associated with discretionary policy. Explain, making reference to an aggregate demand inflation diagram, how the automatic stabilizers can influence real GDP and reduce the size of economic fluctuations.

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Question 3

Exhibit 26-1 
-According to Exhibit 26-1, when real GDP equals potential GDP,

Accepted Answer

The answer of Exhibit 26-1 
-According to Exhibit 26-1, when...

Question 4

What is the difference between a structural surplus and a cyclical surplus?

Accepted Answer

The answer of What is the difference between a structural...

Question 5

If real GDP is equal to potential GDP, the cyclical surplus is zero.

Accepted Answer

If real GDP is equal to potential GDP, it means the economy is operating at full capacity and there is no cyclical surplus or deficit.

Question 6

Suppose you have the following data on projected and actual figures for the U.S. budget for 2001 (in billions of dollars):  (A)What was the projected budget deficit? What was the actual budget deficit? Why did this happen?
(B)If the government debt was $3,530 billion at the end of 2000, what was the debt at the end of 2001?
(C)If GDP was $9,500 billion in 2001, what was the debt to GDP ratio? How does this compare to 1992's debt to GDP ratio?

Accepted Answer

The answer of Suppose you have the following data on...

Question 7

Why is there an inverse relationship between real GDP and the budget deficit?

Accepted Answer

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Question 8

Suppose that real GDP has been above potential GDP for some period of time. The government is considering a reduction in spending, and the Federal Reserve is trying to determine what is likely to happen to inflation. Trace out two possible scenarios that could occur as a result of decreased government spending. Be sure to comment on the long-run inflation level in each case.

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The answer of Suppose that real GDP has been above...

Question 9

Suppose the economy is in a boom and spending is thought to be $75 billion above potential GDP. Suppose Congress decides to reduce military spending in an attempt to stabilize the economy.
(A)Show the situation using the aggregate demand curve and the IA line.
(B)What happens to the inflation rate and the interest rate?
(C)According to the long-run growth model in Chapter 19 in your text, what effect would this policy have on economic growth?

Accepted Answer

The answer of Suppose the economy is in a boom...

Question 10

The table below shows the relationship between the deficit and real GDP. Draw a diagram depicting this relationship. Assume potential GDP is $6,900 billion.   
(A)What is the structural deficit?
(B)If real GDP is $7,050 billion, what is the cyclical deficit?
(C)If real GDP is $6,750 billion, what is the cyclical deficit?
(D)Show what will happen to the relationship between the deficit and real GDP if Medicare and federal prison incarceration costs increase without any corresponding increase in taxes or reduction in other programs.

Accepted Answer

The answer of The table below shows the relationship between...

Question 11

Suppose that the economy is in a recession as a result of a fall in investment spending and real GDP is below potential GDP.
(A)Illustrate this on an aggregate demand inflation diagram.
(B)When real GDP falls, what happens to tax revenue, government spending, and the budget balance?
(C)If a balanced budget amendment were in place, what would have to happen to government spending and/or taxes? Illustrate on the diagram.
(D)It is wise to allow the government to run a deficit during a recession and a surplus during an expansion. Please answer true or false and explain.

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Question 12

Suppose as a professional economist you are asked to take part in a debate about the wisdom of pursuing discretionary fiscal policy versus relying on automatic stabilizers. Outline some of the pros and cons for each side of the debate.

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The answer of Suppose as a professional economist you are...

Question 13

Suppose the budget deficit for a hypothetical economy fell from $107 billion in 1996 to $40 billion in 1997. 
(A)If the economy was undergoing an economic expansion for 1997, explain how this might account for at least part of the decrease in the budget deficit.
(B)Suppose real GDP equaled potential GDP in 1997 and was below potential GDP in 1996. Sketch a diagram that shows the responsiveness of the deficit to real GDP and also shows the structural deficit.

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Question 14

Real GDP and the budget deficit are negatively related.

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The answer of Real GDP and the budget deficit are...

Question 15

Exhibit 26-1 
-If real GDP equals C in Exhibit 26-1,

Accepted Answer

The answer of Exhibit 26-1 
-If real GDP equals C...

Question 16

The size of the budget surplus depends on the state of the economy.

Accepted Answer

The budget surplus is the result of the difference between government revenues and expenditures. The state of the economy affects both of these factors. In a strong economy, tax revenues tend to be higher, while government spending on things like unemployment benefits tends to be lower. In a weak economy, the opposite tends to be true, resulting in a smaller or even negative budget surplus.

Question 17

Suppose the government surplus is currently .5 percent of real GDP and the structural surplus is 1.5 percent.
(A)Is real GDP currently above or below potential GDP? Draw a diagram showing this situation.
(B)In your diagram, show the situation in which real GDP increases. What happens to the cyclical surplus?

Accepted Answer

The answer of Suppose the government surplus is currently .5...

Question 18

Suppose, for a hypothetical economy, potential GDP equals $9,200 billion. If real GDP equals $9,400 billion, then according to the table below, the cyclical surplus equals

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The answer of Suppose, for a hypothetical economy, potential GDP...

Question 19

For real and potential GDP to be equal, the budget surplus has to be zero.

Accepted Answer

The equality of real and potential GDP has no direct relationship with the budget surplus, and therefore, the budget surplus being zero does not have any direct impact on the equality of real and potential GDP.

Quiz 14: Fiscal Policy

Exhibit 26-1 -According to Exhibit 26-1, when real GDP equals potential GDP,