HW 9 Solution - Econ 201 HW 9 51 1 Government tax revenue...

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Econ 201 HW 9 51 1. Government tax revenue is $500,000,000. It’s spending is $575,000,000. Is the government running a surplus, a balanced budget, or a deficit? If it is not running a balanced budget, how large is the imbalance? (2) We find tax revenue – spending. This is $500,000,000 - $575,000,000 = -$75,000,000 This is the deficit. 2. Assume the numbers in #1 refer to an economy at full employment. The following year, the economy enters a recession and the unemployment rises to 8%. Tax revenue falls to $450,000,000. Spending increases to $650,000,000. Find the structural deficit and the cyclical deficit. (2) The budget deficit = the structural deficit + cyclical deficit In this case, the budget deficit = 450,000,000 – 650,000,000 = -200,000,000 If the deficit in #1 is when the economy is at full employment, then $75,000,000 is the structural deficit. We can set up the following: 200,000,000 = 75,000,000 + cyclical deficit 125,000,000 = cyclical deficit 3. Find the Debt to GDP ratio for the U. S. for 2015. Debt can be found here: GDP can be found here: You can use table 1.1.5 to find GDP. Make sure you convert this number to dollars. (1) 4. Offer one reason why the spending multiplier might be less than 1. If the spending multiplier is less than 1 and the government increases spending, will real GDP increase? What is the problem with increased government spending if the multiplier is less than 1? (2) The spending multiplier is equal to 1/MPS. If the multiplier is less than 1, the MPS must be greater than 1. This implies not only that people are saving all of the additional income they earn, but also that the increases income is somehow getting people to reduce their previous spending. This may happen as a result of the crowding out effect, Ricardian equivalence, etc.
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5. If an economy is in recession and the spending multiplier is less than 1, should the government use expansionary fiscal policy? Explain. (There is no right or wrong answer here. I’m looking at the explanation.) (2) This is an opinion question, but I expect your answer to specifically address the possibility of the multiplier being less than 1. This implies that every dollar spent will produce less than $1 of income. One could argue that spending under these circumstances would be inefficient. It is also
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