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Gordon_Answers11e_ch05 - 48 Gordon Macroeconomics Eleventh...

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48 Gordon • Macroeconomics, Eleventh Edition A new Section 5-7 has been added in the 11th edition. It is lifted from Chapter 6, Section 2 in the 10th edition. However, Gordon has rewritten the majority of this section. A Table 5-1 has been added. He has changed the Equation 5.11 (6.7 from the 10th edition) and in this context added the concept “net revaluations” and explained that concept in detail. He has also added new Subsections 5-7d and 5-7e in this chapter. Figure 5-9 (Figure 6-1 in the 10th edition) has been added. He has updated the IP Box in the conclusion section with newer data and figures and changed the last time period of the table. The Summary has been changed. Answers to Questions in Textbook 1. No definitive conclusion on the government’s fiscal policy can be made with the information given in the question because the actual deficit can change due to either a change in fiscal policy or a change in the level of output. To determine whether fiscal policy is expansionary or restrictive, the level of the natural employment deficit must be examined. 2. The cyclical deficit occurs because of a business cycle. It is the difference between the actual budget deficit and the natural employment deficit . The structural deficit is the deficit that remains after the effect of the business cycle is separated out. A structural deficit is the deficit that exists when the economy is at the natural level of output; it is identical to the natural employment deficit . The actual budget deficit is the deficit that exists given the actual tax receipts and the actual level of government spending. It is the sum of the natural employment deficit and the cyclical deficit . 3. Government spending and taxes rise over time as the economy’s output increases. Therefore, to make legitimate comparisons of budget deficits or surpluses at different points in time, it is important to express them in terms of the size of the economy’s output. Finally, because output can rise and fall relative to the economy’s productive capacity, expressing the budget deficits or surpluses as percents of natural real GDP allows for the best comparisons. 4. Both statements indicate confusion between a cyclical deficit increase and a structural one. The increase in the budget deficit is a cyclical increase resulting from the recession. It indicates neither that policymakers have implemented expansionary fiscal policies nor that they have been irresponsible. Enactment of discretionary restrictive fiscal policies could plunge the economy even deeper into recession and result in an even larger budget deficit rather than a smaller one. 5. a. The cut in the tax rate reduces the amount of tax revenues at natural real GDP. Therefore, it increases the size of that natural employment deficit. On the other hand, since the tax cut results in a rise in real GDP relative to natural real GDP, it reduces the size of the cyclical deficit.
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