Gordon_Answers11e_ch12 - Chapter 12 The Government Budget,...

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Chapter 12 The Government Budget, the Public Debt, and Social Security 133 In Section 12-6, Figure 12-3 has been updated with new data, including the year 2006. The numerical example in this section has also been changed to include the additional time periods 1997–2001 and 2002–07. In the 11th edition, he has expanded the discussion about the new empirical examples for the periods 1997–2012 and 2002–07. In Subsection 12-6(b), “Categories of Spending,” he has updated Figure 12-4 with new data. Another subsection from the 10th edition, “Tax Revenue Explosion and Collapse, 1995–2005,” has been deleted. Sections 12-7, 12-8, and 12-9 remain almost unchanged with some minor tweaking of words and explanations. Figure 12-6, “Social Security Outlays, Revenues, and the Trust Fund,” has been updated to include the year 2085, instead of 2080 as in the 10th edition. The concluding Section 12-10 has gone through substantial changes as Gordon has enhanced the discussion about the solutions of the Federal budget deficit. ± Answers to Questions in Textbook 1. For stabilization, the policymaker’s goal is to control GDP so that Y / Y N = 1.0. Economic growth is concerned with the level of Y N . Assuming that stabilization policy is properly being conducted, then the economy will grow at the same rate that Y N is growing. Even though the IS-LM model treats either monetary or fiscal policy as equally well suited to stabilization policy, most economists now feel it is more appropriate to use monetary policy for short-term stabilization purposes. This leaves fiscal policy to be responsible for interest rates and, thus, indirectly responsible for economic growth. For economic growth, the level of capital per capita and the level of productivity are crucial. Policies designed to increase national saving (by increasing private saving and/or reducing the government deficit) make available the funds necessary to finance domestic investment without relying on foreign borrowing. 2. National saving is the sum of private saving by households and firms ( S ) and government saving, or the budget surplus ( T G ). The two main sources of economic growth of GDP per capita are the autonomous factor (discussed in Chapter 9) and the growth of capital (including education and training) per person. While it is true that the output-capital ratio, the depreciation rate, and the population growth rate affect the amount of capital per person, these are normally considered beyond the reach of policymakers. Thus, because the growth of capital per person is limited by the national saving rate and the willingness of foreigners to lend to the domestic economy, the former becomes an important policy tool in the attempt to increase economic growth. By increasing the amount of national saving, either by stimulating private saving or by increasing the government surplus (reducing the deficit), funds are made available for domestic private investment.
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This note was uploaded on 09/04/2010 for the course ECON 311 taught by Professor Gordon during the Spring '08 term at Northwestern.

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Gordon_Answers11e_ch12 - Chapter 12 The Government Budget,...

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