Answers to Problems in Textbook
1.
a.
The amount of taxes at natural real GDP equals .2(11,600)
=
2,320.
b. There is a natural employment deficit because taxes (2,320) are less than government
spending (2,610). The amount of the deficit equals 2,320

2,610
=

290. The natural
employment deficit as a percentage of natural real GDP equals

290/11,600
=

.025
=

2.5 percent.
c. For the natural employment deficit to equal one percent of natural real GDP, the natural
employment deficit must equal

.01(11,600)
=

116 billion.
d. For fiscal policymakers to achieve their goal,
T

G
=

116, and since
T
=
2,320 at natural real
GDP, given no change in the tax rate, 2,320

G
=

116 or
G
=
2,436. Therefore, to achieve
their goal, they must reduce government spending to 2,436 or equivalently, cut spending by
174 billion.
e. For fiscal policymakers to achieve their goal,
T

G
=

116 and since
G
=
2,610, given no change
in government spending,
t
(11,600)

2,610
=

116, or
t
(11,600)
=
2,494. Therefore, the tax rate,
t
, must equal 2,494/11,600
=
.215 for fiscal policymakers to achieve their goal, given no change
in government spending.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentChapter 5
The Government Budget, Foreign Borrowing, and the Twin Deficits
45
f. Fiscal policymakers must either raise the tax rate or cut government spending in order to
accomplish their goal of reducing the natural employment deficit to one percent of GDP. Either
action has a contractionary effect on real income. Therefore, monetary policymakers would have
to take action to lower the interest rate in order to offset the contractionary effect of fiscal policy.
g. The fiscalmonetary policy mix described in Parts c through f reduces the interest rate. Since
private saving falls as the interest rate declines, national saving increases by an amount that is
less than the decline in the natural employment deficit.
2.
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '11
 Staff
 Deficit, Public Finance, budget deficit, national saving, Natural Real GDP, Investment Demand

Click to edit the document details