AllChapter5problems

# AllChapter5problems - Answers to Problems in Textbook 1 a...

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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.

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Chapter 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 fiscal-monetary 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.
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AllChapter5problems - Answers to Problems in Textbook 1 a...

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