Ch 13 &amp; 14 Problem Set (ECON E-202; Introduction to Macroeconomics; Wenyi Shen)

# Ch 13 & 14 Problem Set (ECON E-202; Introduction to Macroeconomics; Wenyi Shen)

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Unformatted text preview: Chapter 13 & 14 Problem Set Price Level LRAQ20'1'] LRAS2012 SRAS20‘I 'l SRAS2012 14.7 "44-2 #02012 (with policy) r #432012 '40 {without policy} AD201 1 Real GDPtthillionS) 12.4 12.8 i2(9 lfthe government does not take any policy actions, what will be the values ofreal GDP and the price level in 2012? If the MPC is 0.8, 110w much will government purchases have to be increased to bring real GDP to its potential level in 2012? (Assume that the multiplier value takes into account the impact of a rising price level on the multiplier effect) lfthe MPC is 0.8, how much will taxes have to be cut to bring real GDP to its potential level in 2012? (Again, assume that the multiplier value takes into account the impact ofa rising price level) If the government takes no policy action, what will be the inﬂation rate in 2012‘? If the government uses ﬁscal policy to keep real GDP at its potential level, what will be the inflation rate in 2012‘? a. Is it likely that the economy grew faster or slower during the ﬁscal 1997 than the CBO had expected? Explain your reasoning. Faster. An economy growing faster than expected Would generate more tax revenues and less government spending on transfer payments. This is the effect of automatic stabilizer. b. Suppose the Congress and the president were committed to balancing the budget each year, Does what happened during the 1997 provide any insight into the difﬁculties they might run into in trying to baIance the budget every year? Yes, because it shows that it is difficult to forecast the performance of the economy well enough to accurately forecast the state of the federal budget. Chapter 13 & 14 Problem Set—Answer If the government does not take any policy actions, what will be the values of real GDP and the price level in 2012? The value of real GDP will be \$12.8 trillion and the price level will be 144.2. If the MPC is 0.8, how much will government purchases have to be increased to bring real GDP to its potential level in 2012‘? (Assume that the multiplier value takes into account the impact ofa rising price level on the multiplier effect) government purchases multiplier=]!(1-0.8)=5 \$100 billion Government purchases will need to be increased by 5 = \$20 billion if the price level is constant. Consider the impact ofa rising price level, government spending need to increase more than \$20 billion. IFthe MPC is 0.8, how much will taxes have to be cut to bring real GDP to its potential level in 2012? (Again, assume that the multiplier value takes into account the impact ofa rising price level) tax multiplier=—0.8I(I-0.8)=—4 00 b'l ' taxes will need to be change by El—l—hﬂ = -\$25 billion(dccrease) if the price level is constant. Consider the impact ofa rising price level, tax need to decrease more than \$25 billion. If the government takes no poiicy action, what will be the inﬂation rate in 2012? If the government uses fiscal policy to keep real GDP at its potential level, what will be the inﬂation rate in 2012? Without expansionary ﬁscal policy, the inﬂation rate in 2012 = [144.2 — 140.0 x100 = 3.0% 140.0 With expansionary ﬁscal policy, the inﬂation rate in 2012 = [147.0 — 140.0 >< 100 = 5.0% 140.0 2. The federal government calculates its budget on a ﬁscal year that begins each year on October 1 and ends on the following September 30. At the beginning of the 1997 ﬁscal year, the Congressional Budget Ofﬁce (CBO) forecast that the federal budget deﬁcit would be \$127.7 billion. The actual budget deﬁcit for ﬁscal 1997 was only \$21.9 billion. Federal expenditures were \$30.3 billion less than the CBO had forecast, and federal revenue was \$35.5 billion more than the CBO had forecast. a. Is it likely that the economy grew faster or slower during the ﬁscal 1997 than the CBO had expected? Explain your reasoning. 1). Suppose the Congress and the president were committed to balancing the budget each year, Does what happened during the 1997r provide any insight into the difﬁculties they might run into in trying to balance the budget every year? ...
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## This note was uploaded on 12/21/2011 for the course ECON 202 taught by Professor Sonte during the Fall '11 term at UCSB.

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Ch 13 & 14 Problem Set (ECON E-202; Introduction to Macroeconomics; Wenyi Shen)

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