Chapter Questions
"Budget deficits should be avoided, even if the economy is below potential, because they reduce saving and lead to lower growth." Does this policy directive follow from the short-run or the long-run framework? Explain your answer. $\mathrm{LO} 1$
What are the two ways government can finance a budget deficit? LOI
Your income is $$\$ 40,000$$ per year; your expenditures are $$\$ 45,000$$. You spend $$\$ 10,000$$ of that $$\$ 45,000$$ for tuition. Is your budget in deficit or surplus? Why? LOI
Canada's debt was $$\$ 630$$ billion at the end of 2003 . Using the information below (in billions of Canadian dollars),fill in the blanks for Canada's budget balance and debt for the following years: $\mathrm{LO} 1$$$\begin{array}{lccc}\hline & \text { Revenues } & \text { Expenditures } & \text { Debt } \\\hline 2004 & \$ 203 & \$ 202 & \$ \\2005 & 215 & - & 626 \\2006 & 227 & 221 & - \\2007 & - & 230 & 619 \\2008 & 258 & 243 & - \\\hline\end{array}$$
If the structural budget deficit is $$\$ 100$$ billion and the actual deficit is $$\$ 300$$ billion, what is the size of the passive or cyclical deficit? $\mathrm{LO} 2$
If the actual budget deficit is $$\$ 100$$ billion, the economy is operating $$\$ 250$$ billion above its potential, and the marginal tax rate is 20 percent, what are the structural deficit and the passive deficit? LO2
Say the marginal tax rate is 30 percent and that government expenditures do not change with output. Say also that the economy is at potential output and that the deficit is $$\$ 200$$ billion.a. What is the size of the passive deficit?b. What is the size of the structural deficit?c. How would your answers to $a$ and $b$ change if the deficit were still $$\$ 200$$ billion but the output were $$\$ 200$$ billion below potential?d. How would your answers to $a$ and $b$ change if the deficit were still $$\$ 200$$ billion but output were $$\$ 100$$ billion above potential?e. Which is likely of more concern to policy makers: a passive or a structural deficit? LO2
Calculate the real deficit or surplus in the following cases:a. Inflation is 10 percent. Debt is $$\$ 3$$ trillion. Nominal deficit is $$\$ 220$$ billion.b. Inflation is 2 percent. Debt is $$\$ 1$$ trillion. Nominal deficit is $$\$ 50$$ billion.c. Inflation is -4 percent. (Price levels are falling.) Debt is $$\$ 500$$ billion. Nominal deficit is $$\$ 30$$ billion.d. Inflation is 3 percent. Debt is $$\$ 2$$ trillion. Nominal surplus is $$\$ 100$$ billion. LO3
Inflation is 20 percent. Debt is $$\$ 2$$ trillion. The nominal deficit is $$\$ 300$$ billion. What is the real deficit? LO3
How would your answer to question 9 differ if you knew that expected inflation was 15 percent? LO3
Assume a country's nominal GDP is $$\$ 600$$ billion, government expenditures less debt service are $$\$ 145$$ billion, and revenue is $$\$ 160$$ billion. The nominal debt is $$\$ 360$$ billion. Inflation is 3 percent and interest rates are 6 percent.a. Calculate debt service payments.b. Calculate the nominal deficit.c. Calculate the real deficit. $\mathrm{LO} 3$
List three ways in which individual debt differs from government debt. LO4
If all of the government's debe were internal, would financing that debt make the nation poorer? LO4
Why is debt service an important measure of whether debt is a problem? LO4
Assume that a country's real growth is 2 percent per year, while its real deficit is rising 5 percent a year.a. Can the country continue to afford such deficits indefinitely?b. What problems might it face in the future? LO4