Ch. 17 Problem Set:

Question 1: Definition

• Budget deficit – when the federal government spends more money than it receives in taxes in a given year.
• Budget surplus – when the government receives more money in taxes than it spends in a year.
• A balanced budget – is when government spending and taxes are equal.

Remember that if government spending > tax revenue –> Budget Deficit

Government spending Budget Surplus

Government spending = tax revenue –> Balanced Budget

Question 2 and 3: Each year is a deficit. Accumulation of years is debt.

• Calculate if you have a deficit or surplus
• then add or subtract it to the debt

Question 3: – Gov’t spending  + tax revenues = deficit or surplus

• then add to current level of debt.

Question 4: Look at the Tax rate column : does it gradually increase or decrease as you move to the next tax bracket level

• Proportional or Flat taxes –  Flat percentage of all wages earned
• Progressive Taxes – Tax rates increase as a household’s income increases
• Regressive Taxes – People with higher incomes pay a smaller share of their income tax

Question 5: Look at the tax rate column–> and determine which tax bracket level the income falls in and that is your marginal tax rate

Question 6: Choose the correct graph corresponding to the question

Question 7: Look at the intersection between Aggregate Demand (AD) and Short-Run Aggregate Supply (SRAS). Is it to the right or left of the Long-Run Aggregate Supply Curve (LRAS/ The line that is vertical)

• If the intersection of AD and SRAS is to the left of the LRAS, then it is a recessionary gap
• If the intersection of AD and SRAS is to the right of the LRAS, then it is an inflationary gap

Question 8: Look at the intersection between Aggregate Demand (AD) and Short-Run Aggregate Supply (SRAS). Is it to the right or left of the Long-Run Aggregate Supply Curve (LRAS/ The line that is vertical)

• We want to bring that AD and SRAS intersection closer to the LRAS

Question 9:Use this formula: Change in Y = Multiplier * Change in G ( gov’t spending)

• refer to graph to determine the potential and actual GDP price level –> that is your change in Y
• set that equal to your multiplier which is given  * Change in G
• solve for G
• Ex: 900-300 = (3Multiplier)(Change in G)
• 600 = (3Multiplier)(Change in G) –> divide both sides by the multiplier
• 200 = Change in G (example answer)

For question 9: You will be using the formula : (Change in Y) = ( Multiplier) (Change in G)

• You will need to solve for G
• First, look at the graph below as an example and look at the hint for the formula
• To find change in Y, you want to make the difference between the 2 price levels
  • 1st find the AD (blue line) and SRAS ( red line) price level where it intersects: It is 900
  • 2nd find where the AD and LRAS price level: it is 400
  • What is the difference? 900-400=500 = Change in Y
• Your multiplier is given to you in the problem which is 6. Plug the numbers into your equation and solve
• 500 = 6 (Change in G) –> solve for –> which means divide both sides by 6
• 500/6 = Change in G
• Change in G = 83.333 ß is your answer
• Now apply what you did here to your problem set and do the same for problem 11

For question 10:

• First, look at the graph below as an example
• The intersection where the AD (blue line) and the SRAS (red line) is the short-run equilibrium of GDP. What is the Price level at that intersection? It is 800
• The intersection where the AD (blue line) and LRAS (black line) is the GDP at full employment. What is the price level at that intersection? It is 700
• The question is asking how big is the recessionary gap? We know that it’s a recessionary gap, bc the AD and SRAS is to the left of the LRAS (black line)
  • To solve this question : take 800-700 = 100.
  • Your answer is 100 for the gap.
  • So now you can apply what you solved here to your problem set.
  • Again look for the difference between the GDP at the full level of employment and the SR-Equilibrium level of GDP

Question 11:Use the same equation as 9.

For this assignment, download the worksheet that is listed above.  Save the document to your computer.  Answer all of the questions completely.  Here are some options for submitting the completed document:

1. Print out the document.  Complete the work by hand and take a picture of the completed assignment.  Make sure the picture is clear and is of high quality so it can be easily read.  Submit the picture(s) to the assignment.
2. Print out the document.  Complete the work by hand and scan the pages.  Submit the scans to the assignment.
3. Type directly onto the document.  Save the document as a new file and upload the new file.

Show as much work as you can for the calculations.  Partial credit will be awarded when applicable.  You will be graded on the accuracy and completeness of your answers.