A Can the Country Continue to Afford Such Deficits Indefinitely
Chapter 31
Deficits and Debt: The Austerity Debate - all with Video Answers
Problem 1
"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. $\quad(L O 31-1)$
Problem 2
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? $(L O 31-1)$
Problem 3
Suppose a country's debt is $\$ 630$ billion before Year 1 . Using the information below (in billions of dollars), fill in the blanks for its budget balance and debt for the following years: $\quad(\operatorname{LO} 31-1)$
Problem 4
What are the two ways government can finance a budget deficit? $(L O 31-1)$
Problem 5
If the structural budget deficit is $\$ 100$ billion and the actual deficit is $\$ 300$ billion, what is the size of the cyclical deficit? $(L O 31-1)$
Problem 6
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 cyclical deficit? $(L O 31-1)$
Problem 7
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. (LO31-1)
a. What is the size of the cyclical 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 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 cyclical or a structural deficit?
Problem 8
Calculate the real deficit or surplus in the following cases: $(L O 31-2)$
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.
Problem 9
Inflation is 20 percent. Debt is $\$ 2$ trillion. The nominal deficit is $\$ 300$ billion. What is the real deficit? $(L O 31-2)$
Problem 10
How would your answer to question 9 differ if you knew that expected inflation was 15 percent? $(L O 31-2)$
Problem 11
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. $(L O 31-2)$
a. Calculate debt service payments.
b. Calculate the nominal deficit.
c. Calculate the real deficit.
Problem 12
List three ways in which individual debt differs from government debt. $\quad(L O 31-3)$
Problem 13
If all of the government's debt were internal, would financing that debt make the nation poorer? $(L O 31-3)$
Problem 14
Assume that a country's real growth is 2 percent per year, while its real deficit is rising 5 percent a year. $\quad(L O 31-3)$
a. Can the country continue to afford such deficits indefinitely?
b. What problems might it face in the future?
Problem 15
Why is who holds the debt an important factor when comparing debt-to-GDP ratios among countries? $(L O 31-4)$
Problem 16
Why is debt service an important measure of whether debt is a problem? $(L O 31-4)$
Problem 17
How can a debt that is too high lead to an even higher debt? $\quad(L O 31-4)$
Problem 18
What might keep the Fed from buying up more bonds if the debt gets too high? $(L O 31-4)$
Source: https://www.numerade.com/books/chapter/deficits-and-debt-the-austerity-debate/
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