Question

1. The budget surplus is defined as taxes less transfers and government purchases, T − G, where T is net taxation (taxes less transfers) and G is government purchases. If the government has collected more than it has spent, the term T − G is positive and the budget is in surplus. If T − G < 0 then the budget is in deficit. Recall that T and G are flows (as is GDP). The budget deficit or surplus is measured in currency, e.g., dollars, and is often expressed as a percentage of Gross Domestic Product, (T − G)/Y × 100. Find FRED series for the U.S. Federal government budget surplus or deficit measured in (millions of) dollars and measured as a percent of GDP. Focus on the period since 1950.

(a) When was the most recent period of surplus?

(b) Under what circumstances (hint: shading) does GDP move towards deficit? What is a possible explanation of this relationship?

(c) Why is expressing the deficit as a percent of GDP a useful way to describe the deficit? Compare the currency and percent of GDP measures of the deficit for 1986 and 2004.

2. In the previous problem set, you solved for equilibrium for an economy with the following model C = 200 + 0.8DI (Consumption) I = 600 (Investment) Ginitial = 1000 (Government purchases) NX = 100 (Net Exports) Tinitial = 1000 (Taxes less Transfers)

(a) What is the equilibrium GDP? What is the budget surplus (deficit)?

(b) What is the effect on the equilibrium GDP and on the budget surplus (deficit) of the following alternative policies? (Complete the table.) Change in Policy Change Equilibrium GDP Budget Surplus (Deficit) (1) ∆G = +100 (2) ∆G = +100, ∆T = +100 (3) ∆T = −100

(c) What is the Government-Purchases Multiplier? What is the Balanced-Budget GovernmentPurchases Multiplier? What is the Tax Multiplier?

(d) Explain why G and T have different multipliers. 1

(e) A reduction in net taxation, option (3) above, could be carried out different ways, for example, increasing the Earned Income Tax Credit, a transfer to lower-income workers, or decreasing the marginal tax rate for higher-income households. Do you think the form of the reduction matters for its effect on equilibrium GDP?

Answer 1

Answer 1:

a. The most recent period of surplus in the United States has been posted in the month of January 2019 by the Treasury Department. Even though the surplus has fallen from the previous period, but January 2019 is the most recent period of surplus in the United States.

b. When the federal spending exceeds the federal expenditure, then the GDP moves towards deficit. It also happens when the level of value of imports of the nation exceed the value of exports of the nation. The rise in imports and increase in federal spending are the main reasons.

c. It is better to express the deficit as a percentage of GDP because it shows the relative measure of debt of the nation as a percentage of GDP of the nation. Earlier in 1986, it was not expressed as a percentage of GDP of the nation,