Assignment

1. Solve the following problem:

Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion. Assuming this economy is closed (GDP=C+I+G), calculate consumption, government purchases, national savings, and investment. [Hint: See pages 162-163 in your textbook.]

Show your work so that we can explain what went wrong if you miss any aspect of this.

2. Mankiw explains the role the federal government budgetary outcome (surplus or deficit) in determining the long run rate of Investment spending and thus economic growth. Let's take a look at the actual data for the period 1996 to the present to see what has actually happened. For this data, see:

http://www.gpoaccess.gov/indicators/11sepbro.html

Once at this site, 1) select 2015; 2) then select "January"; 3) then select "Federal Finance"; and then select the pdf version of "Federal Receipts, Outlays, and Debt."

You should now be on page 32 where the table and graph "Federal Receipts, Outlays, and Debt" are shown. [The graphs at the top of this referenced site show the broad trends (from 2007) rather well. Please note that time in this data is shown in federal fiscal years, and the federal fiscal year begins on October 1 and ends on September 30th. We are now in FY 2015.]
Looking at this data, comment on:

2A. Between FY 1997 and the present, in which fiscal years (if any) has the federal government run a budget surplus? In which fiscal years has it run a budget deficit? [Use the "Total" columns on the left-hand side of the page to answer this question. Note that the "Total" budget surplus or deficit is the combined result of the "On-Budget" and the "Off-Budget" results for each period.]

2B. What is the current situation for the total federal budget? If the budget outcome has changed recently, explain briefly why this change has occurred.

2C. If you were asked to predict the total federal budget outcome for next four years (FY 2015- FY 2018), what would you predict? Explain. [Might the current political deadlock in Washington make a difference in your projection of the overall budget outcome? Might the sluggishness of the current recovery, the economic slowdown in the Euro Zone, and our emerging fight with ISIS in the Middle East have a significant impact on the budgetary outcome?]

[For items # 2B and # 2C, you might find it useful (and interesting) to look also at the next table (page 33) titled "Federal Receipts by Source and Outlays by Function." For this page go to: http://www.gpoaccess.gov/indicators/11sepbro.html

Once at this site, 1) select 2015; 2) then select "January"; 3) then select "Federal Finance"; and then select the pdf version of "Federal Receipts by Source and Outlays by Function."

[Note: Economic Indicators is a monthly publication of the President's Council of Economic Advisors. There are roughly 40 pages of detailed tables in each issue of "Economic Indicators" including three separate tables on federal government finance. If you need to find current macroeconomic data, this is usually a good place to start looking.]