Problem Set complete solutions correct answers key

1) Explain the difference between a budget deficit and the national debt.

2) Use the Marginal Income Tax Rates in Figure 15.6 (see p. 463) to compute the following:

a. Tax due on taxable income of $100,000, $200,000, and $500,000.

b. Average tax rate on taxable income of $100,000, $200,000, and $500,000.

3) Greece, Ireland, Portugal, and Spain all went through national budget difficulties in recent years. Use the data below to answer questions regarding the sovereign debts of these nationals (All data comes from the OECD and is in billions of current US dollars.).

2000 2010 Greece  Ireland  Portugal

a. Compute the debt-to-GDP ratio for all four nations in both 2000 and 2010.

b. Compute the average yearly budget deficit for each of the nations over this period.

c. In your judgment, which of the four nations was in the worse fiscal shape in 2010?  Use your computations from above to justify your answer.

4) Explain the differences between typical demand side fiscal policy and supply side fiscal policy. For each of the following fiscal policy proposals, determine whether the primary focus is on aggregate demand or aggregate supply or both.

a. A $1000 per person tax reduction.

b. A 5% reduction in all tax rates.

c. Pell grants, which are government subsidies for college education.

d. Government sponsored prizes for new scientific discovery.

e. An increase in unemployment compensation.

5) Fill in the blanks in the table below. Assume that the MPC is constant over everyone in the economy.

MPC Spending multiplier Change in Government Spending Change in Income