Problem Set1

Explain the difference between a budget deficit and the national debt. Use the Marginal Income Tax Rates in Figure 15.6 (see p. 463) to compute the following:

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

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

• 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.).

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

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

• 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.

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 $1000 per person tax reduction.
• A 5% reduction in all tax rates.
• Pell grants, which are government subsidies for college education.
• Government sponsored prizes for new scientific discovery.
• An increase in unemployment compensation.

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

Problem Set 2

What are the three functions of money? Which function is the defining characteristic? How is the discount rate different from the federal funds rate? Consider the balance sheet for the Wahoo bank as presented below.

Using a required reserve ratio of 10% and assuming that the bank keeps no excess reserves, write the changes to the balance sheet for each of the following scenarios:

• Bennett withdraws $200 from his checking account.
• Roland deposits $500 into his checking account.
• The Fed buys $1,000 in government securities from the bank.
• The Fed sells $1,500 in government securities to the bank.

4) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, which of the following scenarios produces a larger increase in the money supply, explain why.

a) Someone takes $1000 from under his or her mattress and deposits it into a checking account.

b) The Fed purchases $1,000 in government securities from a commercial bank.

5) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, what is the value of government securities the Fed must purchase if it wants to increase the money supply by $2 million?