Macroeconomics – 8. Budget Deficits and the Public Debt

  1. Write the formula for a budget deficit.
  2. What is the difference between government debt and a budget deficit or surplus?
  3. Why do economists like to compare the debt to the size of the nations’ gross domestic product or GOP?
  4. What is the difference between the real and nominal budget deficit?
  5. Suppose the nominal deficit is $100 billion, inflation is 10 percent, and total debt is $5 trillion. What is the real deficit?
  6. What is the difference between the structural and the cyclical or passive deficit?
  7. Define automatic stabilizers and provide three examples.
  8. Suppose the gross domestic product is $10 trillion, the budget deficit is $100 billion, and the unemployment rate is seven percent, or one percent above the assumed full employment rate. Suppose further that the marginal tax rate is 30%. Which portion of the $100 billion deficit is structural and which portion is cyclical?
  9. What is the central idea behind rational expectations theory?
  10. What is the central policy implication of rational expectations theory?
  11. Why is it important to estimating correctly the natural rate of unemployment important?
  12. What are the three main ways of financing a budget deficit?
  13. Why does the balanced budget multiplier have a value of one?
  14. Use the Keynesian model to illustrate crowding out.
  15. What is the primary problem with the “print money” option of financing the deficit?
  16. Summarize the major arguments, pro and con in the budget deficit debate.
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