PROBLEM SET 4
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
Debt GDP Debt GDP
Greece $138 $127 $488
$308
Ireland $34 $98 $104 $206
Portugal $62
$118 $190 $231
Spain $292 $586 $700
$1,420
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
10 100
2.5 -500
0.5 225
0.2 1000
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