1. What happens to the following variables during an expansion?

a. unemployment compensation

b. welfare payments

c. income tax receipts

d. government budget deficits (surplus)

2. Suppose the government decides to increase taxes by $30 billion in order to increase Social Security benefits by the same amount. How will this combined tax-transfer policy affect aggregate demand at current prices?

3. If the AD shortfall is $800 billion and the MPC is 0.8,

a) How large is the desired fiscal stimulus?

b) How large an income tax cut is needed?

c) Alternatively, how much more government spending would achieve the target?

4. If the AD excess is $400 billion and the MPC is 0.9,

a) How much fiscal restraint is desired?

b) By how much do income taxes have to be increased to get that restraint?

5. From the perspective of someone using aggregate-demand and aggregate supply analysis, what is the impact of a tax cut when the economy is operating above full employment. Is this a wise policy? Why or why not?

6. Explain the difference between our federal government's deficit and debt.

7. What would happen to the budget deficit if the:

a) GDP growth rate jumped from 1 percent to 3 percent?

b) inflation increased by 2 percentage points?

8. Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $10 billion while raising only $8 billion worth of taxes.

a) What will be the government's deficit?

b) If the government finances the deficit by issuing bonds, what amount of bonds will it issue?

c) At a 10 percent rate of interest, how much interest will the government pay each year? d) If this same budget deficit occurs for a second year, what would the national debt become? And at a 10 percent rate of interest, now how much interest would have to be paid by the government each year?

9. According to your textbook, what percent of U.S. debt do foreigners hold? If the interest rate on U.S. Treasury Debt is 3 percent, how much do foreigners collect each year from the U.S. Treasury? (Assume total debt of $13 trillion.)

10. Can government spending that causes crowding out be detrimental to long-run economic growth? Explain.