Name ____________________________ ch.17 3.3@

Hint- standardized: at potential/full GDP

1. The economy begins at full GDP and the T2 tax rate.

2. Soon the economy dips into recession at GDP 400.

3. To stimulate the economy, the tax rate is reduced to T1.

4. The economy surges to 900.

5. To pay-off past debts, the tax rate is raised to T3.

actual standardized standardized standardized past/below

GDP * tax rate = T,T - G = surplus/deficit = T - G = surplus/deficit + T - T = expectations

1. 600 .12 72 -72 = 0 = 72 - 72 = 0 + 72 - 72 = 0

2. 400 .12 __ -72 = ___ = ___ - 72 = ____ + ___ - ___ = ___

3. 400 ___ __ -72 = ___ = ___ - 72 = ____ + ___ - ___ = ___

4. 900 __ __ -72 = ___ = ___ - 72 = ____ + ___ - ___ = ___

5. 900 __ __ -72 = ___ = ___ - 72 = ____ + ___ - ___ = ___

answers: -40 -24 -24 -24 -24 -16 0 0 .08 .08 .18 24 32 32 36 48 48 48 48 48 48 54 72 72 72 72 90 108 108 162 162

Ch.1? Public Budget Introduction & Homework Instructions If you had a tall, thin flag pole planted in your yard, when could you best judge how straight it is? This is difficult because New England always has wind. So ifyou complained abouta bias the wind could be blamed. This same problem hinders clear discussion about the pubic budgets in so far any as any deficit cannot be criticized during a recession. Conversely, no praise for responsible budgeting can be given so long as the economy is above expectations. Standardized or structural analysis sees through good and bad times by always assessing the economy at full GDP, 100% {and never below or beyond}. Below is an example graph. GDP is measured horizontally while public monies are measured vertically. Tax rates T13 are .15, .2 and .25 [800(5000, 1000f5000, 12503'5000}. Government spending is locked in at 800 and full GDP is located at 4000. If the economy is in recession at 3200 while applying the T1 tax rate, then: 32DDGDP'.15T1=512 revenue-8006:288 deficit However if GDP=full=4000*.15T1=E-40 revenue-800G=160 deficit So if the economy were at full, standardized {structural} alnalysis yields a smaller deficit of 540800=160. So this decit of 160 is eminent during normal times. However the recession makes the deficit 288 instead of 160 and 188 worse. So at 3200 recession GDP the poor economy generates a deficit, but of 128, not 288. So of the 288 total deficit, 128 is the fault of the economy, while most, 160, is the fault of the government. Conversely, if GDP booms at 5000, then: 50006DP".15T1=800 revenue-BOOszalance However, who balanced the budget at 5000 GDP, the economy or the government? Considering that standardized [structurally adjusted} revenues would have been 6-40 and under G spending of 800 then the conclusion is that the economy saved the public budget and not the government