Problems 13-1 In 2023, government spending is $5.0 trillion and taxes collected are $4.1 trillion. What is the federal government deficit in that year? 13-2 Suppose that the estimates of federal budget receipts, federal budget spending, and GDP are as shown below, all expressed in billions of dollars. Calculate the implied estimates of the federal budget deficit as a percentage of GDP for each year. Year Federal Budget Receipts Federal Budget Spending GDP 2023 4, 132.0 5,008.8 24,925.2 2024 4,305.2 5, 199.1 25,947.1 2025 4,447.3 5,407.1 27,010.9 2026 4,603.0 5,644.9 28, 145.4 13-3 It may be argued that the effects of a higher public debt are the same as the effects of a higher deficit. Why? 13-4 What happens to the net public debt if the federal government operates next year with the following: a. A budget deficit? b. A balanced budget? c. A budget surplus? 13-5 What is the relationship between the gross public debt and the net public debt?13-6 Explain how each of the following will affect the net public debt, other things being equal. a. Previously, the government operated with a balanced budget, but recently there has been a sudden increase in federal tax collections. b. The goverment had been operating with a small annual budget deficit until three hurricanes hit the Atlantic coast, and now government spending has risen substantially. c. The gross federal debt and the financial assets held by the government increase by the same amount. 13-7 Explain in your own words why there is likely to be a relationship between federal budget deficits and Canadian international trade deficits. 13-8 Suppose that the share of Canadian GDP going to domestic consumption remains constant. Initially, the federal government was operating with a balanced budget, but this year it has increased its spending well above its collections of taxes and other sources of revenues. To fund its deficit spending, the government has issued bonds. So far, very few foreign residents have shown any apuog ey: burgeyound ul leevenu! a. What must happen to induce foreign residents to buy the bonds? b. If foreign residents desire to purchase the bonds, what is the most important source of dollars to buy them? 13-9 Suppose that the economy is experiencing the short-run equilibrium position depicted at point A in the diagram below. Then the government raises its spending and thereby runs a budget deficit in an effort to boost equilibrium real GDP to its long-run equilibrium level of $22 trillion (in base-year dollars). Explain the effects of an increase in the government deficit on equilibrium real GDP and the equilibrium price level. In addition, given that many taxes and government benefits vary with real GDP, discuss what change we might expect to see in the budget deficit as a result of the effects on equilibrium real GDP. LRAS SRAS 130 Price Level 120 AD 0 21 22 DAAl AND PAY VARD13-10 Suppose that the economy is experiencing the short-run equilibrium position depicted at point B in the diagram below. Explain the short-run effects of an increase in the government deficit on equilibrium real GDP and the equilibrium price level. What will be the long-run effects? LRAS SRAS Price Level 125 AD 0 22.5 Real GDP per Year ($ trillions) 13-11 To eliminate the deficit (and halt the growth of the net public debt), a politician suggests that "we should tax the rich." The politician makes a simple arithmetic calculation in which he applies a higher tax rate to the total income reported by "the rich" in a previous year. He says that the government could thereby solve the deficit problem by taxing "the rich." What is the major fallacy in such a claim? 13-12 Refer back to Problem 13-11. If the politician defines "the rich" as people with annual taxable incomes exceeding $1 million per year, what is another difficulty with the politician's reasoning, given that "the rich" rarely earn a combined taxable income exceeding $1 trillion, yet the federal deficit has regularly exceeded $1 trillion in recent years? 13-13 Say that in each of the past few years the federal government has regularly borrowed funds to pay for at least one-third of expenditures that tax revenues were insufficient to cover. Now the federal government decides to increase expenditures for transfers to people. What does this fact imply about how the goverment is paying for most of its discretionary expenditures? 13-14 A fraction of the funds borrowed by the federal government between 2008 and 2015 were used to fund public investments in a number of solar power companies that produced little output and halted operations. These businesses provided no repayments to the government. In what sense might this fraction of deficit spending arguably have imposed a "burden" on future generations? 13-15 The long-run effect of higher government budget deficits on the equilibrium annual flow of real GDP is zero. Who, therefore, benefits in the long run from higher goverment deficits