Question

Chapter 8 Assignment                                                     2-22-2018

1. Solve the following problem:

Suppose GDP is $9 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion. Assuming this economy is closed (GDP=C+I+G), calculate consumption, government purchases, national savings, and investment. [Hint: See pages 165-166 in your textbook.]

Show your work so that we can explain what went wrong if you miss any aspect of this.

2. Mankiw explains the role the federal government budgetary outcome (surplus or deficit) in determining the long run rate of Investment spending and thus economic growth. Let's take a look at the actual data for the period 1997 to the present to see what has actually happened. For this data, see:

https://www.gpo.gov/fdsys/pkg/ECONI-2018-01/pdf/ECONI-2018-01-Pg32.pdf

Once at this site, 1) select 2018; 2) then select “January”; 3) then select “Federal Finance”; and then select the pdf version of “Federal Receipts, Outlays, and Debt.”

You should now be on page 32 where the table and graph "Federal Receipts, Outlays, and Debt" are shown. [The graphs at the top of this referenced site show the broad trends (from 2009) rather well. Please note that time in this data is shown in federal fiscal years, and the federal fiscal year begins on October 1 and ends on September 30^th. We are now in FY 2018.]

Looking at this data, comment on:

2A. Between FY 1999 and the present, in which fiscal years (if any) has the federal government run a budget surplus? In which fiscal years has it run a budget deficit? [Use the “Total” columns on the left-hand side of the page to answer this question. Note that the “Total” budget surplus or deficit is the combined result of the “On-Budget” and the “Off-Budget” results for each period.]

2B. What is the current situation for the total federal budget? If the budget outcome has changed recently, explain briefly why this change has occurred.

2C. If you were asked to predict the total federal budget outcome for next four years (FY 2018- FY 2021), what would you predict? Explain. [Might the presence of a new Administration in Washington (for example, the President’s commitment to a wall on our southern border with Mexico, a promised increase in military spending, a large tax reduction, and a $1.0 trillion increase in transportation infrastructure) make a difference in your projection of the overall budget outcome? Might the current state of the U.S. economy have a significant impact on the budgetary outcome?]

[For items # 2B and # 2C, you might find it useful (and interesting) to look also at the next table (page 33) titled "Federal Receipts and Outlays by Function." Here is the link to page 33:

https://www.gpo.gov/fdsys/pkg/ECONI-2018-01/pdf/ECONI-2018-01-Pg33.pdf

[Note: Economic Indicators is a monthly publication of the President's Council of Economic Advisors. There are roughly 40 pages of detailed tables in each issue of "Economic Indicators" including three separate tables on federal government finance. If you need to find current macroeconomic data, this is usually a good place to start looking.]

Answer 1

Given:

Private savings= $0.5 trillion

Public savings= $0.2 trillion

National savings = Public savings + private savings= 0.5 + 0.2= $0.7 trillion

National savings is the amount not spent by the government or an amount that is not consumed. This means it is the invested amount (I)

Now ,investment(I) = $0.7 trillion

To calculate government expenditure: Public savings= Tax revenue - Government spending

which gives--> 0.2= 1.5 - G

G(government spending)= 1.5 - 0.2 = $1.3 trillion

To calculate consumption expenditure: GDP (Y) = Consumption(C) + Investment(I) + Government spending (G)-----> 9= C + 0.7 + 1.3 ==> C= 9 - 0.7 - 1.3= $7 trillion

Government spending is $ 7 trillion

(2).

A. The Budget has run a surplus in the Fiscal Years 1999, 2000 and 2001 with surplus amount of $125.6 billion, $236.2 billion and $128.2 billion respectively ( as per the data). The government has faced a budget deficit during all the fiscal years starting from 2002 to 2018.

B. The current situation for the total federal budget is a deficit. The change in the current situation is because when compared to the last fiscal year 2017 the situation has changed with a decrease in the budget deficit amount. In the year 2017, the budget deficit amount was $665. 7 billion, while in 2018 it has decreased to $589.5 billion. This is because in the year 2018, there has been an overall increase in receipts or revenue as compared to 2017 by $ 200 billion. The outlay has increased in 2018 as well but the difference between the gap between receipts and outlay in 2018 has narrowed as compared to 2017.

C. Taking into account the policies of the new administration, which includes tax reduction, increased military spending, $ 1 trillion spending on transportation infrastructure, and building a new border wall would definitely mean an increase in deficit as the gap between receipts and outlay widens due to a higher increase in expenditure as compared to revenue the government gets. And a tax cut means lesser revenue for the government alongside huge expenditure. It can be predicted that for the next 4 years from 2018 to 2021 the government budget would be at a deficit as the time taken to cover the costs of the expenditure by means of return on expenditure would take long time. Especially as the expenses are capital expenditure.