Principles of Macroeconomics homework

All of these questions should be answerable in one or a few sentences, or by a single calculation. They will require some thought on your part.

Question 1: First, some practice with simple calculations:

(a) According to Paul Krugman, the complex multiplier for the United States is about equal to 2. The American Recovery and Reinvestment Act of 2009 earmarked $787B in deficit spending, of which $330.4B was spent in 2009. (Total government deficits for 2009 were $1251.7B.) What was the increase in nominal GDP from 2009 to 2010, in billions of dollars? What is the implied multiplier for the deficit spending, by ARRA and in total?

(b) Look at disposable income, personal consumption and personal savings. What was the personal savings rate in the United States in 2011? (Use savings/disposable income, i.e. Average Propensity to Save.)

(c) What proportion of GDP was our federal government sector in 2010? (Divide federal government spending by GDP.) Per dollar of government spending, how much government spending was financed by government debt (negative savings) in 2010 at the federal level? (Divide negative federal government savings by federal government expenditure.)

(d) One popularly reported statistic for national economies is the Debt/GDP ratio. Total US Federal Debt in 2010 was $13.562 Trillion. What was our Debt/GDP ratio in 2010?

(e) Refer to Graph Set #2, the first picture entitled “Eurostat News Release.” How does the EU compare in the size of its public sector? Are its government deficits larger or smaller as a percentage of GDP in 2009?

Question 2: Tax reductions versus Deficit Spending. Between these two scenarios, can you answer each the following questions in one easy sentence?

· The government increases spending without increasing taxes, and a deficit is generated:

· Where does the money to finance the deficit come from?

· How does this affect affordable credit for Investment and Consumption?

· How does it affect National Incomes? Who is the government paying money to?

· The government decreases taxes without decreasing spending, and a deficit is generated:

· Where does the money to finance the deficit come from?

· How does this affect affordable credit for Investment and Consumption?

· How does it affect personal savings rates (if personal taxes are lower)? Business savings rates, i.e. retained earnings, if profits taxes are lowered?

Question 3: In Graph Set #2, on page two, look at the two pie charts showing the composition of US Debt. A third to a half of our debt is typically held by our Federal Reserve Bank and used to modulate our domestic money supply, as we’ll learn in the next Unit. That percentage fluctuates over the business cycle and it is at the low end of its spectrum in the pie chart shown for the third quarter of 2010. The Social Security Administration also buys Treasury bills because they are considered zero-risk, and low risk investment is appropriate for pension funds. Those buyers, plus miscellaneous intra-government reserve funds, pensions, banks, and individual or portfolio demand account for the rest of our domestically-owned debt.

Foreign countries own 20-30% % of our public debt. That proportion also fluctuates over the business cycle. The People’s Republic of China owns ~26% of our foreign-owned debt, or ~5-7% of our total public debt. We have a soft deal with China to refrain from insisting upon appreciation of the Yuan in exchange for their consistent demand for our Treasury bills.

In two or three sentences, what are the pros and cons of allowing a fairly large portion of our public debt to be owned by foreign governments? Would it ever be in China’s interest, for example, to suddenly dump US Treasury Bills, or are we so interdependent that this is not a risk? What do you think? When you prepare the common answers for submission to me, have the Recorder paste in here one comment from each member of the team.