Unit 5 DQ2: Fiscal Policy (version A)
1) If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.)
2) Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion. If the president and the Congress increased government purchases by $500 billion, what would be the result on the economy?
3) Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower. Using these estimates, what was the cyclically adjusted budget deficit or surplus for the year?
4) How could the existence of an unemployment insurance system or other transfer programs have reduced the severity of the Great Depression?