Monday, May 14, 2007

Chapter 12 Homework (Part 2)

7. Key Question
The full-employment budget measures what the Federal budget deficit or surplus would be with existing tax rates and government spending levels if the economy had achieved its full-employment level of GDP in each year. It allows economists to adjust the actualy Federal budget deficits and surpluses to eliminate the automatic changes in tax-revenues.
It can differ from the actual budget if there is economic expansion or recession.

On page 219, figure 12.3, GDP2 reflects a zero deficit or surplus of full-employment budget. To further the country's GDP, I would raise government spending. In terms of the graph, this would cause an upward shift in G.

10. Key Question
The political business cycle is when politicians use expansionary fiscal policy right before an election, and contractionary fiscal policy right after an election, to dampen excessiev aggregate demand.

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