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The real deficit

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Chapter 2 # 4

Lawns produce no crops but occupy more land (25 million acres) in the U.S. than any single crop, such as corn. This means that the United States is operating inefficiently and hence is at a point inside the production possibility curve. Right?
If not, what does it mean?

Chapter 2 # 5

Groucho Marx is reported to have said, "The secret of success is honesty and fair dealing. If you can fake those, you've got it made." What would likely happen to society's production possibility curve if everyone could fake honesty? Why? (Hint: Remember that society's production possibility curve reflects more than just technical relationships.)

Chapter 30 # 3

The government has just increased taxes.
a) Demonstrate the effect on the price level and output in the standard model.
b) How would your answer to a differ if there were partial crowding out?
c) How would your answer to a differ if there were complete crowding out?

Chapter 31 # 4

Assume a country's nominal GDP is $600 billion, government expenditures less debt services are $145 billion, and revenue is $160 billion. The nominal debt is $360 billion. Inflation is 3 percent and interest rates are 6 percent.
a) Calculate debt service payments.
b) Calculate the nominal deficit.
c) Calculate the real deficit.

Please label answers with corresponding question.

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Solution Preview

Lawns produce no crops but occupy more land (25 million acres) in the U.S. than any single crop, such as corn. This means that the United States is operating inefficiently and hence is at a point inside the production possibility curve. Right?
If not, what does it mean?

No, this is not true. It is on the production possibility curve and the allocation reflects people's tastes for lots of lawns, technological advances in producing crops, and the globalization of agricultural markets. So U.S is operating efficiently. If it would be inside the production possibility frontier (PPF), it would reflect too many crops and not enough lawns.

Groucho Marx is reported to have said, "The secret of success is honesty and fair dealing. If you can fake those, you've got it made." What would likely happen to society's production possibility curve if everyone could fake honesty? Why? (Hint: Remember that society's production possibility curve reflects more than just technical relationships.)

If everyone could fake honesty e.g. in a ...

Solution Summary

The real deficit is assessed.

$2.19
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