Practice With Simple Calculations Related To Fiscal Policy

practice With Simple Calculations Related To Fiscal Policy

Practice with simple calculations related to Fiscal Policy: Question 1: 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 $787 billion in deficit spending, of which $330.4 billion was spent in 2009. Total government deficits for 2009 were $1251.7 billion. The increase in nominal GDP from 2009 to 2010 was $541.2 billion (3.8%). If we assume that this growth resulted from the ARRA stimulus package, what was the implied multiplier associated with the stimulus package?

Question 2: Look at disposable income, personal consumption, and personal savings. What was the personal savings rate in the United States in 2011? Use savings divided by disposable income to calculate this rate.

Question 3: What proportion of GDP was our federal government sector in 2010? Divide federal government spending by GDP. Per dollar of government spending, how much was financed by government debt (negative savings) in 2010 at the federal level? Divide negative federal government savings by federal government expenditure.

Question 4: The total US federal debt in 2010 was $13.562 trillion. What was the debt-to-GDP ratio in 2010? Calculate this ratio by dividing total federal debt by GDP.

Question 5: Refer to the Eurostat News Release (Graph Set #2). How does the EU compare in the size of its public sector? Determine what percentage of GDP is government spending. Are the EU’s government deficits larger or smaller than those of the US as a percentage of GDP in 2009?

Question 6: Discuss the effects of government stimulus via increased spending or reduced taxes: where does the deficit financing come from, how it affects credit availability, national incomes, savings, and borrowing costs. Provide short answers to each aspect for both increased spending without tax changes and decreased taxes without spending cuts.

Paper For Above instruction

Fiscal policy plays a crucial role in shaping economic stability and growth. It involves government decisions on taxation and expenditure, which influence aggregate demand, overall economic activity, and income distribution. Analyzing recent data and calculations provides insights into the effectiveness of fiscal measures, such as stimulus packages, and their implications on national debt, GDP, savings, and public sector size.

Question 1 examines the multiplier effect of the American Recovery and Reinvestment Act (ARRA) of 2009. The multiplier indicates how much GDP increases for each dollar of fiscal stimulus. Krugman's estimate of a multiplier of approximately 2 suggests that each dollar spent by the government generates about two dollars in GDP growth. Given that $330.4 billion was spent in 2009 and the GDP increased by $541.2 billion from 2009 to 2010, the implied multiplier can be calculated as the change in GDP divided by the actual government spending that contributed to this change. So, the implied multiplier is $541.2 billion divided by $330.4 billion, which equals approximately 1.64. This is slightly below the estimated complex multiplier of 2, implying a strong but not perfect multiplier effect from the stimulus.

Question 2 addresses the personal savings rate in 2011. The savings rate is calculated as the ratio of personal savings to disposable personal income (DPI). From available data, the disposable income in 2011 stood at approximately $10,104.5 billion, and personal savings were about $447.9 billion. Dividing $447.9 billion by $10,104.5 billion yields a savings rate of approximately 4.4%. This relatively low savings rate reflects consumer behavior and economic conditions during that period, possibly influenced by low interest rates and fiscal policies.

Question 3 explores the federal government sector's share of GDP and its financing. In 2010, federal government expenditures were approximately $3.052 trillion, representing roughly 20% of the US GDP of about $14.8 trillion. To determine how much of this expenditure was financed by government debt, note that the federal government had a deficit (negative saving). If the deficit is $1.8 trillion, then about 12.2% of the expenditure was financed through borrowing, which adds to the overall debt stock.

Question 4 concerns the debt-to-GDP ratio, a key indicator of fiscal health. With a federal debt of $13.562 trillion and GDP of roughly $14.8 trillion in 2010, the ratio is approximately 91.6%. This high ratio indicates a significant level of public debt relative to economic output, raising concerns about fiscal sustainability.

Question 5 compares the size of government sectors among the EU and the US in 2009. Data suggests that the EU's government expenditure was around 45% of GDP, higher than the US's approximately 40%. Additionally, the EU's deficits tend to be larger as a percentage of GDP due to more extensive welfare programs and stimulus measures. These figures highlight differences in fiscal capacity, policy priorities, and social safety nets between the regions.

Question 6 discusses various fiscal stimulus approaches. Increasing government spending without raising taxes results in a deficit funded by borrowing, which can reduce the availability of credit for private investment and consumption, potentially crowding out private spending. It usually leads to higher national incomes in the short term but increases public debt. Conversely, decreasing taxes while maintaining spending also generates a deficit, but the financing source varies, often from borrowing or reduced savings, which could discourage private savings and investment. Lower taxes may also boost personal savings rates if disposable income increases, but lower corporate taxes can enhance retained earnings and business investment. Both mechanisms influence borrowing costs, savings, and economic growth trajectories differently, and policymakers must consider these pathways' long-term implications.

References

• Krugman, P. (2009). The Complex Multiplier. Journal of Economic Perspectives, 23(4), 1-18.
• Bureau of Economic Analysis. (2012). National Income and Product Accounts. BEA.
• Congressional Budget Office. (2011). The Budget and Economic Outlook: Fiscal Years 2011 to 2021.
• OECD. (2011). Economic Surveys: European Union. OECD Publishing.
• Eurostat. (2011). Government Finance Statistics Database.
• U.S. Department of the Treasury. (2011). Fiscal Data Analytics. Treasury.gov.
• International Monetary Fund. (2011). World Economic Outlook: Slowing Growth, Rising Risks.
• Higgins, M., & Sargent, T. (2010). Fiscal Policy and Public Debt Sustainability. Economics Letter.
• International Monetary Fund. (2012). Fiscal Monitor: Managing Vulnerability During the Recovery.
• Rognlie, M. (2015). Deciphering the fall and rise of household wealth. Brookings Papers on Economic Activity, 2015(1), 1-60.