The government's budget surplus in Macroland has risen consistently over the past five years. Two government policy makers disagree as to why this has happened. One argues that a rising budget surplus indicates a growing economy; the other argues that it shows that the government is using contractionary fiscal policy. Can you determine which policy maker is correct? If not, why not?

"An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied." Is this statement true or false? Explain.

In which of the following cases does the size of the government's debt and the size of the budget deficit indicate potential problems for the economy?

The government's debt is relatively low, but the government is running a large budget deficit as it builds a high-speed rail system to connect the major cities of the nation.

Most macroeconomists believe it is a good thing that taxes act as automatic stabilizers and lower the size of the multiplier. However, a smaller multiplier means that the change in government purchases of goods and services, government transfers, or taxes necessary to close an inflationary or recessionary gap is larger. How can you explain this apparent inconsistency?

An article in The New York Times described a successful marketing campaign by the French champagne industry. The article noted that “many executives felt giddy about the stratospheric champagne prices. But they also feared that such sharp price increases would cause demand to decline, which would then cause prices to plunge.” What mistake are the executives making in their analysis of the situation? Illustrate your answer with a graph.

Which of the following is an example of an automatic stabilizer? A. the Works Progress Administration established during the Great Depression B. lump- sum taxes C. a balanced budget requirement for the government D. sales taxes E. economic stimulus checks from the government

In each of the following cases, either a recessionary or inflationary gap exists. Assume that the aggregate supply curve is horizontal, so that the change in real GDP arising from a shift of the aggregate demand curve equals the size of the shift of the curve. Calculate both the change in government purchases of goods and services, and, alternatively, the change in government transfers necessary to close the gap.

Real GDP equals $100 billion, potential output equals$160 billion, and the marginal propensity to consume is 0.75

You are an economic adviser to a candidate for national office. She asks you for a summary of the economic consequences of a balanced-budget rule for the federal government and for your recommendation on whether she should support such a rule. How do you respond?

The Federal Reserve expands the money supply by 5 percent. a. Use the theory of liquidity preference to illustrate in a graph the impact of this policy on the interest rate. b. Use the model of aggregate demand and aggregate supply to illustrate the impact of this change in the interest rate on output and the price level in the short run. c. When the economy makes the transition from its short-run equilibrium to its long-run equilibrium, what will happen to the price level? d. How will this change in the price level affect the demand for money and the equilibrium interest rate? e. Is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?

Which of the following is an example of an automatic stabilizer? When the economy goes into a recession,

a. more people become eligible for unemployment insurance benefits.

b. stock prices decline, particularly for firms in cyclical industries.

c. Congress begins hearings about a possible stimulus package.

d. the Fed changes its target for the federal funds rate.

The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the economy. A press release by the Board on April 29, 2008 stared: "The Conference Board Consumer Confidence Index, which had declined sharply in March, fell further in April. The Index now stands at 62.3(1985=100), down from 65.9 in March."

As an economist, is this news encouraging for economic growth?

In 2012, the policy makers of the economy of Eastlandia projected the debt-GDP ratio and the ratio of the budget deficit to GDP for the economy for the next 10 years under different scenarios for growth in the government's deficit. Real GDP is currently $\$ 1,000$ billion per year and is expected to grow by $3 \%$ per year, the public debt is $\$ 300$ billion at the beginning of the year, and the deficit is $\$ 30$ billion in 2012 .

a. Complete the accompanying table to show the debtGDP ratio and the ratio of the budget deficit to GDP for the economy if the government's budget deficit remains constant at $\$ 30$ billion over the next 10 years. (Remember that the government's debt will grow by the previous year's deficit.)

b. Redo the table to show the debt-GDP ratio and the ratio of the budget deficit to GDP for the economy if the government's budget deficit grows by $3 \%$ per year over the next 10 years.

c. Redo the table again to show the debt-GDP ratio and the ratio of the budget deficit to GDP for the economy if the government's budget deficit grows by $20 \%$ per year over the next 10 years.

d. What happens to the debt-GDP ratio and the ratio of the budget deficit to GDP for the economy over time under the three different scenarios?

Suppose that in Wageland all workers sign annual wage contracts each year on January 1. No matter what happens to prices of final goods and services during the year, all workers earn the wage specified in their annual contract. This year, prices of final goods and services fall unexpectedly after the contracts are signed. Answer the following questions using a diagram and assume that the economy starts at potential output.

In the short run, how will the quantity of aggregate output supplied respond to the fall in prices?

The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the economy. A press release by the Board on December 27, 2016, stated: "The Conference Board Consumer Confidence Index ${ }^8$, which had increased considerably in November, posted another gain in December. The Index now stands at $113.7(1985=100)$, up from $109.4$ in November."

a. As an economist, is this news encouraging for economic growth?

b. Explain your answer to part a with the help of the $A D-A S$ model. Draw a typical diagram showing two equilibrium points $\left(E_1\right)$ and $\left(E_2\right)$. Label the vertical axis "Aggregate price level" and the horizontal axis "Real GDP." Assume that all other major macroeconomic factors remain unchanged.

c. How should the government respond to this news if the economy is below potential output? If it is above potential output?