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 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?

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.

When the Federal Reserve purchases $50 million in U.S. Treasury bills, display the changes to the T-accounts for the Federal Reserve and for commercial banks. How much would deposits in commercial banks change if the public holds a fixed quantity of money (making sure that all loans result in an equal amount of deposits in the banking system), the minimum reserve ratio is$10 percent, and banks don't maintain any extra reserves? How much will the amount of money fluctuate? When the money supply changes by this amount, display the final changes to the T-account for commercial banks.

Indicate whether each of the following statements applies to microeconomics or macroeconomics:

The unemployment rate in the United States was $9.0 \%$ in April $2011$.

Indicate whether each of the following statements applies to microeconomics or macroeconomics:

The consumer price index rose by $1.6 \%$ in $2010$.

Over the past five years the United States has become the world's largest producer of natural gas. But gas producers have struggled to find methods to liquefy natural gas so that it can be exported across the Atlantic. Enter Cheniere Energy, a Houston-based natural gas company that has developed a natural gas export terminal located on the Sabine Pass leading into the Gulf of Mexico. The terminal will give U.S. companies access to markets all over the world.

a. Explain how the development of a natural gas export terminal will affect the market for natural gas in the United States.

b. Assuming natural gas prices are $3.00 per BTU, illustrate the effect of an export terminal on the demand for natural gas in the United States. Explain your findings.

c. Assuming natural gas prices in Europe are$\$6.00$ per BTU, draw a diagram to illustrate how the development of a natural gas terminal in the United States will affect supply and demand in the natural gas market for Europe. Explain your findings.

d. How will the exporting of natural gas from the United States to Europe affect consumers and producers in both places? Note that most of the natural gas in Europe originates from Russia's state-owned natural gas company, Gazprom.

Assume that Al, Beth, Carol, David, and Ed receive incomes of $500,$250, $125,$75, and $50, respectively. Construct and interpret a Lorenz curve for this five-person economy. What percentage of total income is received by the richest quintile and by the poorest quintile?

Assume that $\mathrm{Al}$, Beth, Carol, David, and Ed receive incomes of $\$ 500, \$ 250, \$ 125, \$ 75$, and $\$ 50$, respectively. Construct and interpret a Lorenz curve for this fiveperson cconomy. What percentages of total income are received by the richest quintile and by the poorest quintile?

Although the United States is one of the richest nations in the world, it is also the world's largest debtor nation. We often hear that the problem is the nation's low savings rate. Suppose policy makers attempt to rectify this by encouraging greater savings in the economy. What effect will their successful attempts have on real GDP?

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 Federal Reserve changes its target for the federal funds rate.

Before 1929, most economists thought the federal government should always have a balanced budget (government tax revenues = government spending). When the Great Depression began in 1929, government tax revenues fell rapidly. The federal government responded by cutting spending. What was the impact of this policy on the economy?

Unlike households, governments are often able to sustain large debts. For example, in 2011, the U.S. government's total debt reached $\$ 14.8$ trillion, approximately equal to $102.7 \%$ of GDP. At the time, according to the U.S. Treasury, the average interest rate paid by the government on its debt was $2.2 \%$. However, running budget deficits becomes hard when very large debts are outstanding.

a. Calculate the dollar cost of the annual interest on the government's total debt assuming the interest rate and debt figures cited above.

b. If the government operates on a balanced budget before interest payments are taken into account, at what rate must GDP grow in order for the debt-GDP ratio to remain unchanged?

c. Calculate the total increase in national debt if the government incurs a deficit of $\$ 600$ billion in 2012 .

d. At what rate would GDP have to grow in order for the debt-GDP ratio to remain unchanged when the deficit in 2012 is $\$ 600$ billion?

e. Why is the debt-GDP ratio the preferred measure of a country's debt rather than the dollar value of the debt? Why is it important for a government to keep this number under control?

Which of the following policy recommendations, if any, are consistent with the classical, Keynesian, monetarist, and/or modern consensus views of the macroeconomy?

Since the long-run growth of GDP is 2%, the money supply should grow at 2%