Question

Related to the Economics in Practice Federal government expenditures and receipts for the simple economy of the nation of Topanga are listed in the table below. The government of Topanga would like to reduce the debt-to-GDP ratio, and the Finance Minister of Topanga has proposed the following: "The best way to reduce the debt-to-GDP ratio is to increase GDP, because with a larger GDP, the ratio will have to get smaller. I therefore propose that government expenditures be increased by 25 percent, personal income taxes be reduced by 25 percent, corporate income taxes be reduced by 25 percent, and contributions for social insurance be reduced by 25 percent. All of these moves will increase GDP by 10 percent by increasing consumer spending, business spending, and government spending by the exact amounts of the increased spending and reduced taxes." Debt GDP Government expenditures Government transfer payments Interest payment Personal income tax receipts Corporate income tax receipts Contributions for social insurance $20 million $46 million $5 million $5 million $1 million S6 million S1 million S4 million Assuming that GDP will, indeed, increase by 10 percent and the only changes to the data in the table are those proposed by the Finance Minister, answer the following questions: The current debt-to-GDP ratio is (Round your response to two decimal places) The current budget deficit or surplus is sl million. (Round your response to the nearest whole number with the proposals made by the Finance Minister, the new deficit or surplus will be sl million (Round your response to the nearest whole number) with the proposals made by the Finance Minister, the new debt-to-GDP ratio will be (Round your response to two decimal places ) The Finance Minister's proposals did not reduce the debt-to-GDP ratio because his plan O A. increased corporate spending OB. decreased government revenue while increasing government spending O c. increased consumer spending and debt OD. increased consumers disposable income Click to select your answer(s) Save for Later

Answer 1

Question 1) Debt to GDP ratio = Debt/GDp = 20/46 = 0.43

Question 2) Govetment surplus = Government Revenue - Government Taxes

= Contributions to social insurance + corporate income tax receipts + personal income tax receipts - government expenditure - government transfer payments - interest payments

= 4 + 1 + 6 - 5 - 5 -1 = 11 - 11 = 0

The government suplus = $0 million

the budget is balanced

Question 3)

New govt. expenditure (Increased by 25%) = $6.25 million

New Contributions to social insurance(Reduced by 25%) = $3million

New corporate income tax receipts (Reduced by 25%) = $ 0.75 million

New Personal income tax receipts (Reduced by 25%) = $4.5 Million

Government Surplus = 3 + 0.75 + 4.5 - 6.25 - 5-1 = -$4 million

There is a deficit of $4million

Question 4)

New GDP = $50.6 million

New Debt to GDP ratio = 20/50.6 = 0.39

Question 5)

The Finance minister's plan did nt work because :

B) decreased govt. revenue while increasing government spending

When govt. spending is increased while decreasing govt. revenue the lost revenue must be raised from somewhere. Usually the such deficit is covered through debt and by this the debt increases and debt to GDp ratio will not improve.