Refer to the table below: What would happen to the budget deficit if the (a) GDP

Question

Refer to the table below:

What would happen to the budget deficit if the

(a) GDP growth rate jumped from 3 percent to 6 percent?

Instructions: Enter your responses to the nearest whole number.

The budget deficit increases OR decreases by $....... billion.

(b) Inflation rate increased by 3 percentage point(s)?

The budget deficit decreases OR increases by $........ billion.

• Changes in Real GDP Growth
When the GDP growth rate decreases by one percentage point 1 Government spending (G) automatically increases for     Unemployment insurance benefits.     Food stamps.     Welfare benefits.     Social Security benefits.     Medicaid. 2 Government tax revenues (T) automatically decline for     Individual income taxes.     Corporate income taxes.     Social Security payroll taxes. 3 The deficit increases by $40 billion. • Changes in inflation
When the inflation rate increases by one percentage point 1 Government spending (G) automatically increases for     Indexed retirement and social security benefits     Higher Interest payments. 2 Government tax revenues (T) automatically increase for      Corporate Income taxes      Social Security payroll taxes. 3 The deficit increases by $45 billion

Explanation / Answer

A) when GDP growth rate decreaes by one point, defict inceases by $40 billion

So when GDP increaes or decreses by (6-3)= 3% , defict decreaes or increses by 3x40 = $120 billion

B) when inflation rate increaes by one point, defict increses by $45 billion

So when budget defict decreses or increses by 3%, defict increses or decreses by 3x45= $135 billion

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