18S-ECON103 Version B 33. As of today, the U.S. federal debt exceeds $21 trillio

Question

18S-ECON103 Version B 33. As of today, the U.S. federal debt exceeds $21 trillion. Should we be concerned about a growing federal debt a. b. Yes, because it is likely that the government will confiscate the savings of individuals to pay for the debt. Yes, because if the debt grows too large, we will have to receive bailouts from other countries, which means they will be able to control our policy and economy No, because budget deficits are more important to worry about than the federal debt. Yes, because a large federal debt may slow the rate of economic growth in the future. No, because federal debt, unlike private debt, does not have to be repaid. c. d. e. Table 3. Consider the following U.S. data, where gross domestic product (GDP) values are measured in trillions of dollars Year Nominal GDP 2008 2009 $14.5S 2010 $15.23 2011 Real GDP $14.89 GDP Deflator 103 100 $14.93 $15.19 104 34. Refer to Table 3. What was the inflation rate between 2010 and 2011? Round to the nearest decimal. a. 1.8 percent b. 1.6 percent c. 2.0 percent d. 2.2 percent e. 3.7 percent Suppose a major hurricane hits the eastern coast of Florida and only destroys significant amounts of physical capital. In the short run, you would expect that a. there will be a downward movement along the production function. b. there will be no effect on the production function. c. the production function will shift downward. d. the production function will shift upward. e. there is an upward movement along the production function. 35. 36. Suppose you are offered a $5,000 raise at work. Your current income tax rate is 25 percent. Your marginal income tax rate is 28 percent. Your average tax rate is 20 percent. The additional income tax you owe to the federal government (assuming you stay in the same rate bracket) if you accept the job will be a. $250. b. $1,000. d. $150. e. $1,250 c. $1,400. 37. To avoid the negative effects of unexpected inflation, workers have an incentive to a. expect a certain level of inflation and to negotiate their contracts accordingly b. never negotiate wage contracts c. stay unemployed during years of inflation. d. lock in their current wages for years. e. change jobs regularly. Page

Explanation / Answer

(33) (d)

A large public debt increases interest payments and slows down economic growth.

(34) (e)

In 2010, GDP Deflator = (Nominal GDP / Real GDP) x 100 = (15.23 / 14.93) x 100 = 102

Inflation in 2011 = % Change in GDP Deflator = (104 / 102) - 1 = 1.0196 - 1 = 0.0196 = 1.96%

(35) (c)

Destruction of physical capital reduces production of goods in the country, which shifts the PPF inward in short run.

(36) (b)

Increase in income tax = Increase in taxable income x Average tax rate = $5,000 x 20% = $1,000

(37) (b)

Wage contracts are negotiated on basis of an expected inflation rate which remains fixed during the contract term. If inflation rises above the expected level, real wage decreases since nominal wage cannot be increased during contract term.

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