By NEAS - 12/1/2022 4:10:33 PM
Barro Mod 19 & 20 chapter 14 budget deficit practice exam questions
(The attached PDF file has better formatting.)
Real government savings
The following are government accounts for year 20XX:
● Real taxes = 5,041
● Real transfers = 620
● Nominal value of government debt = 13,410
● Interest rate on government debt = 5%
● Other government spending = 5,497
● The price level = 150 (meaning 1.50)
The price level is constant, the debt is held throughout the year, and the government prints no new money.
Question 19.1: Interest expense on government debt
What is the interest expense on the government debt in nominal value?
Answer 19.1: Interest expense is the nominal value of the debt times the interest rate = 13,410 × 5% = 670.50
Question 19.2: Real interest expense on government debt
What is the interest expense on the government debt in real terms?
Answer 19.2: Interest expense in real terms is the nominal value divided by the price level = 670.50 / 1.50 = 447.00.
Question 19.3: Real government expenditures
What are real government expenditures for the year?
Answer 19.3: Real government expenditures are real transfers + real interest expense + other government spending = 620 + 5,497 + 447.00 = 6,564.00.
Question 19.4: Real government savings
What are real government savings?
Answer 19.4: Real government savings = real taxes – real government expenditures = 5,041 – 6,564 = (1,523) = –1,523.
Government expenditures are more than taxes, so government savings are negative.
Take heed: The solution to exam problems depends on the data given: Gt is government spending; (Gt + Vt + rt-1 × (Bgt-1/P) is real government expenditures. Real government savings = taxes – government expenditures =
taxes – [ government spending + transfers + interest on government debt ] =
Tt – [ (Gt + Vt + rt-1 × (Bgt-1 / P) ]
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