Aim for FiveMacroeconomics

Short free-response question

A recession and the budget

  • Units 3 and 5
  • 5 points
  • About 12 minutes

You can use a calculator on this question, just like on exam day.

A shorter question on one or two models, often with data in a table. You might calculate something like an unemployment rate, real GDP or the spending change needed to close a gap, draw a labeled graph (described in words on this site), and explain an effect. On the exam: Questions 2 and 3 of 3 in Section II; each is worth a quarter of the section score, with about 12 minutes suggested for each. A four-function calculator is allowed.

The question and its sources

Fennick enters a recession in Year 2. Its government passes no new laws about taxes or spending in Year 1 or Year 2. The table shows the government's budget in each year.

Table 1. Fennick's government budget (billions of dollars)

ItemYear 1Year 2
Government purchases of goods and services500500
Transfer payments200240
Tax revenue650600

Source: Hypothetical data

Suggested time: 12 minutes

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Part (a)

1 point

Calculate Fennick's budget balance in Year 1, and identify whether it is a deficit or a surplus. Show your work.

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Part (b)

1 point

Calculate Fennick's budget balance in Year 2, and identify whether it is a deficit or a surplus. Show your work.

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Part (c)

1 point

Explain why Fennick's tax revenue fell and its transfer payments rose in Year 2 even though no new laws were passed.

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Part (d)

1 point

Explain how the changes in tax revenue and transfer payments affect aggregate demand in Fennick during the recession.

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Part (e)

1 point

At the end of Year 1, Fennick's national debt was $3,000 billion. Assuming the debt changes only because of the Year 2 budget balance, calculate the national debt at the end of Year 2.

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