1. The following table shows economic information regarding the current year and the forecast for the next year: 

                                                             GDP Forecast

Year                    Potential GDP                     Real GDP              Price Level 

Present                 $18.5 trillion                       $18.5 trillion                 114.7 

Future Year           $20.8 trillion                        $20.1 trillion                 118.3 

• Should Congress & the President use expansionary or contractionary fiscal policy in the current year? Consistent with this answer, should they raise or lower government purchases? Should they raise or lower taxes? 
• If Congress & the President succeed in achieving real GDP in the current year that reaches its potential level, will each of the following be higher, lower, or the same in future years as it would have been if they had taken no action (explain each of your answers):  
  • Real GDP 
  • Potential GDP 
  • The inflation rate 
  • The unemployment rate 

2. Suppose that real GDP is currently $18.1 trillion, potential GDP is $18.5 trillion, the government purchases multiplier is 2.6, and the tax multiplier is -1.5. 

• Holding other factors constant, how much will government purchases need to increase the economy to equilibrium at potential GDP? Show your calculations and explain. 
• Holding other factors constant, how much will taxes be cut to bring the economy to equilibrium at potential GDP? Show your calculations and explain. 
• What is an example of a combination of an increase in government purchases and tax cuts that would bring the economy to equilibrium at potential GDP? 

3. Suppose the federal budget deficit for the year was $1 trillion, and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $120 billion higher and government spending on transfer payments $80 billion lower. Using these estimates, what was the year's cyclically adjusted budget deficit or surplus? Show your calculations and explain.