### Real Deficit – Principles of Macroeconomics Homework

The key words in this Macroeconomics course include debt-to-GDP ratio, Data, Country, Fiscal Shape, Discretionary Spending, Nominal Deficit, Government Spending, Real Deficit, Real GDP, Deficit-to-GDP Ratio, Social Security, Principles of Macroeconomics.

Based on the data below, which of the four nations was in the worst fiscal shape in 2010? (All data comes from the OECD and is in billions of current U.S. dollars.)

Spain, because it had the highest debt in 2010.

Ireland, because it had the lowest GDP in 2010.

Greece, because it had the highest debt-to-GDP ratio in 2010.

Spain, because it had the highest annual budget deficit between 2000 and 2010.

Explanation: The most informative number in answering this question is a nation’s debt-to-GDP ratio, which is the amount of debt a country has divided by its GDP. Typically, the higher the debt-to-GDP ratio is, the worse off a country is fiscally. Greece’s debt-to-GDP ratio in 2010 was 1.48 = \$455 billion debt ÷ \$308 billion GDP. This is worse than Ireland’s (0.602), Portugal’s (0.879), or Spain’s (0.517). This means that relative to how much it produced, Greece had the most debt, and therefore out of the four countries was in the worst fiscal shape.

Discretionary spending by the government is spending that

is under the direct control of congress

is developed in secret

applies to some industries but not to others

applies to some states but not to others

Explanation : Discretionary outlays comprise government spending that can be altered when the government is setting its annual budget. Discretionary outlays include federal spending on education.

Suppose that over the past 50 years, the nominal and real deficit of a country grew from \$100 billion to \$200 billion. Suppose that, over the same time, real GDP grew from \$100 billion to \$300 billion. Using __________, we can give an accurate picture of what happened in the country and conclude that the country is __________.

deficit-to-GDP ratio; worse off

deficit-to-GDP ratio; better off

real deficits; worse off

real deficits; better off

Explanation : Despite the fact that real and nominal deficits have grown, GDP grew at a much faster rate, and the country is actually better off. Looking at deficit-to-GDP ratios gives a more accurate and clearer picture of what happened to the country. Over the 50-year period, the deficit-to-GDP ratio decreased from 1 to 2/3.

The fear about Social Security is that

in several years, it will be eliminated altogether

in several years, fewer individuals will retire to take advantage of the program

in several years, benefits will be cut by 50 percent

in several years, there will not be enough funds to cover 100 percent of promised benefits

Explanation : The program requires workers to contribute a portion of their earnings into the Social Security Trust Fund with the promise that they will receive these back (including a modest growth rate) upon retirement. The goal of the program is to guarantee that no U.S. worker retires with no retirement income. In 1960 there were more than five workers per beneficiary in the Social Security system. With that number, it wasn’t very difficult to accumulate a large trust fund. But now there are fewer than three workers per beneficiary, and as the baby boomers retire, this number is set to fall to just above two, as indicated by the projections for the years 2030 and 2050.