Federal government expenditures and receipts for the simple economy of the nation of Topanga are listed in the table in the next column. The government of Topanga would like to reduce the debt-to-GDP ratio, and the Finance Minister of Topanga has proposed the following: “The best way to reduce the debt-to-GDP ratio is to increase GDP, because with a larger GDP, the ratio will have to get smaller. I therefore propose that government expenditures be increased by 25 percent, personal income taxes be reduced by 25 percent, corporate income taxes be reduced by 25 percent, and contributions for social insurance be reduced by 25 percent. All of these moves will increase GDP by 10 percent by increasing consumer spending, business spending, and government spending by the exact amounts of the increased spending and reduced taxes.” Assuming that GDP will, indeed, increase by 10 percent and the only changes to the data in the table are those proposed by the Finance Minister, answer the following questions:

a. What is the current debt-to-GDP ratio?
b. What is the amount of the current budget deficit or surplus?

c. With the proposals made by the Finance Minister, what will be the amount of the new budget deficit or surplus and what will be the new debt-to-GDP ratio?
d. Based on your answer to part (c), will the Finance Minister’s proposals work to reduce the debt-to-GDP ratio? Explain.

Debt .............................................................. $20 million
GDP .............................................................. $40 million
Government expenditures ........................ $5 million
Government transfer payments ............... $5 million
Interest payment ........................................ $1 million
Personal income tax receipts .................... $6 million
Corporate income tax receipts .................. $1 million
Contributions for social insurance ............ $4 million