Consider the case of an income transfer program. Under current law, the program has 1 million beneficiaries each of whom receives a benefit of $10,000 per year. Given current program rules, government statisticians estimate that the population of beneficiaries will grow at a rate of 4% per year. In addition, current law requires that benefits be increased for inflation each year at a rate of 3%. Suppose that a policy is proposed that would simply cap the annual growth in spending on the program at a flat 2% per year.

1. a. Calculate the 10-year baseline of the program under current law.
2. b. Calculate the 10-year stream of program spending under the proposed policy change.
3.  c. Given your answers to a and b, what is the budgetary impact of the policy change?
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5. Opponents of the proposed change argue that under the proposed new policy, spending on the program will suffer a cut. Supporters of the proposed change counter by saying that spending on the program will continue to increase. Citizens following the debate who have not taken a public budgeting course are confused. How would you explain this to them?