Suppose that r is the rate of growth of desired expenditure in Figure 18.5 while p is the growth rate along the actual revenue path.
a. Explain the relationship between r and p at points a, b, c and d in Figure 18.5.
b. As explained in the text, a Rainy Day Fund can accumulate a positive balance from point a to point c in the business cycle to use from point c to point e in the cycle. An alternative design for the fund is to accumulate funds as long as the rate of growth of revenue p exceeds the desired rate of growth in expenditure r. Explain how that type of fund would work in terms of Figure 18.5.
c. Suppose that your state government is at point f in Figure 18.5. Explain what newspaper accounts will say about state revenues from f to h. What will the stories about the state government as it continues to spend along the desired expenditure path?