Question

Many people believe that Congress will eventually have to reduceSocial Security benefits in order to reduce the budget deficit.Although most of the changes would not take place until later,assume for the purpose of this problem that Social Securitybenefits were cut today by $100billion per year.
A) If the marginal propensity to consume is 0.8, explain what thelong-run effects would be on real GDP, public saving, and nationalsaving.
B) The US is a large open economy with a trade deficit. Use theappropriate graphs to illustrate and state what the reduction inSocial Security benefits would do to each of the following inthelong run: national saving, investment, the US real interest rate,net capital outflows, the real exchange rate, and the tradedeficit.
C) Now, consider the small open economy of Norway, which has atrade surplus. If the US, a large open economy, were to reduce itsSocial Security benefits, use the appropriate graphs to illustrateand state what would happen in the long run to Norway’s nationalsaving, investment, interest rate, real exchange rate, and tradesurplus.