An economy is operating with output$50,000,000 below the natural rate of output.Fiscal policy makers want to close this recessionarygap. The central bank agrees to adjust the moneysupply to keep the interest rate constant, so therewill be no crowding out. The marginal propensityto consume is 0.75, and the price level iscompletely fixed in the short run.3. How much would government spending needto increase (use a negative number if it needs todecrease) to restore the economy to fullemployment?4. How much would taxes need to increase (use anegative number if it needs to decrease) to restorethe economy to full employment?

here we calculate the how much government spending affect economy and need of tax by using the…

An economy is operating with output $50,000,000 below the natural rate of output. Fiscal policy makers want to close this recessionar gap. The central bank agrees to adjust the money supply to keep the interest rate constant, so there will be no crowding out. The marginal propensity to consume is 0.75, and the price level is

An economy is operating with output $50,000,000 below the natural rate of output. Fiscal policy makers want to close this recessionar gap. The central bank agrees to adjust the money supply to keep the interest rate constant, so there will be no crowding out. The marginal propensity to consume is 0.75, and the price level is

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.4P

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Similar questions

Under what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy?
16. If consumers in a country spend 4/5 of their disposable income. If their governmentdecreases its spending by 55 trillion and in order to maintain a balanced budgetsimultaneously decreases taxes by 55 trillion. Calculate the effect of the 55 trillion change ingovernment spending and 55 trillion change in taxes on the country’s aggregate demand.
Attempts 10. Crowding out effect Keep the Highest/2 Suppose economists observe that an increase in government spending of $13 billion raises the total demand for goods and servic If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be Now suppose the economists allow for crowding out. Their new estimate of the MPC would be than their initial one. Grade It Now 3/4 1/4 4 52 billion. Save & Continue
14 If government spending and taxes both change by the same amount, how much must they change to eliminate the recessionary gap? 15. Suppose the MPC is .90 and the MPI is .10. If govern- ment expenditures go up $100 billion while taxes fall
1.Gomad is a small economy operating with output that is $40 million below its natural level. Assume there is no crowding-out effect and the price level is completely fixed in the short run, how much government spending does the fiscal policymakers need to change to close this recessionary gap if MPC is 0.8?
6. Does government borrowing crowd out private spending? Suppose a hypothetical economy is operating at an output level that is well below full employment. In an attempt to increase aggregate demand, the government borrows money in order to increase spending. According to Keynesian economists, how are each of the following items affected by the increase in government spending and borrowing? Increases Decreases Consumer and Business Optimism O O Consumption O Business Investment O
explanation. Be sure to exp Assume the United States has been in another recession for the past 10 months. Unemployment is 10% and GDP has dropped $1.9 trillion from its previous peak of $ 20.8 trillion. The housing and heavy equipment industries have been hit the hardest. Inflation has been near the 2% target but has started to dip below. Also, the countries average MPC is 60. Determine the best fiscal policy/strategy to help the economy recover and explain why it is the best choice. Be sure to reference Aggregate Demand and Aggregate Supply and explain your specific tools in your answers. Calculations Explanation Graph (More space for the explanation on the back)
2. Suppose the economy is in recession. Policymakers estimate that aggregate demand is$100 billion short of the amount necessary to generate the long run natural rate of output.That is, if aggregate demand were shifted to the right by $100 billion, the economy would be inlong run equilibrium.a. Explain the impact on the economy if the government chooses to use fiscal policy to stabilizethe economy and the marginal propensity to consume (MPC) is given as 0.75 with no crowdingout.b. If there is a crowding out effect and investment is very sensitive to changes in the interest rate,should the government increase spending more or less than this amount?
Suppose that due ot a fiscal stimulus, there is an increase in disposable incomes of $100 billion in the first round. Then, $33 billion was spent in consumption from this initial change of the disposable incomes. Following the same marginal propensity to consume, how much is the change in consumption spending in the next round from the $33 billion?
FISCAL POLICY, DEF spending has shifted AD left and now we are at AD • Assume that the economy's full-employment is Q- and we want the government to restore full-employment with stable Py using fiscal tools. It has 3 main options: 1. Increase government spending 2. Reduce taxes 3. Use a combination of the twe Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. 1) By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve this same increase in aggregate demand? Why the difference? 1 Money Multiplier (K) = 1-MPC Total Change in Spending = multiplier × new spending injection
When is the effect of fiscal policy on real GDP the highest? O a. Steep SRAS curve, Small multiplier O b. Flat SRAS curve, Small multiplier c. Steep SRAS curve, Large multiplier d. Flat SRAS curve, Large multiplier
1. If the government is required to balance the budget and the economy falls into a recession, which of the actions is a feasible policy response? - invest in infrastructure - cut spending equal to the reduction in tax revenue - cut taxes to encourage consumer spending - increase government spending to stimulate the economy 2. What is a likely consequence of this policy? - The negative consequences of the recession are magnified. - Consumer spending increases due to their ability to keep more of their after-tax income. - Unemployment falls due to the economic stimulus. - There is hyperinflation due to an increase in aggregate demand.