1. Indicate whether each of the following government actions are Expansionary or Contractionary. Determine if the situation describes to changes in leakages or injections and whether it increases or decreases. Then indicate whether it is an automatic or discretionary stabilizer. /18 a) In middle of a recession, government provides subsidies to support exports of Canadian products. b) As the recession deepens, government expenditures on employment insurance increase ($ paid to unemployed people by the government).. c) The Government passes a new law to impose a new carbon tax d) As the economy slows, Government spends 100's of millions on roads and bridges. e) As the economy strengthens in a strong recovery, the amount of tax money from sales tax increases f) In the midst of a recession, the federal government decides to reduce income tax rates. Put a check mark in the proper boxes You will complete 3 columns for each prompt - a prompt will either effect leakages or injections. (not Both) Expansionary OR Reduce or Increase or Automatic Increase decrease OR Contractionary Leakage Injections Discretionary A C E F

1. Indicate whether each of the following government actions are Expansionary or Contractionary. Determine if the situation describes to changes in leakages or injections and whether it increases or decreases. Then indicate whether it is an automatic or discretionary stabilizer. /18 a) In middle of a recession, government provides subsidies to support exports of Canadian products. b) As the recession deepens, government expenditures on employment insurance increase ($ paid to unemployed people by the government).. c) The Government passes a new law to impose a new carbon tax d) As the economy slows, Government spends 100's of millions on roads and bridges. e) As the economy strengthens in a strong recovery, the amount of tax money from sales tax increases f) In the midst of a recession, the federal government decides to reduce income tax rates. Put a check mark in the proper boxes You will complete 3 columns for each prompt - a prompt will either effect leakages or injections. (not Both) Expansionary OR Reduce or Increase or Automatic Increase decrease OR Contractionary Leakage Injections Discretionary A C E F

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Suppose the economy has fallen into a recession (output level ?0), and the federal government wants to return the economy to its original level of output (?). Respond to each of the following questions using appropriate diagrams and explanations.(a) If policy makers can only use fiscal tools, what should they do?(b) If policy makers can only use monetary tools, what should they do? (c) What should they do if they want to return output to its original level but keep investment from changing?
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
Suppose there were an increase in Government spending of $100 billion. The MPC is 75 andthe tax rate is 2. No. imports a. What is the net impact on the economy if the crowding out effect is equal to $20 billion?b. What if the crowding out effect is $60 billion7c. Which of the two scenarios corresponds to the reaction of an economy which is closer to fullemployment? Explain
14. Suppose that Korea has been in recession and many economists have concerns about the long-term recession. Therefore, the Bank of Korea and the government are preparing stimulus packages for the economy. (1) Using both AA and DD curves, describe the effect of the government’s temporarily expansionary fiscal policy on the change of equilibrium of national output and foreign exchange rate. (2) The Korean government decides to annually spend an extra budget on constructing and maintaining social infrastructure forever. Using both AA and DD curves, describe the impact of the government’s policy on the change of equilibrium of national output and foreign exchange rate.
4. Deficits in new classical economics Felix lives in the fictional country of Lindelof, which raises government revenue by taxing everyone the same amount. The government of Lindelof has just implemented a tax cut that reduces annual taxes by $3,500 per person. However, government spending has not changed, nor is it likely change in the future. The tax cut has raised Felix's income by $3,500. If Felix acts according to the prediction of new classical economics (and doesn't plan to leave Lindelof), his consumption is likely to increase by Suppose that instead of cutting taxes while keeping its spending the same, the government did the opposite: it increased its spending by $3,500 per person while keeping taxes the same. If everyone in Lindelof acted like Felix, the likely increase in aggregate demand would be per person.
Assume that the economy experiences very high increasing energy prices. 1. Explain about what counter cyclical fiscal policy should be used. (Use the macroeconomic approach and include diagram)
Suppose the government, in an effort to avoid an increase in the deficit, votes for a budget neutral tax cut policy. Assume the marginal propensity to consume (MPC) is equal to 0.75 and taxes are cut by $15 billion. Round answers to the nearest billion, and specify decreases as a negative number. By how much will government spending change? change in government spending: $ What is the resulting change in the equilibrium level of real GDP? change in equilibrium level of real GDP: $ billion billion
1. The government expenditure multiplier is the effect of a change in government expenditure (G) on goods and services: a. An increase in aggregate expenditure increases aggregate demand (AD), which increases real GDP, which induces an increase in consumption expenditure (C), and which further increases aggregate demand (AD). b. An increase in aggregate expenditure increases aggregate supply (AS), which increases real GDP, which induces an increase in consumption expenditure (C), and which further increases aggregate supply (AS). c. An increase in aggregate expenditure decreases aggregate demand (AD), which decreases real GDP, which induces an decrease in consumption expenditure (C), and which further decreases aggregate demand (AD). d. An increase in aggregate expenditure decreases aggregate supply (AS), which decreases real GDP, which induces an decrease in consumption expenditure (C), and which further decreases aggregate supply (AS). 2. How do banks create money? Group of…
Automatic stabilizers are increases in spending and reductions in taxes that__ ?which one? a.Are enacted by Congress when the economy enters in a recession b.Are the result of existing tax and revenue spending rules c.Are required by the Department of Treasury as needed d.Are enacted by the President when the economy enters in a recession
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
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