2. Discretionary fiscal policy and multiplier effects Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.5. The following graph shows the aggregate demand curves (AD₁ and AD₂), the short-run aggregate supply curve (SRAS), and the long-run aggregate supply curve (LRAS). The economy is currently at point A. PRICE LEVEL 140 136 132 128 124 120 116 112 108 400 500 LRAS The economy is currently experiencing AD2 SRAS 124 600 700 800 REAL GDP (Billions of dollars) AD₁ 900 1000 1100 1200 gap of $ In order to close this gap, one option would be for the government to taxes do not change). billion. (?) government purchases by $ billion (assuming net

2. Discretionary fiscal policy and multiplier effects Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.5. The following graph shows the aggregate demand curves (AD₁ and AD₂), the short-run aggregate supply curve (SRAS), and the long-run aggregate supply curve (LRAS). The economy is currently at point A. PRICE LEVEL 140 136 132 128 124 120 116 112 108 400 500 LRAS The economy is currently experiencing AD2 SRAS 124 600 700 800 REAL GDP (Billions of dollars) AD₁ 900 1000 1100 1200 gap of $ In order to close this gap, one option would be for the government to taxes do not change). billion. (?) government purchases by $ billion (assuming net

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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TOPIC: Crowding Out.
Which fiscal policy will increase aggregate supply? increasing tax rates on businesses O increasing tax rates on consumers instituting more regulations on businesses allocating more money for federal student loans
The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Price Level 160 140 LA 120 100 80 60 40 20 0 Fiscal Policy LRAS AD₁ Real GDP (billions of dollars) billion AS 80 160 240 320 400 480 560 640 720 800 AD O Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? billion B b. If the MPC is 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? Suppose instead that the MPC is 0.75. c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and government purchases need to change by $ billion.
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The graph shows an economy's aggregate demand and aggregate supply curves and potential GDP. Does this economy have an inflationary gap or a recessionary gap? How does this economy return to full employment? This economy has _______ gap. It returns to full employment as _______. A. an inflationary; the money wage rate rises B. a recessionary; potential GDP increases C. a recessionary; the money wage rate falls D. an inflationary; aggregate demand decreases
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7. Supply-side effects Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand curve (AD) and short-run aggregate supply curve (SRAS) for the economy. The long-run aggregate supply curve (LRAS) is represented by a vertical line at $6 trillion. The economy is initially producing at potential output. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. (? 120 LRAS SRAS 100 AD 80 SRAS LRAS 40 AD 20 2 4 6 8 10 12 QUANTITY OF OUTPUT (Trillions of dollars) PRICE LEVEL
An economy is currently in a short-run equilibrium at point a. Which fiscal policy action would MOST likely bring the economy back to full employment output? LRAS SRAS Aggregate Price Level (P) Aggregate Output (Q) increase in taxes decrease in interest rates increase in government spending O increase in transfer payments ADO 自 ˊˋ
Question 4. Due to COVID-19 Pandemic, the economy of Finland is in a recession. The government is planning to increase government spending by 30 billion euros. Assume that marginal propensity to consume is 0.75 and there is no crowding-out effect. Define this policy measure and its consequences. Quantify the total effect of an increase in government spending on aggregate demand. Compare if the tax cut of 30 billion euros would lead to the same result. Discuss how can the crowding-out effect change the consequences of an increase in government spending.
Why do you think multiplier is equal to zero and fiscal policy becomes less effective when we have an equilibrium on long run aggregate supply curve (Use graph to make your arguments stronger when necessary)
5. Supply-side effects Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand (AD) curve and short-run aggregate supply (AS) curve for the economy. The long-run aggregate supply curve is represented by a vertical line at the potential GDP level of $6 trillion. The economy is initially producing at potential GDP. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther 8 100 8 PRICE LEVEL 8 9 8 True Potential GDP O False AS AD 10 QUANTITY OF OUTPUT (Trillions of dollars) 12 True or False! Supply side…
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