26. A contractionary monetary policy combined with an expansionary fiscal policy will (A) decrease both income and consumption (B) increase both income and consumption (C) have uncertain effects on the interest rate and investment (D) increase the interest rate and decrease investment (E) increase both the interest rate and investment

26. A contractionary monetary policy combined with an expansionary fiscal policy will (A) decrease both income and consumption (B) increase both income and consumption (C) have uncertain effects on the interest rate and investment (D) increase the interest rate and decrease investment (E) increase both the interest rate and investment

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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6.9 An editorial in the Wall Street Journal states: “We don’t put much stock in future budget forecasts because they depend on so many variables.” What variables would a forecast of future federal budget deficits depend on? Why do these variables make future budget deficits difficult to predict?
Assume that the government is implementing an expansionary fiscal policy and as a result has increased borrowing. At the same time, the central bank is carrying out a contractionary monetary policy. As a result, we can expect: Interest rates would rise substantially and private investments would be significantly reduced. Interest rates would not change substantially as the 2 policies counterbalance each other, and private investments would not be significantly reduced. Interest rates and private investments would rise. Interest rates and private investments would fall.
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The current market rate of interest is 10 percent. At that rate of interest, businesses borrow $300 billion per year for investment and consumers borrow $50 billion per year to finance purchases. The government is currently borrowing $150 billion per year to cover its budget deficit. a. Derive the market demand for loanable funds, and show how investors and consumers will be affected if the budget deficit increases to $250 billion per year. Draw a graph to show your conclusion. b. Assuming taxpayers do not anticipate an increase in the future market rate of interest due to the increase in budget deficit, show the impact of the increase in the budget deficit on the market for loanable funds.
In the 2000s savings and loans institutions significantly increased the number of subprime mortgages they offered. Note: subprime mortgages are loans to people who have not-so-good credit and/or ability to make loan payments for home purchases. After the 2008-09 recession they became much less common. why subprime mortgages are or are not good for the country and the individuals who take these mortgages? What are the positive and negative effects?
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Explain the difference between fiscal policy and monetary policy. Explain also 2 advantages and 2 disadvantages of both policies.
10- Assume that the economy starts at an equilibrium output Y*,and interest rate i*. Suggest a policy mix to achieve the following objectives. a) Increase Y while keeping i constant. b) Decrease fiscal deficit while keeping Y constant. c) Government wants to decrease the interest rate while keeping Y constant.
7. Agreement and disagreement among economists Suppose that Paolo, an economist from a research institute in Alberta, and Sharon, an economist from a public television program, are arguing over budget deficits. The following dialogue shows an excerpt from their debate: Sharon: Most people recognize that the budget deficit has been rising considerably over the last century. We need to find the best course of action to remedy this situation. Paolo: I believe that a cut in income tax rates would boost economic growth and raise tax revenue enough to reduce budget deficits. Sharon: I actually feel that raising the top income tax rate would reduce the budget deficit more effectively. The disagreement between these economists is most likely due to Despite their differences, with which proposition are two economists chosen at random most likely to agree? O Employers should not be restricted from outsourcing work to foreign nations. O Central banks should focus more on maintaining low…
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?
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