4. Assume the government cuts taxes and the marginal propensity to save is 0.4. a. Would this be considered expansionary fiscal policy or contractionary fiscal policy? b. If the tax cut was $1 billion, what would be the effect on real GDP? (Show your work.)

4. Assume the government cuts taxes and the marginal propensity to save is 0.4. a. Would this be considered expansionary fiscal policy or contractionary fiscal policy? b. If the tax cut was $1 billion, what would be the effect on real GDP? (Show your work.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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3. Focusing on the tax cut of 1964, the personal current tax receipts for 1965, the year after the tax cut is $ _______ billion. 4. Focusing on the tax cut of 1964, the personal current tax receipts for 1966, two years after the tax cut is $ _______ billion. 5. Focusing on the tax cut of 1964, the personal current tax receipts for 1967, three years after the tax cut is $ _______ billion.
6. Changes in taxes The following graph shows the aggregate demand curve. Shift the aggregate demand curve on the graph to show the impact of a tax cut. PRICE LEVEL 130 120 110 100 90 80 70 0 10 20 30 OUTPUT Aggregate Demand 40 50 60 Aggregate Demand (2) Suppose the governments of two different economies, economy A and economy B, Implement a permanent tax cut of the same size. The marginal propensity to consume (MPC) in economy A is 0.7 and the MPC in economy B is 0.85. The economies are identical in all other respects. The tax cut will have a smaller impact on aggregate demand in the economy with the
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2. Assume a given economy has an equilibrium GDP of $360 billion. A. If government spending and taxes both increase by $40 billion, determine the new equilibrium GDP. B. If both G and taxes increase by $40 billion, what impact will these two changes happening at the same time have on the budget? In other words, will these two changes cause a surplus, a deficit, or a balanced budget? C. Solve for the numerical value of the balanced budget multiplier.
10. Agreements and disagreements among economists regarding fiscalpolicy Consider a hypothetical economy in which households spend $0.75 of each additional dollar of their after-tax income. The expenditure multiplier for this economy is Suppose that this economy is experiencing a recession. The government would like to stimulate aggregate demand and is deciding whether it should increase its spending by $1 billion or reduce income tax by $1 billion. Assume other things remain constant, and the marginal propensity to consume remains at 0.75. Before any multiplier effect takes place, a $1 billion increase in government spending will increase the aggregate demand by s $1 billion reduction in income tax will increase the aggregate demand by billion, while a billion. Now consider the effect of each fiscal policy after the multiplier effect is complete. A $1 billion increase in government spending will result in a total increase of aggregate demand by $ billion, whereas a $1 billion…
(Figure: Fiscal Policy Choices) Use Figure: Fiscal Policy Choices. If the government uses discretionary fiscal policy in the economy depicted in panel (b) when real GDP is Y₁, government spending is likely to be, and taxes are likely to be Panel (a) Panel (b) Price level P₂ P1 reduced; cut increased; increased reduced; increased increased; cut Y₁ Yp SRAS AD₂ AD₁ Real GDP Price level P₁ P2 Yp Y₁ SRAS AD₁ AD₂ Real GDP
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1. What is fiscal policy? 2. What are the shortcomings of fiscal policy? 3. What is supply-side fiscal policy? Notes Comments :: étv MacBook Ai F9 F10 F5 F6 F7 F8
1. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is 0.8 Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $320 billion . This increases income yet again, causing a second change in consumption equal to $256 billion $2 trillion ($2,000 billion) The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD,) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate…
5. Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they over. The following graph plots the economy's initial aggregate demand curve (AD1). Suppose now that the government increases its purchases by $2.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) after the multiplier effect takes pla Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following gra (?) PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 12 AD₁ 10 102 104 106 108 110 112 OUTPUT (Billions of dollars) 114 116 Money Supply Į þ The following graph plots equilibrium in the money market at an interest rate of 6% and a quantity of money equal to $15 billion. AD2 Show the impact of the increase in government purchases on the interest rate by shifting one or…
6. Graphical treatment of taxes and fiscal policy The main difference between variable taxes and fixed taxes is that unlike fixed taxes, variable taxes do not vary with GDP The following graph shows the consumption schedule for an economy with a given level of taxes. Suppose the government implements a tax increase through a fixed tax. Use two green points (triangle symbol) to connect the two black points (plus symbols) representing the consumption schedule after the change in taxes. Hint: The new consumption schedule must pass through one point on the left and one point on the right. Hint: The new consumption schedule must pass through one point on the left and one point on the right. 50 Consumption with Tax Increase through a Fixed Tax Consumption with Tax Increase through a Variable Tax + 20 40 60 80 100 REAL GDP (Billions of dollars) The blue line on the next graph represents the original total expenditure line for this economy before the change in tax structure. Use the new…
1 et Question 3 There is an inflationary gap of $40 billion in the economy. The MPC is 75%. What is the MPS [Select] and the Government Spending Multiplier [Select] Government need to [Select] much [Select] change taxes, would they [Select] the Tax multiplier [Select] [Select] ? Would the spending? By how ? If the Government decided to taxes? What is and by how much