4. Government purchases: Suppose Congress and the president decide to increase government purchases today, say for national defense. Explain how this affects the IS curve. How does your answer depend on the way in which the spending is financed and on the extent to which Ricardian equivalence holds?
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- Macmillan Learning . 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: S What is the resulting change in the equilibrium level of real GDP? change in equilibrium level of real GDP: $ billion billionThe following table shows the real output demanded and supplied at various price levels in a hypothetical economy. Real Output Demanded (Billions of dollars) 20 40 60 100 160 Price Level (Index number) 160 120 80 40 20 Real Output Supplied (Billions of dollars) (Billions of dollars) 170 160 140 100 Note: Line segments will automatically connect the points. 40 On the following graph, use the blue points (circle symbols) to plot the aggregate demand (Initial AD) curve for the economy. Then use the orange points (square symbols) to plot the short-run aggregate supply (SRAS) curve for the economy.US President Collin Hawkins is concerned about the economy. He orders the Treasury to issue direct stimulus payments to citizens in an effort to prevent a recession. On average citizens save 20% of their income. The total of this stimulus amount is $1.3 trillion USD. What is the multiplier? What is the total economic impact of this injection? $ "instead of using 'O's, simply note the number using "m", "b", or "t" for 'million, "billion, or 'trillion. For example if your answer is "$56,100,000,000", you should instead type "$56.1b"
- Use the table below to calculate the MPC, MPS, government spending multiplier, and tax multiplier. Planned Aggregate Expenditures 2,700 3,000 3,300 3,600 3,900 4,200 4,500 MPC = (Round your response to one decimal place.) Consumption Output Spending 2,100 2,000 2,600 2,300 3,100 2,600 3,600 2,900 4,100 3,200 4,600 3,500 5,100 3,800 Planned aggregate expenditure, AE 4,000 3,500 3,000- 2,500 2,000 1,500 1,000 500+ 0+ 0 45 line 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Aggregate output, YTheoretically, a decline in G such as the one in the first question leads to a change in equilibrium Y, Ye. First, give the simple equation for how much a change in autonomous government spending changes Ye. Second, we expect that the fall in G will lead to a fall in Ye that is even greater in dollars than the change in G and this will be due to the multiplier effect. Please explain how this multiplier effect (not the multiplier itself but rather the process that shows how spending ripples down through the economy) where a rise in G of $100 billion leads to a change in Ye of more than $100 billion. Once done, answer the following: if the size of the MPS rises as people become more concerned about the possible coming recession what will happen to the amount by which Ye changes with a given rise in G? Explain in words why this change makes sense.6. What change in government spending (airports, police, teachers, roads, etc.) would reestablish full employment with price stability? 7. What change in taxes would achieve the same goal? Explain why it is different from the change in government and is the opposite sign. 8. Should we balance the budget in this situation? And why? Q4. Suppose that in the closed economy of Keynesia, consumption is given by C = 100 + 0.75(Y -T). Investment I is constant at 200, government purchases G are 160, and the government’s budget is balanced so G = T. Aggregate supply responds passively to changes in demand, so Y = C+I+G. a. What is the marginal propensity to consume? b. Use algebra to find the equilibrium value of Y, the equilibrium level of income? c. If government spending rises to 180 with no change in taxes, what will happen to the Keynesian equilibrium level of income? What is the government-expenditure multiplier AY/AG? d. If taxes increase to 180 with no change in government spending, what…
- QUESTION 5 05. The "crowding-out secondary effect expansionary macroeconomic policy a) For fiscal policy it is about government borrowing to finance the government budget deficit, associated with expansionary fiscal policy. This increased government borrowing tends to increase the market rate of interest, which dampens investment spending. b) For monetary policy it is about the expansion of the economy increasing the demand for money to service the increased volume of transactions. This tends to increase the market rate of interest, which dampens investment spending. c) Decreases the autonomous spending multiplier and thus the impact of expansionary policy. d) All of the above.Macroeconomic** In the Keynesian model, when government decreases its spending by $20 billion, and it decreases taxes by $30 billion, and the MPC is .75, by how much will total spending in the economy change? Reg. multiplier = 4, tax multiplier = -3 Would this be 4 * 20 = 80 billion? The actual answer is 10 billion which I don't get it at all. Thanks.2. Fiscal policy Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should be used. Economist A believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist B believes that the government spending multiplier is 4 and the tax multiplier is 2. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect. Policy Options for Closing Output Gap Increase in Spending Tax Cut (Billions of dollars) Spending Multiplier (Billions of dollars) Tax Multiplier 4 Economist A 8 Economist B 4 2 Economist C favors increases in government spending over tax cuts. This means that Economist C…
- 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. 160 Price Level 140 120 100 80 60 40 20 0 Fiscal Policy LRAS AS 80 160 240 320 400 480 560 640 720 800 AD AD₁ Real GDP (billions of dollars) billion 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. If the MPC is 0.75, 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 0.9. 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.Suppose the MPC is 34 and the government wants to increase output by $2000. 1. How much should government spending increase? 2. How much should taxes decrease? (You can leave your answer as a fraction) 3. Describe the intuition behind why these two values are different 4. Suppose instead the government wants to decrease output by $ 2000. By how much should they raise taxes?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 160 140 120 100 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 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 O b. If the MPC is 0.8, 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 0.9. 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.