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- 11. The U.S. economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economic Stimulus Act of Act of 2009) that combined would deliver about $700 2008 and the American Recovery and Reinvestment billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers. a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if MPC in the United States is 0.5. Then calculate the resulting change in real GDP arising from the $700 billion in payments. 76177 b. Illustrate the effect on real GDP with the use of a graph depicting the income-expenditure equilib- rium. Label the vertical axis “Planned aggregate spending, AE Planned" and the horizontal axis "Real GDP." Draw two…(in trillions) anupuedgejetoally $35 $30 $25 $20 $15 $10 $5 $5 $10 $15 $20 $25 45° Line AE $30 $35 Real GDP (in trillions) The central bank has recently conducted monetary policy that substantially reduces the real interest rate. As a result, autonomous spending increases by $5 trillion. Examine the effects of this reduction in the real interest rate by identifying (1) the amount of autonomous spending before the real interest rate falls, (2) the amount of induced spending before the real interest rate falls, (3) the level of equilibrium Real GDP before the real interest rate falls, (4) the value of the spending multiplier, (5) the level of equilibrium Real GDP after the real interest rate falls, and (6) the amount of induced spending after the real interest rate falls.8. Using policy to stabilize the economy The government possesses the tools necessary to influence the output level in the short run through use of monetary and fiscal policy. However, there is some debate regarding whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. The current tax system acts as an automatic stabilizer. Businesses make investment plans many months in advance. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. Which of the following policies are examples of automatic stabilizers? Check all that apply. Personal income taxes The discount rate The federal funds rate
- 4. Other things being constant, what will be the effect of each of the following on disposable income (or real GDP)? (a) An increase in the amount of liquid assets consumers are holding15. Consider the economy of Farland. C = 200 + 0.75(Y – T) I = 200 – 25r M = Y – 100r M = 1000; P = 2 G = 100; T = 100 d P a. Find equilibrium interest rate and the equilibrium level of income Y b. With the initial values for monetary and fiscal policy, suppose that the price level rises from 2 to 4. What happens? What are the new equilibrium iaterest rate and level of income? c. Derive and graph an equation for the aggregate demand curve. What happens to this aggregate demand curve if government increases its purchaşes or National Bank provides more money supply?Supply, S Real Interest rate Demand Loanable funds (billions of dollars per year) Refer to the graph above. Which of the following situations would have caused the shift as shown in the graph? O Taxes are changed so that real interest income is taxed rather than nominal interest income An expected recession decreases the profitability of new investment O The government runs a budget deficit O Technological change increases the profitability of new investment
- 7. Use of discretionary policy to stabilize the economy Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy, as well as the pros and cons of using these tools to combat economic fluctuations. The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the U.S. economy in February 2026. Suppose the government chooses to intervene in order to return the economy to the natural level of output by using Depending on which curve is affected by the government policy, shift either the AS curve or the AD curve to reflect the change that would successfully restore the natural level of output. AS 110 X AD 70 LRAS 24 26 OUTPUT (Trillions of dollars) PRICE LEVEL 150 130 50 20 22 28 30 AD policy. AS Suppose that in February 2026 the government successfully carries out the type of…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 LEVEL4. Use of discretionary policy to stabilize the economy The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (SRAS), and long-run aggregate supply curve (LRAS) for the U.S. economy in February 2020. Suppose the government decides to intervene to bring the economy back to its potential output. In this case, the government would engage in policy. Depending on which curve is affected by the government policy, shift either the SRAS curve or the AD curve to reflect the change that would successfully restore potential output. 150 SRAS AD 130 110 SRAS AD 70 LRAS 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) PRICE LEVEL
- The enormous budget deficits of 2009 through 2011 meant that the federal government was borrowing upwards of $1.5 trillion per year. If that borrowing had limited the ability of the private sector to get financial capital for its purposes, economists would call this crowding out. There was O significant evidence this was a problem because interest rates were very high. O little evidence this was a problem because interest rates were very low. O significant evidence this was a problem because interest rates were very low. O little evidence this was a problem because interest rates were very high.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…4. Using fiscal policy to fight inflation Consider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 100 and real GDP of $740 billion. Then aggregate demand (AD) increases from AD₁ to AD2, moving the economy up along the intermediate and classical ranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $770 billion, and the price level increases to 115. PRICE LEVEL (CPI) 130 125 120 115 110 105 100 95 90 85 80 700 710 720 AS 730 740 750 760 770 780 REAL GDP (Billions of dollars) AD 790 AD2 800 ?
