2. Fiscal policySuppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion. Four economists agree that expansionaryfiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should beused.Economist A believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist B believes that the government spendingmultiplier 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 eachscenario, compute the size of the tax cut that would achieve this same effect.Policy Options for Closing Output GapIncrease in SpendingTax Cut(Billions of dollars)Spending Multiplier(Billions of dollars)Tax Multiplier4Economist A8Economist B42Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that:YO6:344/29/20 Homework (Ch 23)Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for eachscenario, compute the size of the tax cut that would achieve this same effect.Policy Options for Closing Output GapIncrease in SpendingTax CutSpending Multiplier Tax Multiplier(Billions of dollars)(Billions of dollars)Economist A84Economist B42Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that:Government purchases increase aggregate demand by stimulating investment.O Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand.Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the followingstatements is consistent with Economist D's belief?O A rise in government spending does not crowd out private sector spending.O A rise in government spending completely crowds out private sector spending.OO

Fiscal policy is the use of government spending and taxation to influence the economy.. Fiscal…

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 Spending Multiplier Tax Multiplier (Billions of dollars) (Billions of dollars) Economist A 8 4 Economist B 4 2 Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that: O Government purchases increase aggregate demand by stimulating investment. O Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand. Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the following statements is consistent with Economist D's belief? O A rise in government spending does not crowd out private sector spending. O A rise in government spending completely crowds out private sector spending.

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 Spending Multiplier Tax Multiplier (Billions of dollars) (Billions of dollars) Economist A 8 4 Economist B 4 2 Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that: O Government purchases increase aggregate demand by stimulating investment. O Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand. Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the following statements is consistent with Economist D's belief? O A rise in government spending does not crowd out private sector spending. O A rise in government spending completely crowds out private sector spending.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter24: Fiscal Policy

Section: Chapter Questions

Problem 5P

See similar textbooks

Similar questions

Explain how automatic stabilizers work, both on the taxation side and on the spending side, first in a situation where the economy is producing less than potential GDP and then in a situation where the economy Is producing more than potential GDP.
Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy whereas a cut in a state income tax is not fiscal policy?
Under what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy?
What is the main advantage of automatic stabilizers over discretionary fiscal policy?
What is the main reason for employing expansionary fiscal policy during a recession?
What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?
What would happen if expansionary fiscal policy was implemented in a recession but, due to lag, did not actually take effect until after the economy was back to potential GDP?
What would happen if contractionary fiscal policy were implemented during an economic boom but, due to Lag, it did not take effect until the economy slipped into recession?
Assume there is no discretionary increase in government spending. Explain how an improving economy will affect the budget balance and, in turn, investment and the trade balance.
Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and sketch a diagram using aggregate demand and aggregate supply curves to illustrate your answer: A recession. A stock market collapse that hurts consumer and business confidence. Extremely rapid growth of exports. Rising inflation. A rise in the natural rate of unemployment. A rise in oil prices.
What is the difference between discretionary fiscal policy and automatic stabilizers?
What are some of the ways fiscal policy might encourage economic growth?