FIGURE 2. AD2 AD3 AD1 Refer to Figure 2. Suppose the multiplier is 3 and the government increases its purchases by $25 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Finally, assume the horizontal distance between the curves AD1 and AD3 is $40 billion. The extent of crowding out, for any particular level of the price level, is $15 billion $35 billion O $95 billion $40 billion

FIGURE 2. AD2 AD3 AD1 Refer to Figure 2. Suppose the multiplier is 3 and the government increases its purchases by $25 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Finally, assume the horizontal distance between the curves AD1 and AD3 is $40 billion. The extent of crowding out, for any particular level of the price level, is $15 billion $35 billion O $95 billion $40 billion

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Refer to the photo below. What is the equilibrium level of income for this economy if Y = C + I + G ? a. 240.71 b. 240.86 c. 242.86 d. 242.91 What is the size of the tax multiplier for this economy? a. 2.19 b. 2.29 c. 2.31 d. 2.6
Theoretically, 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.
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…
where is the 11 comming from?
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1.Suppose MPC = 0.75, if government increases taxes by $2,000, how much will the household consumption increase or decrease initially?