Suppose some imaginary economy is currently experiencing 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 unable to decide which method of expansionary policy will resolve the situation. Economist One believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist Two 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. Economist Three favors increases in government spending over tax cuts. This means that Economist Three likely believes that: - Government purchases increase aggregate demand by stimulating investment -Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand. Economist Four claims it is impossible to move the economy out of recession with an increase in government spending. Which of the following statements is consistent with Economist Four's belief? -A rise in government spending completely crowds out private sector spending. -A rise in government spending does not crowd out private sector spending.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose some imaginary economy is currently experiencing 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 unable to decide which method of expansionary policy will resolve the situation.

Economist One believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist Two 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.

Economist Three favors increases in government spending over tax cuts. This means that Economist Three likely believes that:

- Government purchases increase aggregate demand by stimulating investment

-Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand.

Economist Four claims it is impossible to move the economy out of recession with an increase in government spending. Which of the following statements is consistent with Economist Four's belief?

-A rise in government spending completely crowds out private sector spending.

-A rise in government spending does not crowd out private sector spending.

Economist One
Economist Two
Spending Multiplier
8
4
Tax Multiplier
4
2
Policy Options for Closing Output Gap
Increase in Spending
Tax Cut
(Billions of dollars)
(Billions of dollars)

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