Suppose the federal government observes an increase in gross investment. Examine this event in terms of the aggregate demand and aggregate supply model. a. The increase in gross investment will cause (Click to select) b. This will lead to [(Click to select) in the price level and [(Click to select) in real GDP. c. (Click to select) fiscal policy will be used to [(Click to select) d. The fiscal policy actions may include [(Click to select) in taxes and/or [(Click to select) in government purchases. 4

Suppose the federal government observes an increase in gross investment. Examine this event in terms of the aggregate demand and aggregate supply model. a. The increase in gross investment will cause (Click to select) b. This will lead to [(Click to select) in the price level and [(Click to select) in real GDP. c. (Click to select) fiscal policy will be used to [(Click to select) d. The fiscal policy actions may include [(Click to select) in taxes and/or [(Click to select) in government purchases. 4

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter24: Fiscal Policy

Section: Chapter Questions

Problem 11P

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Assume an economy that is operating above full employment. Draw a correctly labeled aggregate demand and aggregate supply graph and show each of the following: The long-run aggregate supply curve. Current price level and output levels, labeled PLe and Ye Full employment output, labeled Yf a. Identify one fiscal policy action that could resolve the problem. b. Using your graph above, show the short-run effects of the action you identified on each of the following: Aggregate demand. Explain (use the cause and effect chain you learned in the lesson) Output Price Level c. Using a correctly labeled loanable funds graph, show the effect of the policy you identified in your resolution of the problem in section a on real interest rates. d. Given the change in the real interest rate in c. What is the impact on each of the following? Investment Economic growth rate. Explain The international value of the dollar. Explain. e. Now assume instead that the government takes no…
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.
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. Fiscal Policy Price Level 180 LRAS AS 160 140 120 100 80 60 40 20 0 AD AD1 100 200 300 400 500 600 700 800 900 Real GDP (billions of dollars) (900, 120) Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to increase to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.75, how much does government purchases need to increase to shift aggregate demand by the amount you found in part a? $ billion Suppose instead that the MPC is 0.6. c. How much does aggregate demand and government purchases need to increase to restore the economy to its long-run equilibrium? Aggregate demand needs to increase by $ billion and government purchases need to increase by $ billion.
do fast.
a. Which statement best describes the classical fiscal policy prescription for a recession? Select "Do nothing; the economy will self-adjust." "Increase government spending and/or decrease taxes." "Decrease government spending and/or increase taxes." b, Which statement best describes the Keynesian fiscal policy prescription for a recession? Select "Decrease government spending and/or increase taxes." "Increase government spending and/or decrease taxes." "Do nothing. If V is stable, fiscal policy does not matter." c. Which statement best describes the monetarist fiscal policy prescription for a recession? Select "Do nothing. If V is stable, fiscal policy does not matter" "Increase government spending and/or decrease taxes" "Do nothing; the economy will self-adjust." d. Which statement best describes the Keynesian monetary policy prescription for a recession? Select "Decrease the money supply. Higher interest rates decrease investment." "Increase the money supply. Lower interest rates…
Suppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that an upcoming political election causes anxiety among consumers and consumption falls. Show the effects on your graph and label the new equilibrium point "2." Lastly, our government wants the economy to return to full-employment as quickly as possible. Should it intervene? If so, show the impact of successful fiscal policy on your graph. Label this new equilibrium point "3."
An expansionary fiscal policy can increase the level of aggregate demand by decreasing government purchases. reducing grants to state and local governments. O reducing corporate tax rates to increase investment spending.
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 AD billion AS AD 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) 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 0.6, 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 0.5. 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.
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The federal government implements an expansionary fiscal policy of increased spending and decreased taxes. Policy advisors predict output will increase 4% but are surprised when only 3% growth occurs. What might account for the fact that GDP increased by less than the multiplier predicted? a. Policy advisors' calculation of MPS was too high b. The aggregate supply curve was perfectly elastic c. Foreign purchases of domestic goods was greater than expected due to a devalued currency d. Consumption increases more than expected because of the decrease in taxes e. Investment decreased due to rising interest rates
Assume there is a decrease in the aggregate demand, if expansionary fiscal policy is being used, the following action could be taken a. increase consumption by raising disposable income through cuts in personal taxes or payroll taxes b. increasing government spending by raising after-tax profits through cuts in business taxes c. increase government purchases through increased Federal Government spending on final goods and services and raising grants to state and local government to increase their expenditures on final goods and services d. All of the above