The crowding-out effect stresses that an increase in government expenditures will stimulate aggregate demand and, thereby, help to prevent recessions. an increase in taxés will restrain aggregate demand and, thereby, help to control inflation. additional government borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise. a budget deficit is a highly effective tool with which to combat recessions. O both a and d are correct.

The crowding-out effect stresses that an increase in government expenditures will stimulate aggregate demand and, thereby, help to prevent recessions. an increase in taxés will restrain aggregate demand and, thereby, help to control inflation. additional government borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise. a budget deficit is a highly effective tool with which to combat recessions. O both a and d are correct.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter24: Fiscal Policy

Section: Chapter Questions

Problem 3P

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The Canadian federal budget moved from a surplus of 9.6billioninthe2007-2008 fiscalyeartoade ficitof5.8 billion the next year, and a large deficit of S55.6 billion in 2009-2010. a. Suppose real GDP was at potential in each of the first two years. What can you conclude about the cause of the change in the budget deficit? Show this change in a diagram of the budget deficit function. b. Suppose from 2008-2009 to 2009-2010, two things happened: real GDP fell and the government implemented an expansionary fiscal policy (both of which were true). Show these two separate events in a diagram of the budget deficit function.
Is is possible for federal investment to have a negative rate of return? Yes, if the spending results in a strong crowding-out effect or if state and local governments substitute towards federal investment by reducing stateand local investment. Either would potentially reduce future productivity and output (GDP), resulting in a negative return. Yes, if the spending results in a weak crowding-out effect or if state and local investments complement the increase in federal investment by. Either would potentially reduce future productivity and output (GDP) and hence result in a negative return. No. At worst, federal investment can have no future return as the expenditure offered some form of service (ex. jobs training) or useful infrastructure (ex. highways). No. If in the future there were a negative return, the federal government would increase expenditures again to offset it.
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E2
Expectation in Fiscal policy & Ricardian equivalence. One can argue that macroeconomics is essentially a story of a 'journey' from disequilibrium back to equilibrium. The recession caused by Covid that had forced many countries to use fiscal policy to compensate the shock and stimulate the economy is one example of disequilibrium. Cited from the Ministry of Finance website, the use of the government budget to mitigate the impact of the Covid crisis was clearly stated: "The state budget will continue to work hard to protect the community through Covid 19 handling from a health perspective, especially during the implementation of the Emergency Community Activity Restrictions (PPKM). This refocusing and sharpening of priorities is expected to help all communities in various sectors, especially the health sector, in dealing with Emergency PPKM." (MOF-RI News Index, 7/5/2021). Questions: a. Based on the macro workhorse model, explain the 'journey' (mechanism) how an initial disequilibrium…
07. What factors make an expansionary "stimulus" fiscal policy effective? One answer a) A government budget deficit associated with fiscal stimulus should should borrow money from those who spend less and save more, to those who spend more and save less. b) A permanent decrease in taxes is more effective in stimulating spending than a temporary one c) An increase in government purchases of goods and services should be temporary and should not permanently displace private spending d) The most expansionary way of financing the budget deficit associated with a fiscal stimulus policy is by the central bank expanding the quantity of money in circulation. e) Infrastructure investment belongs with long-term growth policy, but invariably makes a poor element in stimulus policy because such investment normally take a long time to implement. f) All the above
01. Which ff the following reasons why fine-tuning the economy is not likely to be successful, is not really a problem for fiscal policy? O (a) Recognition lag (b) Policy lag O (c) Implementation lag (d) Impact lag (0) Both (a) and (b)
When the government borrows funds in financial markets to pay for budget deficits and interest rates rise as a result, the net effect of the increase in the budget deficit and the government's borrowing to finance it is that it is enhancing the multiplier effect of higher government purchases on aggregate demand. the interest rate and savings decrease. Aggregate demand shifts to the right. O crowding out private investments.
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What's the difference between the debt and a deficit? Expansionary fiscal policy involves increasing This will lead to a budget and decreasing Contractionary fiscal policy involves increasing and decreasing In the AS/AD model of the economy, fiscal policy aims to shift which curve? Contractionary policy will shift this curve left or right? Which school of economic thought is for expansionary fiscal policy in a recession? Explain why there is no time lag for automatic stabilizers. . In March 2020, the US government passed a $2 package. What will this do the budget for fiscal year 2020? stimulus hp
a. The Covid-19 pandemic has signifigantly effect the economy around the world and the suitable policy to be implemented is expansionary fiscal policy. Suppose the government is focusing more on tax component instead of the other components. Explain in details how tax can impact both aggregate demand and aggregate supply in this situation. Give an example of each. b. If actual employment is lesser than full employment, what fiscal policy actions could eliminate the gap? Is there any possible new problem will occur with the policy taken by the government to eliminate the gap? Illustrate and explain what adjustments, if any, take place?
a) Suppose that there are no crowding-out effects and the MPC is 0.8. By how much must the government increase expenditures shift the aggregate-demand curve right $10 billion? b. The model of Long-run Growth, proposes that fiscal policy can have lasting effects on savings, investment, and economic growth. On the other hand, the model of Aggregate Demand-Aggregate Supply suggests that the only long run effect of fiscal policy is an increase in the price level. How could you use the Aggregate Demand and Aggregate Supply model for a more accurate description of the short-run and long-run effects of an increase in government spending? Could you distinguish between different uses of government expenditures to predict their effects on prices and output?