Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 12, Problem 2CQ
To determine
Concept of crowding-out effect, classical and Keynesian view on crowding-out model.
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Chapter 12 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- On the following graph, AD1 represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 trillion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) AS 106 105 104 103 63 102 101 100 99 98 AD AD 吕 1 97 96 Full Employment 96 6 7 8 9 10 11 12 13 14 15 16 REAL GDP (Trillions of dollars) AD 2 Equilibrium The initial short-run equilibrium level of real GDP is $ trillion, and the initial short-run equilibrium price level is Suppose the government, seeking full employment, borrows money and increases its expenditures by the amount it believes necessary to close thearrow_forwardOn the following graph, AD1 represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 billion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) 106 105 104 103 102 H AS 1ŏ1 101 ADA 100 AD 3 99 AD 2 98 AD1 97 Full Employment 96 6 7 8 9 10 11 12 13 14 15 16 REAL GDP (Billions of dollars) Equilibrium (?)arrow_forwardIf government policy makers were worried about the inflationary potential of the economy, which of the following would be a correct fiscal policy change?arrow_forward
- The various kinds of automatic stabilizers are: Group of answer choices Expansionary Monetary Policy All of them Taxes and Transfer payments Increased Defense spendingarrow_forwardIf the simple Keynesian macroeconomic model is used to explain expansionary fiscal policy, which of the following can be concluded with regard to macroeconomic equilibrium? a) That firms experience an unplanned increase in their inventories. b) The economy will move towards equilibrium. c) Inventory levels will rise above the equilibrium level. d) The effect on equilibrium cannot be determined given the information givenarrow_forwardAccording to Keynesian economics, what impact would a balanced budget amendment to the constitution requiring the federal government to balance its budget annually have on the economy?arrow_forward
- Consider the Keynesian Cross model. If the fiscal multiplier equals 2, and the government decides to increase government purchases by 100, by how much would equilibrium output increase?arrow_forwardKeynes believes that when the economy is in liquidity trap, fiscal policy is ineffective. True or Falsearrow_forwardAccording to the standard textbook Keynesian analysis, which is greater: the tax multiplier or the government spending multiplier? Explain the reasoning behind this relationship.arrow_forward
- Consider a Keynesian model but where investment (just like consumption) is increasing in aggregate income, e.g., because investment depends on business cash flow. Now that investment depends on aggregate income, a fiscal stimulus has more effect on equilibrium output.Answer true, false, or uncertain. Please briefly explain your answerarrow_forward5. New classical view Suppose the government of a hypothetical economy decides to pursue a restrictive fiscal policy by permanently decreasing government expenditures. The following graph shows the market for loanable funds in this hypothetical economy. Show the effect of the restrictive fiscal policy according to the new classical view by shifting the appropriate curve or curves on the following graph of the loanable funds market. If you decide that the policy produced no effect, leave the graph unchanged. Supply Demand Supply Demand QUANTITY OF LOANABLE FUNDS The following graph shows the goods and services market for the same hypothetical economy. Show the effect of the restrictive fiscal policy according to the new classical view by shifting the appropriate curve or curves (aggregate demand, AD; aggregate supply, AS) on the following graph of the goods and services market. If you decide that the policy produced no effect, leave the graph unchanged. INTEREST RATEarrow_forwardUsing the concept in Keynesian economics, which one of the following may not be an effective fiscal policy when there is inflation? a) increasing aggregate demand b) increasing corporate taxes. c) increasing personal taxes. d) decreasing government purchases.arrow_forward
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