Economics: Private and Public Choice
16th Edition
ISBN: 9781337642224
Author: James D. Gwartney; Richard L. Stroup; Russell S. Sobel
Publisher: Cengage Learning US
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Chapter 12, Problem 9CQ
To determine
The effects of budget deficit on capital formation based on Keynesian crowding out and new classical theories.
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a) Why can't the government run a budget deficit in a one-
period macroeconomic model?
b) Why are government transfer payments not included in
(expenditure-based) GDP?
How can the Keynesiam model of deficit budget spending affect the government management?
explain the keynesian theory of high public spending to stimulate economic growth?
Chapter 12 Solutions
Economics: Private and Public Choice
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Similar questions
- In the short-run framework, budget deficits should: Choose correct and explain why never be run since they slow economic growth over the long run. never be run since they crowd out investment in the short run. be run on a temporary basis whenever the economy is below potential output. be run on a permanent basis since they can always be financed by printing money.arrow_forwardKeynesian economics defends budget balance. However, according to economists, budget balance may exacerbate the effects of the business cycle. Isn't it also a Keynesian view to use discretionary policy to smoothen the business cycles? Aren't those two views contradictory?arrow_forwardIdentify how planned investment will change in each scenario. In an effort to reduce constant budget deficits, Congress announces plans to increase the corporate income tax rate. Due to the Congress, planned investment will increase, decrease, or stay the same? A major recession has reduced consumption spending, which has hurt profit levels for Aston-Benz, a high-end car manufacturer. Due to the recession, planned investment will increase, decrease, or stay the same?arrow_forward
- C1. What is meant by the "time inconsistency" of economic policy? Why might policymakers be tempted to renege on an announcement they made earlier? In this situation, what is the advantage of a policy rule?C2. What are the policy issues connected with economic growth?C3. Briefly describe how Modigliani's life-cycle hypothesis and Milton Friedman's permanent income hypothesis solve the consumption puzzle.C4. Is the government debt really a problem? Describe the traditional view and the Ricardian view. answer all the parts please and correctly.arrow_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_forwardWhy Keynesian economics become popular back in 1930’s. Do you think that during 2005-08 financial crisis, Keynesian 1930 solution work for the economy? Explain your answerarrow_forward
- A. Differentiate between discretionary fiscal policy and nondiscretionary or built-in stabilization policy. B. When in a recession a government has the option to increase government spending or decrease taxes to stimulate the economy. Discuss which piece of GDP is being targeted when each is used.arrow_forwardNow, Congress steps in and insists that the policy be "deficit neutral" so that the government deficit will not be affected. In other words, taxes will decrease by an equivalent $50 billion so as to keep the deficit constant. What will be the effect on real GDP, again assuming no mitigating factors?arrow_forwardWith the aid of appropriate diagrams, briefly explain the impact of a fiscal restraint under an IMF-supported reform programme on employment, wages, output, interest rates and prices assuming the Ghanaian economy can be characterized as a Keynesian economic system.arrow_forward
- The Focus box “Can a Budget Deficit Reduction Lead to an Output Expansion? Ireland in the 1980s” provides an example of fiscal consolidation. Ireland had a large budget deficit in 1981 and 1982. Although the data shows strong output growth from 1987 to 1989, there is some evidence of continued macroeconomic weakness in Ireland during the second fiscal consolidation. What is that evidence?arrow_forwardWhich statement best explains why budget deficits may bring on a recession? a) Large deficits increase interest rates, attracting foreign investors. b) Persistent deficits lead to economic problems that scare away foreign investors. c) Spiraling national debt depresses private saving, reducing the amount of capital that can be invested. d) Deficit spending leads to a reduction in aggregate demand and a decrease in output.arrow_forwardThe main way that are designed to stop inflation and eliminate large budget deficits. include trade reforms, privatizations, and deregulation. are designed to open the economy to more market-based decision making. are implemented is through a cut in government expenditures.arrow_forward
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