The effects of discretionary fiscal policy as per Keynesian model. Concept Introduction : Gross Domestic Product : It is the final value of all the final goods and services produced within the territorial boundaries of a nation in a given period of time. Discretionary Fiscal Policy: It is a tool used by the government to achieve equilibrium level of GDP during different economic situations. The policy mainly focuses on government spending and its taxation tools. A tax cut or an increase in government spending is an expansionary fiscal policy. A decrease in government spending and an increase in tax rates is a contractionary fiscal policy. These policies are used to achieve objectives of low unemployment rates, price stability, and economic growth .

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 13, Problem 13.1LO

To determine

:

The effects of discretionary fiscal policy as per Keynesian model.

Concept Introduction:

Gross Domestic Product: It is the final value of all the final goods and services produced within the territorial boundaries of a nation in a given period of time.

Discretionary Fiscal Policy: It is a tool used by the government to achieve equilibrium level of GDP during different economic situations. The policy mainly focuses on government spending and its taxation tools.

A tax cut or an increase in government spending is an expansionary fiscal policy. A decrease in government spending and an increase in tax rates is a contractionary fiscal policy. These policies are used to achieve objectives of low unemployment rates, price stability, and economic growth.

Expert Solution & Answer

Explanation of Solution

Keynesian economists argue that the intervention of government is necessary to correct the output gap. They assume that the private expenditure and government expenditure are not a substitute of each other.

An expansionary fiscal policy implies that the government has either increased their spending or reduced taxes to give a boost to the economy.

A higher spending will increase the aggregate demand directly and a tax cut would increase the disposable income (after tax income) of the consumers, which would in turn lead to an increase in the aggregate demand.

As a result, the aggregate demand will shift rightwards leading to an increase in the value of real GDP and price levels.

This policy is used to correct a recessionary gap or a negative output gap (actual GDP lower than the potential; GDP).

A contractionary fiscal policy implies that the government has either decreased their spending or increased taxes.

Reduced government spending will decrease the aggregate demand directly and a tax increase would decrease the disposable income (after tax income) of the consumers, which would in turn lead to a decrease in the aggregate demand.

As a result, the aggregate demand will shift leftwards leading to a decrease in the value of real GDP and price levels.

This policy is used to correct an inflationary gap or a positive output gap (actual GDP higher than the potential; GDP).

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

Section III: Empirical Findings: Descriptive Statistics and inferential statistics………………..40% Descriptive statistics provide details about the Y variable, based on the sample for the 10-year period. Here, you use Excell or manually compute Mean or the average income per capita. Interpret the meaning of average income per capita. Draw the line chart showing the educational performance over the time-period of your study. Label the Vertical axis as Y performance and X axis as the explanatory variable (X1) . Do the same thing between Y and X2 Empirical/ Inferential Statistics: Here, use the sample information to perform the following: Draw the Scatter plot and impose the trend line: showing the Y variable and explanatory variables ( X1). Draw the scatter plot and impose the tend line: Showing Y and X2. Does your evidence (data) support your theory? Refer to the trend line: Is the relationship positive or negative as expected? Based on the data sheet below: Years Y ( per…

Section III: Empirical Findings: Descriptive Statistics and inferential statistics………………..40% Descriptive statistics provide details about the Y variable, based on the sample for the 10-year period. Here, you use Excell or manually compute Mean or the average income per capita. Interpret the meaning of average income per capita. Draw the line chart showing the educational performance over the time-period of your study. Label the Vertical axis as Y performance and X axis as the explanatory variable (X1) . Do the same thing between Y and X2 Empirical/ Inferential Statistics: Here, use the sample information to perform the following: Draw the Scatter plot and impose the trend line: showing the Y variable and explanatory variables ( X1). Draw the scatter plot and impose the tend line: Showing Y and X2. Does your evidence (data) support your theory? Refer to the trend line: Is the relationship positive or negative as expected? Create graphs based on table below; Years Y ( per…

Please help me with this Accounting question

Answer 2