MANKIW: PRINCIPLES OF MACROECONOMICS
8th Edition
ISBN: 9781337801782
Author: Mankiw
Publisher: CENGAGE L
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Chapter 21, Problem 3QR
To determine
Multiplier and crowding out effect on aggregate demand.
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The economy is in a recession The government enacts a policy to increase the real GDP by $10 bilion. The MPS is 0.2. Assuming that the aggregate supply curve is
horizontal across the range of GDP being considered, by how much should the government change spending or taxes in order to achieve its objective? Show your
calculations.
How can a reduction in Corporation Tax lead to supply side improvements in an economy?
Which of the following is not an example of government spending hike that will increase aggregate demand?
Answers:
A.
Unemployment compensation.
B.
Government purchase of new military jet fighters.
C.
The construction of a new highway.
D.
Government purchase of new health care plan for retirees.
Chapter 21 Solutions
MANKIW: PRINCIPLES OF MACROECONOMICS
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- The government spends $3 billion to buy police cars.Explain why aggregate demand might increase bymore or less than $3 billion.arrow_forwardThe economy goes into recession. Which of the following lists contains things policymakers could do to try to end the recession? a. Increase the money supply, increase taxes, decrease government spending b. Decrease the money supply, increase taxes, decrease government spending c. Increase the money supply, increase taxes, increase government spending d. Increase the money supply, decrease taxes, increase government spendingarrow_forwardOne way that the government can increase aggregate demand is by: A. reducing income taxes. B. increasing the interest rates. C. reducing government spending. D. increasing business taxes.arrow_forward
- Give typing answer with explanation and conclusionarrow_forwardCompare the impact of a recession that reduces consumer income by 10 percent on the consumption of durable goods and house rentals. Suppose that the income elasticity of demand for durable goods is 1.5 and the income elasticity of demand for house rentals is 0.3. Based on your response, make a policy argument to support through government funding either businesses or house rentals.arrow_forwardIf businesses and consumers become pessimistic, the government can attempt to reduce the impact on the price level and real GDP by A reducing taxes or decreasing government spending increasing taxes or increasing government spending © increasing taxes or decreasing government spending D reducing taxes or increasing government spendingarrow_forward
- Referring to the figure, an increase in government purchases will A. shift aggregate demand from AD1 to AD3. B. have no effect on aggregate demand. C. shift aggregate demand from AD1 to AD2. D. cause movement from point A to point B along AD1.arrow_forwardDuring recessions, taxes tend to a. rise and thereby increase aggregate demand. b. fall and thereby decrease aggregate demand. c. fall and thereby increase aggregate demand. d. rise and thereby decrease aggregate demand.arrow_forwardShould the government fight recessions with spending hikes rather than tax cuts ? Explain.arrow_forward
- supply-side economists believe that a reduction in the tax rate a. always decrease government tax revenue b. shifts the aggregate supply curve to the right c. would decrease consumption d. provides no incentive for people to work more d. provides no incentive for people to work morearrow_forwardWorksheet 5: Aggregate Supply and Aggregate Demand Complete the questions below. Be sure to show your work. Upload this worksheet to Moodle. Consider the following Aggregate Supply and Aggregate Demand curves. 2. 3. D P 10 8 6 4 2 20 AS/AD 40 LRAS 60 80 140 SRAS AD Name: 100 120 GDP 4. Suppose the government increased spending (G). What would happen to Aggregate Demand? Draw the resulting curve, and mark a new equilibrium on the graph.arrow_forwardUse the model of aggregate demand ang aggregate supply (long run and short run) to explain the impact of the government's decision to increase government spending. Please create a detailed graph.arrow_forward
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