Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 29, Problem 3.4P
To determine
Macro economic effects of the spending and tax changes, when the government tries reduce the deficit.
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You are advising the Bank of Canada and the Federal Government. The economy is in a state of contraction.
a) Determine the monetary policy actions that you would recommend and explain how these actions will help to turn the economy around.
b) Determine the fiscal policy measures that you would recommend and explain how these actions will help to turn the economy around.
What is supply-side economics? Does it oppose the Classical, Keynesian, or Monetarist theory? How does supply-side economics affect fiscal policy?
Most economists agree that individual consumers and business cannot pull the economy out of a severe recession without help from either the government or the Federal Reserve.
Which group(s) believe fiscal policy is ineffective: Keynesians or Monetarists? Briefly explain the answer.
Which group(s) believe monetary policy is ineffective in the short run: Keynesians or Monetarists? Briefly explain the answer.
Which group(s) believe monetary policy is ineffective in the long run: Keynesians or Monetarists? Briefly explain the answer.
Chapter 29 Solutions
Principles of Economics (12th Edition)
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- Do you think the typical time lag for fiscal policy is likely to be longer or shorter than the time lag for monetary policy? Explain your answer?arrow_forwardRead the following quote and explain in complete sentences whether it discusses fiscal policy, monetary policy or both. “Taking substantial action at this point, though, would send what could be a negative message to the market — that the balance sheet runoff, which former Chair Janet Yellen said would be ‘like watching paint dry,’ is running into snags and requires corrective action. However, the Fed would have no choice if there are indications that it can't control the market movements, particularly considering the record level of Treasury debt the government has issued this year.”arrow_forwardSuppose a government has a tax revenue shortfall. Will hyperinflation inevitably follow unless the government cuts its fiscal expenditures?arrow_forward
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- From 2008, how might monetary policy (as reflected in the OCR) have affected the degree of crowding out resulting from fiscal policy (as reflected in government expenditure)?arrow_forwardPlease explain the differences between: Expansionary fiscal policyExpansionary monetary policy Contractionary fiscal policyContractionary monetary policyarrow_forwardIn 2006, the U.S. economy experienced an inflationary gap when the economy was booming and the unemployment rate was low. Would you consider a tax increase in that period to be demand-side focused, supply-side focused or both? What would be the impact of this policy on the price level and the real GDP? Explain.arrow_forward
- Use the following graph to answer the next question. Price Level AS AD₂ AD₂ ADoi I Yo Y₁ Y₂ Y₂ Real GDP Suppose an economy's full employment output is at the level Y₁, and the economy's current aggregate demand is represented by AD2. If the government swiftly implements contractionary fiscal policy that immediately shifts the economy's aggregate demand to AD₁, the short to medium term aggregate demand would be most closely represented by AD₁arrow_forwardWhich of the following statements is false? It might sometimes make sense for a government to combine an expansionary monetary policy with an expansionary fiscal policy. If spending is very responsive to changes in interest rates, and the demand for money is interest inelastic, then monetary policy tends to be more powerful than fiscal policy. It would never make sense for a government to combine an expansionary monetary policy with a contractionary fiscal policy. If spending is not very responsive to changes in interest rates, and the demand for money is interest elastic, then fiscal policy tends to be more powerful than monetary policyarrow_forwardThe economy is experiencing rapid inflation, pushing above 9%. Which fiscal policy action should the government implement in an attempt to fix this problem? A.) decrease interest rates B.) raise taxes C.) increase spending D.) increase reserve requirementsarrow_forward
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