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 32, Problem 3.3P
To determine
Disagreements on relative merits of supply side economics.
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Principles of Economics (12th Edition)
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- Why has Supply Side Economics not yielded the results envisioned by its proponents?arrow_forwardHow can a reduction in Corporation Tax lead to supply side improvements in an economy?arrow_forwardA neoclassical economist and a Keynesian economist are studying the economy of Vineland. It appears that Vineland is beginning to experience a mild recession with a decrease in aggregate demand. Which of these two economists would likely advocate that the government of Vineland take active measures to reverse this decline in aggregate demand? Why?arrow_forward
- Average Tax Rate Tax Revenue ($B) 20% $250 40 300 60 250 80 200 Refer to the table. If the current tax rate is 60 percent, supply-side economists would advocate Multiple Choice lowering tax rates to 20 percent, or lower if possible. lowering tax rates to 40 percent. keeping tax rates at 60 percent. raising tax rates to 80 percent.arrow_forwardThe following graph shows aggregate demand (AD) and aggregate supply (AS) curves for a hypothetical economy. PRICE LEVEL (CPI) 140 135 130 125 120 115 110 105 100 95 90 200 220 240 AS AD 260 280 300 320 340 REAL GDP (Billions of dollars) 360 380 400 AD₂ New Macro Eq ? Suppose the full employment output level in this economy is $300 billion. In order to move the economy to full-employment output at the lowest possible price level, the aggregate demand curve must shift to the by at each price level.arrow_forwardRight now many economies in the world are experiencing a downturn due to the Corona Virus.a) What kind of fiscal policy can governments use to address the decline? b) What actions will be taken by the government in implementing the fiscal policy that you described in part a? c) What will be the effect on Aggregate Demand (if any) as a result of the actions taken in part b?d) What will be the effect on Aggregate Supply (if any) as a result of the actions taken in part b?arrow_forward
- Aggregate supply (AS) changes with each of the following except: Fiscal policy and monetary policy Potential GDP changes The money wage rate changes The money prices of other resources changearrow_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_forwardYou are hired by the Bureau of Economic Analogies (BEA) as an economic consultant. The chairperson of the BEA tells you that he believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. He wants to know what policy to pursue to increase aggregate output by $700 billion. The best estimate he has for the MPC is 0.8. Which of the following policies should you recommend? Select one: a. increase government spending by $700 billion and taxes by $600 billion b. reduce government spending by $350 billion and reduce taxes by $250 billion c. increase government spending by $350 billion and reduce taxes by $700 billion d. increase both government spending and taxes by $700 billionarrow_forward
- Suppose the government of a particular state has a large surplus, so the state's policymakers want to provide a large one-time tax cut (i.e., a decrease in taxes) sometime soon. In parts a.) - c.), show ( on a different graph for each part), how the tax cut under the given conditions would affect the equilibrium Price Level and GDP in the state (in parts b.) and c.), include any changes caused by the Self-Correcting Mechanism- i.e., assume the tax cut happens first, followed by any changes caused by the Self-Correcting Mechanism). a.) A tax cut when the economy exhibits a Recessionary Gap ( assume that the tax cut gets the economy back to the "Natural Rate of Output". So there will be no changes caused by the Self-Correcting Mechanism in this part) (1) b.) A tax cut when the economy is operating at the "Natural Rate of Output”. (1) c.) A tax cut when the economy exhibits an Inflationary Gap. (1) d.) In which of the 3 cases above does the macroeconomy have the LEAST inflation (just list…arrow_forwardTax Revenue and Marginal Tax Rates: Laffer Curve 31. The Laffer Curve is a critical component in the theory of Supply Side Economics. 32. Starting with President Regan, in 1980 the argument was that marginal tax rates were too high. So lowering the tax rate would raise total government tax revenue. The Laffer Curve 33. The second key concept is that if you cut business taxes it would create a wave of investment spending. 34. Thus, shifting out the PPF would increase average income for all households. Why? 35. Thus, cutting taxes for the corporations and the wealthy will create a "trickle down effect." 36. Empirical economic evidence indicates that: 37. During Reagan's presidency, the national debt grew from $997 billion to $2.85 trillion. 38. This led to the U.S. moving from the world's largest international creditor to the world's largest debtor nation (U.S. Dept. Treasury). 39. As pointed out in slide 12 on income distribution, the 60% of American households have experienced a…arrow_forwardDifferentiate between monetary and fiscal policy.arrow_forward
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