Modern Principles of Economics
Modern Principles of Economics
4th Edition
ISBN: 9781319098728
Author: Tyler Cowen, Alex Tabarrok
Publisher: Worth Publishers
Question
Book Icon
Chapter 37, Problem 1FT

Subpart (a):

To determine

Multiplier and impact on GDP.

Subpart (a):

Expert Solution
Check Mark

Explanation of Solution

The initial increase in government spending leads to increased income and consumption. This is because, the increased government spending leads to more investment, thus increasing the aggregate demand and therefore the output. This would further increase income and consumption and hence there is an overall increment in the National Income which is greater than the initial increase in spending. Hence the multiplier tends to be greater than one during this time. Thus greater the multiplier, the net effect is an increase in the GDP.

There is also a possibility that if the economy tends to be at full capacity, the increased government spending may tend to crowd out the private sector, resulting in no net increase in aggregate demand thus no net effect on GDP.

Economics Concept Introduction

Concept introduction:

GDP (Gross Domestic Product): GDP refers to the market value of all final goods and services that are produced in an economy during an accounting year. It is equated as GDP=Consumption (C)+Investment (I)+Government expenditure (G)+Net export .

Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in the initial consumption at a constant price rate. Multiplier is positively related to the marginal propensity of the consumer and negatively related to the marginal propensity to save.

Crowding out: Crowding out effect refers to the decrease in the availability of money for private investment due to increase in the fiscal expansion.

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Subpart (b):

To determine

Multiplier and impact on GDP during recession.

Subpart (b):

Expert Solution
Check Mark

Explanation of Solution

During a recession, the growth rate is negative. The multiplier is estimated to be lower during recession. In such a situation the increased government spending can stimulate the economy. It is also possible that the increased spending may create a multiplier effect which causes the unemployed to attain job, hence income leading to an increase in aggregate demand. This can result into a final increase in GDP than the initial injection.

Economics Concept Introduction

Concept introduction:

GDP (Gross Domestic Product): GDP refers to the market value of all final goods and services that are produced in an economy during an accounting year. It is equated as GDP=Consumption (C)+Investment (I)+Government expenditure (G)+Net export .

Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in the initial consumption at a constant price rate. Multiplier is positively related to the marginal propensity of the consumer and negatively related to the marginal propensity to save.

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

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
Describe the various measures used to assess poverty and economic inequality. Analyze the causes and consequences of poverty and inequality, and discuss potential policies and programs aimed at reducing them, assess the adequacy of current environmental regulations in addressing negative externalities. analyze the role of labor unions in labor markets. What is one benefit, and one challenge associated with labor unions.
Evaluate the effectiveness of supply and demand models in predicting labor market outcomes. Justify your assessment with specific examples from real-world labor markets.
Explain the difference between Microeconomics and Macroeconomics?  2.) Explain what fiscal policy is and then explain what Monetary Policy is? 3.) Why is opportunity cost and give one example from your own of opportunity cost. 4.) What are models and what model did we already discuss in class? 5.) What is meant by scarcity of resources?
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education