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Chapter 13: Q. 13 (page 297)
Assume that the Ricardian equivalence theorem is not relevant. Explain why an income-tax-rate cut should affect short-run equilibrium real GDP.
As a result of changes in autonomous spending, the equilibrium real GDP is less stable.
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Suppose that Congress and the president decide that the nation's economic performance is weakening and that the government should "do something" about the situation. They make no tax changes but do enact new laws increasing government spending on a variety of programs.
a. Prior to the congressional and presidential action, careful studies by government economists indicated that the Keynesian multiplier effect of a rise in government expenditures on equilibrium real GDP per year is equal to . In the months since the increase in government spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. What factors might account for this?
b. Another year and a half elapses following passage of the government spending boost. The government has undertaken no additional policy actions, nor have there been any other events of significance. Nevertheless, by the end of the second year, real GDP has returned to its original level, and the price level has increased sharply, Provide a possible explanation for this outcome.
Determine whether each of the following is an example of a situation in which there is indirect crowding out resulting from an expansionary fiscal policy action.
a. The government provides a subsidy to help keep an existing firm operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business.
b. The government reduces its taxes without decreasing its expenditures. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.
c. Government expenditures fund construction of a high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building.
Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. What might account for this outcome?
Determine whether each of the following is an example of an automatic fiscal stabilizer.
a. A federal agency must extend loans to businesses whenever an economic downturn begins.
b. As the economy heats up, the resulting increase in equilibrium real GDP per year immediately results in higher income tax payments, which dampen consumption spending somewhat.
c. As the economy starts to recover from a severe recession and more people go back to work, government-funded unemployment compensation payments begin to decline.
d. To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on govemment programs.
In Figure 13-6, explain why a budget deficit naturally tends to rise at a real GDP level such as to the left of .
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