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Chapter 13: Q. 4 (page 296)

Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs.

a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use.

b. The government increases its expenditures without raising taxes. 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. The government finances the construction of a classical music museum that otherwise would never have received private funding.

Short Answer

Expert verified

a) As a result, when the government competes with the private sector, direct spending offsets fiscal policy.

b) As a result, it is evident that the government does not compete with the private sector, but rather seeks assistance in the form of borrowing.

c) It is a direct expenditure offset to fiscal policy because the government has decided to contribute monies before the private sector makes a decision.

Step by step solution

01

:Introduction (part a)

The given is the situations in which a direct expenditure offset to Fiscal policy

The objective is to determine which situations suit the concept best

02

Explanation (part a)

(a)

Because the government purchases unused track, trains, passenger, and freight wagons before private persons do so in order to stimulate the nation's railroad infrastructure, this situation provides a direct expenditure offset to fiscal policy.

A reason, direct spending balances out monetary stimulus when the government competes with the financial market.

03

Introduction (part b)

The given is the situations in which a direct expenditure offset to Fiscal policy

The objective is to determine which situations suit the concept best

04

Explanation (part b)

(b)

This approach suggests indirect expenditure to the fiscal policy since the government seeks to increase spending without raising taxes. It also needs to borrow money from the private sector to cover the budget gap. This will raise market interest rates while deterring private investment expenditure plans.

As a result, it's clear that the government doesn't compete with the private sector, preferring instead to borrow money.

05

Introduction (part c)

The given is the situations in which a direct expenditure offset to Fiscal policy

The objective is to determine which situations suit the concept best

06

Explanation (part c)

(c)

Because no government or private contributions have been received for the establishment of the classical music museum, this situation clearly indicates a direct expenditure offset to fiscal policy.

Because the government opted to contribute cash before the private sector did, it is a direct expenditure offset to fiscal policy.

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Most popular questions from this chapter

Consider the diagram below, in which the current short-run equilibrium is at point A, and answer the questions that follow.

a. What type of gap exists at point A?

b. If the marginal propensity to save equals 0.02, what change in government spending financed by borrowing from the private sector could eliminate the gap identified in part (a)? Explain.

Explain how time lags in discretionary fiscal policy making could thwart the efforts of Congress and the president to stabilize real GDP in the face of an economic downturn. Is it possible that these time lags could actually cause the discretionary fiscal policy to destabilize real GDP?

1. Other things being equal, what features of a nation's economy do you think would tend to contribute to a higher value for its stabilization coefficient? [Hint: Consider the chapter's discussion of the reasons fiscal policy actions tend to have larger effects on real GDP.)

Determine whether each of the following is an example of discretionary fiscal policy action.

a. A recession occurs, and government-funded unemployment compensation is paid to laid-off workers.

b. Congress votes to fund a new jobs program designed to pat unemployed workers to work.

c. The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow inflation.

d. Under powers authorized by an act of Congress, the president decides to authorize an emergency release of funds for spending programs intended to head off economic crises.

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 3. In the 12 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.
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