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Chapter 13: Q.b - For Critical Thinking (page 291)

Based on Schwinn's conclusions, is the government likely to be able to boost real GDP with an increase in government spending if it has raised and lowered its expenditures a number of times in previous months? Explain your reasoning.

Short Answer

Expert verified

If the economy is in a downturn, and the public authority can get from the private section, then it can go about as an expansionary monetary game plan to help the general financial turn of events.

Step by step solution

01

introduction

The extended government spending might have a multiplier effect. If organization spending makes the jobless get occupations, by then they will have more compensation to spend inciting a further augmentation in complete interest.

02

explanation

If the economy is close as far as possible, higher government spending can incite swarming out. This is the place where the assembly burns through even more. Anyway, it has the effect of reducing private division spending. Assuming the economy is close as far as possible, by then higher government spending might cause inflationary loads and little augmentation in real GDP. If the economy is in a downturn, and the public authority can get from the private section, then it can go about as an expansionary monetary game plan to help the general financial turn of events.

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Most popular questions from this chapter

Assume that MPC= 45when answering the following questions.

a. If government expenditures rise by \( 2 billion, by how much will the aggregate expenditure curve shift upward? By how much will equilibrium real GDP per year change?

b. If taxes increase by \) 2 billion, by how much will the aggregate expenditure curve shift downward? By how much will equilibrium real GDP per year change?

Recall that the Keynesian spending multiplier equals 1 /(1-M P C). Suppose that in Figure 13-4, the MPC is equal to 0.9. In addition, the amount of the horizontal leftward shift from AD2 to AD3 caused by a crowding-out effect on planned investment spending was 0.5\( trillion, or \) 500 billion. How much investment spending was crowded out?

A government is currently operating with an annual budget deficit of \(40 billion. The government has determined that every \)10 billion reduction in the amount it borrows each year would reduce the market interest rate by 0.1 percentage point. Furthermore, it has determined that every 0.1-percentage-point change in the market interest rate generates a change in planned investment expenditures in the opposite direction equal to \(5 billion. The marginal propensity to consume is 0.75. Finally, the government knows that to eliminate an inflationary gap and take into account the resulting change in the price level, it must generate a net leftward shift in the aggregate demand curve equal to \)40 billion. Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? (Hint: How much new private investment spending is induced by each $10 billion decrease in government spending? )

Currently, a government's budget is balanced. The marginal propensity to consume is \(0.80. The government has determined that each additional \)10 billion it borrows to finance a budget deficit pushes up the market interest rate by role="math" localid="1651613391961" 0.1 percentage point. It has also determined that every role="math" localid="1651613378175" 0.1-percentage point change in the market interest rate generates a change in planned investment expenditures equal to \(2 billion. Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price level, it must generate a net rightward shift in the aggregate demand curve equal to \)200 billion. Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase its expenditures? (Hint: How much private investment spending will each $10 billion increase in government spending crowd out?)

2. Why do you suppose that some economists have argued that a key determinant of a nation's stabilization coefficient value is whether its government relies to a greater extent on automatic fiscal stabilizers instead of discretionary policy actions?
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