Figure 16-7 Price level P₁ P₂ P₁ LRAS LRAS (8 C SRAS, SRAS AD₁ AD₂ 0 Y₂ Ya Real GDP (trillions of dollars) Refer to Figure 16-7. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP? increase taxes contractionary fiscal policy O increase government spending decrease interest rates

Figure 16-7 Price level P₁ P₂ P₁ LRAS LRAS (8 C SRAS, SRAS AD₁ AD₂ 0 Y₂ Ya Real GDP (trillions of dollars) Refer to Figure 16-7. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP? increase taxes contractionary fiscal policy O increase government spending decrease interest rates

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter24: Fiscal Policy

Section: Chapter Questions

Problem 6P

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Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy whereas a cut in a state income tax is not fiscal policy?
Exercise D24 Compare two policies: a tax cut on income or an increase in government spending on roads and bridges. What are both the short-term and longâ€”term impacts of such policies on the economy?
The graph below shows real GDP levels over time. Answer the following questions based on this graph. Real GDP Business Cycle A Time a. At time T, what is the economy experiencing? O an economic expansion O full-employment output O an economic contraction b. In order to smooth out the business cycle, what type of fiscal policy should the government undertake? O expansionary fiscal policy O contractionary fiscal policy c. What type of actions might the government take? O a decrease in taxes and an increase in government purchases O an increase in taxes and a decrease in government purchases O a decrease in both taxes and government purchases. O an increase in both taxes and government purchases
Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Such an amendment, f strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession. This is because when the economy enters a recession, 0000 net tax revenue falls and transfer payments rise. Balancing the budget would require raising transfer payments and raising taxes. net tax revenue rises and transfer payments fall. Balancing the budget would require raising transfer payments and lowering taxes. net tax revenue falls and transfer payments rise. Balancing the budget would require lowering transfer payments and raising taxes net tax revenue rises and transfer payments fall. Balancing the budget would require lowering transfer payments and lowering taxes
Figure 8-23. The figure represents the relationship between the size of a tax and the tax revenue raised by that tax. 6 on4m21 3 Tax Revenue B Tax Size Refer to Figure 8-23. If the economy is at point A on the curve, then a small increase in the tax rate will O increase the deadweight loss of the tax and increase tax revenue. O increase the deadweight loss of the tax and decrease tax revenue. decrease the deadweight loss of the tax and increase tax revenue. O decrease the deadweight loss of the tax and decrease tax revenue.
Overall Price Level 49 43 32 19 AD2 AS O Increase government spending: $19 O Increase taxes; $26 O increase taxes; $19 O Increase government spending; $29 AD 26 29 Real GDP Please refer to the graph above. Assume we begin in equilibrium at ADO and AS. Ceteris paribus, which fiscal policy will lead to which initial real GDP?
16. If consumers in a country spend 4/5 of their disposable income. If their governmentdecreases its spending by 55 trillion and in order to maintain a balanced budgetsimultaneously decreases taxes by 55 trillion. Calculate the effect of the 55 trillion change ingovernment spending and 55 trillion change in taxes on the country’s aggregate demand.
15. If consumers in a country spend 3/4 of their disposable income. If their governmentincreases its spending by 75 trillion and in order to maintain a balanced budgetsimultaneously increases taxes by 75 trillion. Calculate the effect of the 75 trillion change ingovernment spending and 75 trillion change in taxes on the country’s aggregate demand.
3. a. Suppose that in a year when GDP is rising rapidly you also observe theGovernment budget balance increasing. How can you explain this correlation? b. Now suppose instead that in a year when GDP is rising rapidly you also observethe Government budget balance decreasing. How can you explain this correlation?
Complete the following table and answer one question. a. Assuming an 8 percent sales tax is levied on all consumption, complete the following table: Instructions: Round your responses for "Sales Tax" to the nearest whole number. Round your responses for "Percentage of Income Paid in Taxes" to one decimal place. Income Consumption $10,000 20,000 40,000 80,000 Sales Tax $11,000 $ 20,000 $ 1,400 36,000 $ 2,520 60,000 $ 4,200 x 770x Percentage of Income Paid in Taxes 7.7% 7.0% 6.3% X 5.3%
3. What is fiscal equalization? Give an example
Y C I G X $ 100 $ 120 $ 20 $ 30 $ 10 $ 300 $ 300 $ 20 $ 30 - $ 10 $ 500 $ 480 $ 20 $ 30 - $ 30 $ 700 $ 660 $ 20 $ 30 - $ 50 14.If government spending increases by $ 15, what is the new equilibrium level of the real GDP? If government spending increases by $ 15 then to find the new equilibrium I can use the recessionary GAP formula Recessionary GAP = GDP Gap / Spending Multiplier (5) 15 = GDP Gap (5) 5 75 = GDP Gap GDP Gap + Old equilibrium level of the real GDP =…