The response of the economy to fiscal consolidation a. Use an IS-LM diagram to show the effects on output of a decrease in government spending. Can you tell what happens to investment? Why? b. Discuss the effects of fiscal consolidation onbudget deficit and equilibrium output. How can monetary policy offset the effects of fiscal consolidation on output?

Step 1: IS Curve ShiftDecrease in Government Spending: Government spending is a component of…

Answered: The response of the economy to fiscal…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter24: Fiscal Policy

Section: Chapter Questions

Problem 15P

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The U.S. government has shut down a number of times In recent history Explain how a government shutdown will affect the variables In the national Investment and savings identity Could the shutdown affect the government budget deficit?
d. Macroland implements a combination of expansionary fiscal and monetary policies. What will be the effect of these policies on each of the following?i. Aggregate demand in Macrolandii. The price level in Macroland iii. Explain the effects of expansionary fiscal policies on interest rates inMacroland.iv. Explain the effects of expansionary monetary policies on interest rates in Macroland.
a. What are the fiscal policy tools the government can use to expand an economy that is in a recession? Explain the interaction between monetary and fiscal policy?b. Explain how monetary policy is expected to affect investment and aggregate expenditure and discuss its connection with interest rates and output?
Exercise 4 Use a combination of text and drawing of figures when answering the following questions: a) Discuss the effect of an expansionary fiscal policy using the IS TR model. Why doces the interest rate change and what does it mean for the Keynesian multiplier? b) How will the answer from the previous sub-question change if: i. the inflation targeting of the Central Bank became more flexible? ii. the country opens up like after a pandemic leading to more imports? c) Explain the difference between the effect of an expansionary fiscal policy using an IS- TR-IFM model comparing Norway and Denmark as examples of countries with different exchange rate regimes. d) Assume a model where actual inflation depends on 1. Underlying inflation, 2. Output gap and 3. Supply chock. Explain in a diagram with an aggregate supply curve (AS) and using numbers for each of these three factors, the outcome in the short run and in the long run, if a negative supply shock like a war occurs.
Should fiscal policy encourage more consumption or more saving? Does it matter? I need a reason why.
Our macroeconomic model suggests that after a decline in aggregate demand like that of 2007, the economy will self correct and return to a position where the GDP gap is zero. If this is correct, why should the government ever intervene with fiscal policy? a. It take many years for the GDP gap to close on its own. b. This is part of the government's "mission statement" as given in the Constitution. c. Fiscal policy is profitable for banks. d. People do not trust the theory behind the model.
Fiscal Policy: End of Chapter Problem Examine what the "three difficulties with using fiscal policy" look like in real life. Categorize cach of the following three stories as either crowding out, magnitude, or a matter of timing. a. During a recession, the State of New York hires 1,000 new trash collectors. The state legislature in Albany takes six months to pass a law to hire the new trash collectors. Then, because of government rules and paperwork, the government actually hires the workers 18 months after the recession has begun. The difficulty is____________. b. During a recession, the State of New York hires 1,000 new trash collectors. Five hundred of the new trash collectors, however, were just people who quit their jobs as restaurant employees to take the better-paying trash collector jobs. The difficulty is_____________. c. During a recession, the State of New York hires 1,000 new trash collectors. However, during the course of the recession, 300,000 additional people…
The graph below shows real GDP levels over time. Answer the following questions based on this groph. Real GDP T Business Cycle Time Y" a. At time T. what is the economy experiencing? O full-employment output an economic expansion an economic contraction b. In order to smooth out the business cycle, what type of fiscal policy should the government undertake? contractionary fiscal policy expansionary fiscal policy c. What type of actions might the government take? a decrease in taxes and an increase in government purchases a decrease in both taxes and govemment purchases an increase in taxes and a decrease in government purchases an increase in both taxes and government purchases
B. Move the Economy back to Potential GDP C. Do nothing D. Decrease Inflation, Lower Interest Rates, Increase Spending 33. If an Economy is producing below Potential GDP, the correct form of action is: A. Expansionary Monetary Policy combined with Contractionary Fiscal Policy B. Contractionary Monetary Policy combined with Expansionary Fiscal Policy C. Expansionary Monetary Policy or Expansionary Contractionary Policy or some Combination of both D. Contractionary Monetary and Fiscal Policy in the Same Amounts xt Predictions: On Editor Suggestions: Showing Et P + 51°
10. In order to close an inflationary gap, the government needs to implement which of the following measures A. expansionary fiscal policy B. contractionary fiscal policy C. expansionary monetary policy D. contractionary monetary policy
One of the main arguments against using Fiscal Policy is the crowding out effect. Suppose the government uses government purchases to stimulate the economy. Explain the crowding out effect in detail using a graph for the bond market, the money market, the foreign exchange market, and the AD SRAS LRAS model.
Identify each scenario as an example of expansionary fiscal policy, contractionary fiscal policy, or not an example of fiscal policy. a. An increase in the money supply is b. A decrease in taxes is fiscal policy. not an example of fiscal policy. a contractionary an expansionary d. An increase in tax rates is c. A decrease in the unemployment rate is fiscal policy. fiscal policy. f. A decrease in the money supply is e. A decrease in government spending is fiscal policy. fiscal policy. h. An increase in corporate bonds purchased is g. A decrease in transfer payments is fiscal policy. fiscal policy. i. An increase in government spending is fiscal policy.

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