60 Suppose the government, in an effort to avoid an increase in the deficit, votes for a budget neutral tax cut policy. Assume the marginal propensity to consume (MPC) is equal to 0.85 and taxes are cut by $8 billion. Round answers to the nearest billion, and specify decreases as a negative number. By how much will government spending change? change in government spending: $ What is the resulting change in the equilibrium level of real GDP? change in equilibrium level of real GDP: $ billion

60 Suppose the government, in an effort to avoid an increase in the deficit, votes for a budget neutral tax cut policy. Assume the marginal propensity to consume (MPC) is equal to 0.85 and taxes are cut by $8 billion. Round answers to the nearest billion, and specify decreases as a negative number. By how much will government spending change? change in government spending: $ What is the resulting change in the equilibrium level of real GDP? change in equilibrium level of real GDP: $ billion

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the government, in an effort to avoid an increase in the deficit, votes for a budget neutral tax cut policy. Assume the marginal propensity to consume (MPC) is equal to 0.75 and taxes are cut by $15 billion. Round answers to the nearest billion, and specify decreases as a negative number. By how much will government spending change? change in government spending: $ What is the resulting change in the equilibrium level of real GDP? change in equilibrium level of real GDP: $ billion billion
17 The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Price Level 160 140 120 100 80 60 40 20 0 (40, 100) Fiscal Policy LRAS प्रै ======= AD₁ billion AS 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) $| Suppose instead that the MPC is 0.5. AD Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and government purchases need to change by $ billion.
2. Discretionary fiscal policy Suppose the economy had been producing at potential output but is now producing above it. Which of the following are discretionary fiscal policies that could bring the economy closer to potential output? Check all that apply. ооо Additional spending on bridge repairs A reduction in spending on new road construction A tax cut A tax increase In the preceding scenario, is the discretionary fiscal policy needed to bring the economy closer to potential output an example of expansionary fiscal policy or contractionary fiscal policy? Expansionary Contractionary
9. The lag associated with fiscal policy can: magnify economic fluctuations. stimulate output beyond full employment. depress output below full employment. all of the above.
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2. Assume a given economy has an equilibrium GDP of $360 billion. A. If government spending and taxes both increase by $40 billion, determine the new equilibrium GDP. B. If both G and taxes increase by $40 billion, what impact will these two changes happening at the same time have on the budget? In other words, will these two changes cause a surplus, a deficit, or a balanced budget? C. Solve for the numerical value of the balanced budget multiplier.
10. Agreements and disagreements among economists regarding fiscalpolicy Consider a hypothetical economy in which households spend $0.75 of each additional dollar of their after-tax income. The expenditure multiplier for this economy is Suppose that this economy is experiencing a recession. The government would like to stimulate aggregate demand and is deciding whether it should increase its spending by $1 billion or reduce income tax by $1 billion. Assume other things remain constant, and the marginal propensity to consume remains at 0.75. Before any multiplier effect takes place, a $1 billion increase in government spending will increase the aggregate demand by s $1 billion reduction in income tax will increase the aggregate demand by billion, while a billion. Now consider the effect of each fiscal policy after the multiplier effect is complete. A $1 billion increase in government spending will result in a total increase of aggregate demand by $ billion, whereas a $1 billion…
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3 Question 2 Given the following information: 1= 150, G = 150, T-150 and C= 150 +0.75(Yd) O At least 2 of the choices 75 is the fiscal multiplier O 25% is the marginal propensity to save O Equilibrium Aggregate Expenditure will increase by 400 if gov't spending is increased by 100?
8. Which of the following is the best example of Crowding out? The US government spends more (G increases), therefore they must increase taxes. If US G increases, interest rates fall, thereby causing business investment, I. to increase. If US government spending on libraries increases, reading will become more popular, and people then will spend more on books. O If US G increases and this is financed through borrowing from foreign lenders, this tends to cause an appreciation of the $. In turn this causes exports to decrease in the short run. O None of the other options.