2. Fiscal policySuppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion. Four economists agree that expansionaryfiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should beused.Economist A believes that the government spending multiplier is 8 and the tax multiplier is 2. Economist B believes that the government spendingmultiplier is 4 and the tax multiplier is 8.Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for eachscenario, compute the size of the tax cut that would achieve this same effect.Policy Options for Closing Output GapIncrease in SpendingTax CutSpending MultiplierTax Multiplier(Billions of dollars)(Billions of dollars)Economist AEconomist B48 Economist C favors tax cuts over increases in government spending. This means that Economist C likely believes that:A dollar in tax cuts immediately and fully adds to aggregate demand.Tax cuts induce investment spending and improve workers' incentives.Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the followingstatements is consistent with Economist D's belief?A rise in government spending completely crowds out private sector spending.A rise in government spending does not crowd out private sector spending.

Government expenditure(G) multiplier and tax(T) multiplier shows the change in the total output(Y)…

Economist C favors tax cuts over increases in government spending. This means that Economist C likely believes that: A dollar in tax cuts immediately and fully adds to aggregate demand. Tax cuts induce investment spending and improve workers' incentives. Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the following statements is consistent with Economist D's belief? O A rise in government spending completely crowds out private sector spending. A rise in government spending does not crowd out private sector spending.

Economist C favors tax cuts over increases in government spending. This means that Economist C likely believes that: A dollar in tax cuts immediately and fully adds to aggregate demand. Tax cuts induce investment spending and improve workers' incentives. Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the following statements is consistent with Economist D's belief? O A rise in government spending completely crowds out private sector spending. A rise in government spending does not crowd out private sector spending.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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