Suppose this economy is in long-run equilibrium, as shown in the graph. Consider an exogenous decrease in government expenditures. Individuals are present-biased and do not take this reform into account when deciding how much to work. What are the short-run and long-run effects of this fiscal reform? Explain your answer. Interest FE line rate, r XM curve IS curve Output, Y

Suppose this economy is in long-run equilibrium, as shown in the graph. Consider an exogenous decrease in government expenditures. Individuals are present-biased and do not take this reform into account when deciding how much to work. What are the short-run and long-run effects of this fiscal reform? Explain your answer. Interest FE line rate, r XM curve IS curve Output, Y

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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You are the Secretary of the Treasury, working with the president to implement appropriate policies. Currently, actual GDP is below potential output and falling. To stabilize the economy, you'd recommend fiscal policy, which could include a. expansionary; increased government purchases and tax cuts b. expansionary; decreased government purchases and a tax increase c. contractionary; increased government purchases and tax cuts d. contractionary; decreased government purchases and a tax increase
Hide student question Time Left : Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs. a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use. b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending. c. The government finances the construction of a classical music museum that otherwise would never have received private funding.
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Suppose that the fiscal policy multiplier is 8.6. What is MPC? Use that MPC and assume that there is no crowding out in this economy. If the federal government knows that it will take a $750 billion rightward shift in AD to end a recession, how much does government spending need to be raised to accomplish that?
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How relevant is the multiplier concept to the implementation of expansionary andcontractionary fiscal policies?