Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 10, Problem 4AP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model.
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Explain how Classical and Keynesian economists view the use of active government to maintain full employment.
Which of the following would be a fiscal policy prescription for ending inflation?
A) Raise taxes
B) Increase government expenditures to let the multiplier work
C) Raise interest rates to stimulate saving
D) Promote exports to increase injections in the domestic economy
A number of countries, like Greece and the United Kingdom, have in the past few years responded to growing and problematic levels of debt by introducing “austerity” policies: significant cuts to government purchases (G) combined with significant tax (T) increases. These policies have been controversial among both economists and the public.
What is the long run effect of austerity on the unemployment rate?
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- Given the b=mpc=.8, and Yf-Ye=400, how much government spending is necessary to close the recessionary gap, and how much tax cut is necessary to get to full employment?arrow_forward10 . In the “complete Keynesian model”, the investment functions was I = I0 - f(i). An analyst now proposes the following investment function: I = I0 - f(i) + qY, where “q” is a parameter and Y is national income = GDP. Provide two different arguments, i.e. explanations as to why this investment function makes sense. The focus is on the new term, qY (q times Y), in the function.arrow_forwardThe Government of Bangladesh opted for expansionary fiscal policy to fight economic depression. Identify the type of inflation it is expected to create and its impact on the wages. Illustrate the process on the graph. Assume the Pakistan’s economy is in recession: Pakistan implements a combination of expansionary fiscal and monetary policy. In the absence of complete crowding out what will be the effect of these policies on each of the following:(i) Aggregate demand in Pakistan(ii) The price level in Pakistan(iii) Interest rates in Pakistanarrow_forward
- Is fiscal policy, say an increase in government expenditures (G), effective according to the Real Business Cycle (RBC) theory? If it is, should it be used? Explain by using production function, labor market, goods market and asset market equilibrium tools.arrow_forwardAn inflationary gap is how much GDP needs to decrease from the current GDP to maintain employment while avoiding inflation. Let's say that we are experiencing an inflationary gap of $200 million. The government decides to increase taxes. Assume the MPC equals .80. How much will the tax increase be?arrow_forwardThe efficiency wage theory argues that (a) Firm choose to pay a lower wage than the classical equilibrium wage, thus the real wage is lower than the wage at which the labor market clears (b) Firm choose to pay a lower wage than the classical equilibrium wage, thus the real wage is higher than the wage at which the labor market clears (c) Firm choose to pay a higher wage than the classical equilibrium wage, thus the real wage is lower than the wage at which the labor market clears. (d) Firm choose to pay a higher wage than the classical equilibrium wage, thus the real wage is higher than the wage at which the labor market clearsarrow_forward
- Identify one fiscal policy action that could counter the increase in investments. Explain how this policy will affect each of the following.i. Output ii. The price level iii. Nominal interest ratesarrow_forwardAlthough the United States is one of the richest nations in the world, it is also the world's largest debtor nation. We often hear that the problem is the nation's low savings rate. Suppose policymakers attempt to rectify this by encouraging greater savings in the economy. What effect will their successful attempts have on real GDP? Income-expenditure equilibrium will fall by several times the change in spending Planned investment spending will rise in the short-run The economy will expand Consumer spending will fallarrow_forward
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