Macroeconomics (Book Only)
12th Edition
ISBN: 9781285738314
Author: Roger A. Arnold
Publisher: Cengage Learning
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Question
Chapter 11, Problem 1VQP
To determine
Explain the difference between zero crowding out, incomplete crowding out, and complete crowding out effect.
Expert Solution & Answer
Explanation of Solution
Zero crowding out: In zero crowding out effect, the government increases spending, but the private sector spending remains constant.
Incomplete crowding out: In incomplete crowding out, the government increases spending, then there is less than the proportionate decrease in price sector spending.
Complete crowding out: In complete crowding out effect, if the government increases spending, then there is an equal decrease in private sector spending.
Figure -1 shows the recessionary gap as follows:
In Figure -1, the recessionary gap occurs at point 1. Here, a fall in private expenditure offsets the initial increase in aggregate
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Students have asked these similar questions
Suppose the MPC is 0.60. Assume there are no
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answer the following questions with calculation details.
(1) If the government increases expenditures by $200
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(2) If the government decreases taxes by $200 billion,
then by how much does aggregate demand shift to the
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(3) Are the above two results the same? Why or why
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Madhavi
The country is experiencing a serious rise in inflation which the government wants to control through fiscal policy. The Government will decrease spending by $20 million and increase taxes by $15 million. The marginal propensity to consume (MPC) is 0.80. What will be the effect on GDP and by how much?
A recessionary gap is how much GDP needs to increase from the current GDP to achieve full employment. Let's say that we are experiencing a recessionary gap of $36 million. Also assume that the MPC equals .80. The government decides to decrease taxes to close the recessionary gap. How much will be the tax decrease?
An 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?
The government wants to achieve a balanced budget. It therefore increases…
Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20.
The marginal propensity to consume (MPC) for this economy is
Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead
to an increase in income, generating an initial change in consumption equal to
This increases income yet again, causing a
second change in consumption equal to
The total change in demand resulting from the initial change in government spending
is
and the spending multiplier for this economy is
.
The following graph shows the aggregate demand curve (AD₁ ) for this economy before the change in government spending.
Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the spending multiplier effect takes place.
Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD1…
Chapter 11 Solutions
Macroeconomics (Book Only)
Ch. 11.1 - Prob. 1STCh. 11.1 - Prob. 2STCh. 11.1 - Prob. 3STCh. 11.1 - Prob. 4STCh. 11.3 - Prob. 1STCh. 11.3 - Prob. 2STCh. 11.3 - Prob. 3STCh. 11.4 - Prob. 1STCh. 11.4 - Prob. 2STCh. 11 - Prob. 1VQP
Ch. 11 - Prob. 2VQPCh. 11 - Prob. 3VQPCh. 11 - Prob. 4VQPCh. 11 - Prob. 5VQPCh. 11 - Prob. 1QPCh. 11 - Prob. 2QPCh. 11 - Prob. 3QPCh. 11 - Prob. 4QPCh. 11 - Prob. 5QPCh. 11 - Prob. 6QPCh. 11 - Prob. 7QPCh. 11 - Prob. 8QPCh. 11 - Prob. 9QPCh. 11 - Prob. 10QPCh. 11 - Prob. 11QPCh. 11 - Prob. 12QPCh. 11 - Prob. 13QPCh. 11 - Prob. 14QPCh. 11 - Prob. 15QPCh. 11 - Prob. 16QPCh. 11 - Prob. 17QPCh. 11 - Prob. 18QPCh. 11 - Prob. 19QPCh. 11 - Prob. 20QPCh. 11 - Prob. 21QPCh. 11 - Prob. 22QPCh. 11 - Prob. 23QPCh. 11 - Prob. 24QPCh. 11 - Prob. 1WNGCh. 11 - Prob. 2WNGCh. 11 - Prob. 3WNGCh. 11 - Prob. 4WNGCh. 11 - Prob. 5WNGCh. 11 - Prob. 6WNGCh. 11 - Prob. 7WNGCh. 11 - Prob. 8WNG
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