Macroeconomics (Book Only)
12th Edition
ISBN: 9781285738314
Author: Roger A. Arnold
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
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
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Suppose the MPC is 0.60. Assume there are no
crowding out or investment accelerator effects. Please
answer the following questions with calculation details.
(1) If the government increases expenditures by $200
billion, then by how much does aggregate demand shift
to the right?
(2) If the government decreases taxes by $200 billion,
then by how much does aggregate demand shift to the
right?
(3) Are the above two results the same? Why or why
not?
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
Knowledge Booster
Similar questions
- Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases income yet again, causing a second change in consumption equal to The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD₁ ) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by selecting it…arrow_forwardIt appears that there was an economic drop during the 2019-2021 period as a result of the pandemic. Assume that we can view this as a negative shock to private investment, due to a combination of lockdowns and uncertainty about the world. In under 150 words, answer the following question: Was government consumption expenditure used as stabilisation policy following the slow-down during 2020 and 2021? (Note, you only need to discuss this in terms of our demand model of Income-Expenditure, IS-MPR, and Aggregate Demand.) Year Government consumption per capita ($) (rounded to a whole number) 2003 6672 2004 6820 2005 7016 2006 7394 2007 7515 2008 7757 2009 8040 2010 7892 2011 7931 2012 7969 2013 7955 2014 8041 2015 8154 2016 8124 2017 8096 2018 8238 2019 8371 2020 8658 2021 9207 2022 9962arrow_forwardWhat is the eventual effect on real GDP if the government increases its purchases of goods and services by $75,000? Assume the marginal propensity to consume (MPC) is 0.75. $ What is the eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $75,000? Assume the MPC has not changed. $ An increase in government transfers or taxes, as opposed to an increase in government purchases of goods and services, will result in an identical eventual effect on real GDP. no change to real GDP. a larger eventual effect on real GDP. a smaller eventual effect on real GDP.arrow_forward
- Consider a Keynesian model but where investment (just like consumption) is increasing in aggregate income, e.g., because investment depends on business cash flow. Now that investment depends on aggregate income, a fiscal stimulus has more effect on equilibrium output.Answer true, false, or uncertain. Please briefly explain your answerarrow_forwardConsider a simple Keynesian income-spending model of an economy described by the following equations 1. C= 250 + 0.75Yd TR = 200 T = 0.1Y 1=250 %3D G= 600 X = 350 %3D M=0.15Y (a) Calculate the equilibrium income level. (b) Sketch this equilibrium position using a two-dimensional graph. If potential GDP is 3,570 what is the size of the output gap? If public sector spending on goods and services is increased by 50, what is the new equilibrium level of income? How much should public spending have been increased by in order to have closed the output gap? (c) [All calculations to one decimal point. You must report your calculations.] MacBook Air 888 000 F1 F2 F3 F4 FS F7 F10 £ # @ € 2 $ % & 3 4 5 6 7 8 %3D Q E R Y A S F V alt cmd cmd Varrow_forwardLet the marginal propensity to consume for an economy be 0.9 (MPC = 0.9). Policymakers in the federal government view the economy as "overheating" and want to enact fiscal policy to reduce AD. This scenario applies questions 31 - 33. Question 31 If the federal government reduces it purchases, G, by $50 billion, by much will real GDP change assuming no mitigating factors on the fiscal multiplier? Edit View Insert Format Tools Table 12pt v Paragraph v BIU A ...arrow_forward
- An economy is operating with an output that is $400 billion dollars below its natural rate of $2000 billion dollars and fiscal policy makers want to close the recessionary gap. The central bank agrees to hold the interest rate constant so there is no crowding out. The marginal propensity to consume is 4/5. In which direction and by how much would the government spending need to change to close the gap? Fully explain your answer and provide a graph that shows the initial situationarrow_forwardThe Japanese government decides to stimulate the economy by increasing direct spending by $70 billion. If the final change in real GDP is $280 billion, what is Japanese consumers' marginal propensity to consume (MPC)? Please round your answer to two decimal places.arrow_forwardSuppose economists observe that an increase in government spending of $14 billion raises the total demand for goods and services by $42 billion. If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be . Now suppose the economists allow for crowding out. Their new estimate of the MPC would be than their initial one.arrow_forward
- Fill in the missing blanks in the following table. Assume for simplicity that taxes are zero. Also assume that the values represent billions of dollars. National Income and Real GDP (Y) $8,000 $9,000 $10,000 $11,000 $12,000 In the above example, the marginal propensity to consume is (Enter your response rounded to two decimal places.) In the above example, the marginal propensity to save is (Enter your response rounded to two decimal places.) Consumption (C) $4,800 $5,400 $6,000 $6,600 $7,200 Saving (S) $ $arrow_forwardConsider the graph at right showing an economy in recession. Aggregate demand is currently at AD. Equilibrium currently occurs at Eo. If aggregate demand was ADF, there would be full employment. Suppose the government engages in fiscal policy that results in full crowding out. Using the line drawing tool, draw the new demand curve that shows full crowding out. Carefully follow the instructions above, and only draw the required object. Price level Eo EF ADO F Real GDP per Year ($ trillions) SRASO ADF O Uarrow_forwardPlease check the solution to (a) and (b) of the following problem for accuracy and elaborate: Given MPC (marginal propensity to consume) = 0.75, if the government implements an expansionary fiscal policy as (a) cutting taxes by $10 billion, then by how much would total spending increase over an infinite period? (b) spending $10 billion, then by how much would total spending increase over an infinite period? MPC = 0.75 Tax multiplier = (-MPC / 1) = (-0.75 / 1 – 0.75) = (-0.75 / 0.25) = -3. (a) Cutting taxes by $10 billion. The total spending increase by (-3) (-$10 billion) = $30 billion. Spending multiplier = (1/1 – MPC) = (1 / 1 – 0.75) = 1 / 0.25 = 4 (b) Spending 1ncrease by 10 billion. The total spending increase by (4) ($10 billion) = $40 billion.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
