Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 11, Problem 5E
To determine
The effect of an increase in social security transfers.
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Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional doilar they earn and save the remaining
$0.20.
The marginal propensity to consume (MPC) for this economy is
, and the spending multiplier for this economy is
Suppose the government in this economy decides to decrease government purchases by $400 billion. The decrease in government spending will lead
to a decrease in income, creating an initial change in consumption equal to
This decreases income yet again, leading to a
second change in consumption equal to
The total change in demand resulting from the initial change in government spending is
Consider the following model: Y=C+I+G, C=c(Y-T), I=i(Y,r) Analyze the effects of expansionary and contractionary fiscal policies and indicate them on a graph.
Consider the IS/LM model. Show the effects of the following policies on Y and r on a graph:
a) Contractionary fiscal policy
b) Expansionary fiscal policy
Chapter 11 Solutions
Macroeconomics (Fourth Edition)
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- 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? Madhaviarrow_forwardConsider 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_forward
- On the following graph, AD1 represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 billion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) 106 105 104 103 102 H AS 1ŏ1 101 ADA 100 AD 3 99 AD 2 98 AD1 97 Full Employment 96 6 7 8 9 10 11 12 13 14 15 16 REAL GDP (Billions of dollars) Equilibrium (?)arrow_forwardIt appears that there was an economic drop during the 2019-2021 period as a result of the pandemic. Assume that we can view this as a negative shock to private investment, due to a combination of lockdowns and uncertainty about the world. In under 150 words, answer the following question: Was government consumption expenditure used as stabilisation policy following the slow-down during 2020 and 2021? (Note, you only need to discuss this in terms of our demand model of Income-Expenditure, IS-MPR, and Aggregate Demand.) Year Government consumption per capita ($) (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_forwardFiscal policy consists of intentional changes in the government's spending levels or tax policies designed to achieve specific macroeconomic goals such as full employment, price stability, or economic growth. By influencing the amount of total spending in the economy, the government can influence the position of the aggregate demand curve. Our theory tells us that aggregate demand will shift by a multiple of the change in spending or taxes. However, spending and tax changes have slightly different effects, as changes in taxes affect spending only indirectly by changing the amount of disposable income. An expansionary fiscal policy may be implemented to fight a recession, while a contractionary policy may be appropriate to control demand-pull inflation. Exploration: How do changes in government spending and taxes affect the equilibrium price level and real GDP? Discuss in detail use your economics textbook.arrow_forward
- On the following graph, AD1 represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 trillion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) AS 106 105 104 103 63 102 101 100 99 98 AD AD 吕 1 97 96 Full Employment 96 6 7 8 9 10 11 12 13 14 15 16 REAL GDP (Trillions of dollars) AD 2 Equilibrium The initial short-run equilibrium level of real GDP is $ trillion, and the initial short-run equilibrium price level is Suppose the government, seeking full employment, borrows money and increases its expenditures by the amount it believes necessary to close thearrow_forwardChanges in taxes The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax cut has on the economy. Suppose the governments of two very similar economies, economy B and economy A, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy B is 0.7 and the MPC in economy A is 0.85. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the (SMALLER MPC or LARGER MPC).arrow_forwardQ.3.2 Explain, using the AD-AS model, how the South African Government can use fiscal policy as a tool to recover from the negative effects of this COVID-19 pandemic. Your answer must include the following: The description of the type of fiscal policy required; An explanation of how the implementation of this tool will work their way through the economy to achieve the desired effect; The AD-AS graph showing the implications of your recommendations.arrow_forward
- Consider the Keynesian Cross model. If the fiscal multiplier equals 2, and the government decides to increase government purchases by 100, by how much would equilibrium output increase?arrow_forwardUsing the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. PRICE LEVEL 130 20 120 110 100 90 80 Aggregate Demand 70 + + 0 10 20 30 OUTPUT 40 50 60 Aggregate Demand ? Suppose the governments of two very similar economies, economy Y and economy Z, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy Y is 0.85 and the MPC in economy Z is 0.8. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with thearrow_forwardplease explain this question in words. Assume that fiscal policy can be accomplished by changing only one of G and T. In the IS-LM framework, suppose the effect on the general equilibrium output is the same between expansionary fiscal policy and expansionary monetary policy. Which one would you expect to have a greater impact on the equilibrium consumption?arrow_forward
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