Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 24, Problem 4PA
To determine
Impact of tax cut.
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Consider two policies-a tax cut that will last for only one year, and a tax cut that is expected to be permanent. which policy will stimulate greater spending by consumers? which is policy will have the greater impact on aggregate demand? explain
What happens to the Aggregate Demand (AD) when there is an increase in Government purchases.
Identify factors that would cause consumption spending to increase. What effect would that have on aggregate demand?
Chapter 24 Solutions
Essentials of Economics (MindTap Course List)
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- If there is an increase in government expenditures and an increase in taxes by an equal amount by how much will the aggregate demand increase?arrow_forwardHow can a reduction in Corporation Tax lead to supply side improvements in an economy?arrow_forwardSuppose actual real GDP is $13.37 trillion, potential real GDP is $12.33 trillion, and the marginal propensity to consume is 0.62. If we ignore price effects, by how many trillions of dollars should the government change its spending to fix the gap? (Round this to two digits after the decimal and enter this value as either a positive value or a negative value without the dollar sign.)arrow_forward
- Consider two policies: a tax cut that will last for only one year and a tax cut that is expected to be permanent. True or False: A tax cut that is expected to be permanent will have a greater impact on aggregate demand than a tax cut that will last for only one year. True Falsearrow_forwardExplain why increased government spending of, for example, $15 billion, will have a different impact on aggregate demand than a $15 billion tax cut.arrow_forwardChapter 11 shows that increased government purchases, with taxes held constant, can eliminate a recessionary gap. How could a tax cut achieve the same result?arrow_forward
- Suppose actual real GDP is $13.56 trillion, potential real GDP is $12.34 trillion, and the marginal propensity to consume is 0.74. If we ignore price effects, and if the government already decided to increase its spending by $1.90 trillion, by how many trillions of dollars should the government change its lump sum taxes to fix the gap? (Round this to two digits after the decimal and enter this value as either a positive value or a negative value without the dollar sign.)arrow_forwardConsider the graph at right showing an economy in recession. Aggregate demand is currently at AD. Equilibrium currently occurs at Eo. If aggregate demand was ADF, there would be full employment. Suppose the government engages in fiscal policy that results in full crowding out. Using the line drawing tool, draw the new demand curve that shows full crowding out. Carefully follow the instructions above, and only draw the required object. Price level Eo EF ADO F Real GDP per Year ($ trillions) SRASO ADF O Uarrow_forwardIn February 2021, retail sales fell by 3.3% compared to January. What does the drop in retail sales indicate about how consumption has changed? Investment spending fell by 2.2% in February. How will these changes affect aggregate expenditures? How will equilibrium GDP be affected? How do you think the stimulus checks that many Americans will receive will affect consumption? How will that affect aggregate expenditures and GDP and employment? Do you expect the change in aggregate expenditures be temporary or permanent? Part of the stimulus package passed by Biden includes an extra $300 per week in unemployment benefits. Do you agree with the stimulus checks and additional $300 per week in unemployment benefits? Why or why not?arrow_forward
- Consider an economy that is operating below the full-employment level of real GDP. What would be the effect of an increase in government spending on aggregate demand and real GDP?arrow_forwardSuppose actual real GDP is $13.74 trillion, potential real GDP is $12.69 trillion, and the marginal propensity to consume is 0.6. If we ignore price effects, and if the government already decided to increase its spending by $1.61 trillion, by how many trillions of dollars should the government change its lump sum taxes to fix the gap? (Round this to two digits after the decimal and enter this value as either a positive value or a negative value without the dollar sign.) Correct Answer: 3.38 Please solve to get that same answerarrow_forwardUsing the graph, shift the aggregate demand curve to depict the impact that a tax cut has on the economy. PRICE LEVEL 130 120 110 100 90 80 70 0 10 + 20 + 30 OUTPUT Aggregate Demand 40 50 60 Aggregate Demand ?arrow_forward
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