Economics (7th Edition) (What's New in Economics)
7th Edition
ISBN: 9780134738321
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 27, Problem 27.2.7PA
To determine
The expansionary fiscal policy.
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Briefly discuss the effects of time lags in relation to fiscal policy, including: a comparison to monetary policy, what the level of fiscal policy will be, and its effect on fiscal policy during recession.
3.5 The hypothetical information in the following table
shows what the situation will be in 2021 if Congress and
the president do not use fiscal policy:
Year
2020
2021
Potential
GDP
$18.0 trillion
18.4 trillion
Real GDP
$18.0 trillion
18.0 trillion
Price
Level
120.3
122.7
a. If Congress and the president want to keep real GDP at
its potential level in 2021, should they use an expan-
sionary policy or a contractionary policy? In your
answer, be sure to explain whether Congress and the
president should increase or decrease government
purchases and taxes. Draw an aggregate demand and
aggregate supply graph to illustrate your answer. Be
sure that your graph contains LRAS curves for 2020
and 2021; SRAS curves for 2020 and 2021; AD curves
for 2020 and 2021, with and without fiscal policy
action; and equilibrium real GDP and the price level in
2021, with and without fiscal policy.
i. Real GDP
ii. Potential GDP
iii. The inflation rate
iv. The unemployment rate
b. If Congress and the president…
6.9 An editorial in the Wall Street Journal states: “We don’t put much stock in future budget forecasts because they depend on so many variables.” What variables would a forecast of future federal budget deficits depend on? Why do these variables make future budget deficits difficult to predict?
Chapter 27 Solutions
Economics (7th Edition) (What's New in Economics)
Ch. 27.A - Prob. 1PACh. 27.A - Prob. 3PACh. 27.A - Prob. 4PACh. 27.A - Prob. 5PACh. 27 - Prob. 27.1.1RQCh. 27 - Prob. 27.1.2RQCh. 27 - Prob. 27.1.3RQCh. 27 - Prob. 27.1.4PACh. 27 - Prob. 27.1.5PACh. 27 - Prob. 27.1.6PA
Ch. 27 - Prob. 27.1.7PACh. 27 - Prob. 27.2.1RQCh. 27 - Prob. 27.2.2RQCh. 27 - Prob. 27.2.3PACh. 27 - Prob. 27.2.4PACh. 27 - Prob. 27.2.5PACh. 27 - Prob. 27.2.6PACh. 27 - Prob. 27.2.7PACh. 27 - Prob. 27.2.8PACh. 27 - Prob. 27.3.1RQCh. 27 - Prob. 27.3.2RQCh. 27 - Prob. 27.3.3PACh. 27 - Prob. 27.3.4PACh. 27 - Prob. 27.3.5PACh. 27 - Prob. 27.3.6PACh. 27 - Prob. 27.4.1RQCh. 27 - Prob. 27.4.3RQCh. 27 - Prob. 27.4.4PACh. 27 - Prob. 27.4.5PACh. 27 - Prob. 27.4.6PACh. 27 - Prob. 27.4.7PACh. 27 - Prob. 27.4.8PACh. 27 - Prob. 27.4.9PACh. 27 - Prob. 27.5.1RQCh. 27 - Prob. 27.5.2RQCh. 27 - Prob. 27.5.3PACh. 27 - Prob. 27.5.4PACh. 27 - Prob. 27.5.5PACh. 27 - Prob. 27.5.6PACh. 27 - Prob. 27.5.7PACh. 27 - Prob. 27.6.1RQCh. 27 - Prob. 27.6.2RQCh. 27 - Prob. 27.6.3RQCh. 27 - Prob. 27.6.4RQCh. 27 - Prob. 27.6.5PACh. 27 - Prob. 27.6.6PACh. 27 - Prob. 27.6.7PACh. 27 - Prob. 27.6.9PACh. 27 - Prob. 27.6.10PACh. 27 - Prob. 27.6.11PACh. 27 - Prob. 27.7.1RQCh. 27 - Prob. 27.7.2RQCh. 27 - Prob. 27.7.3RQCh. 27 - Prob. 27.7.4PACh. 27 - Prob. 27.7.5PACh. 27 - Prob. 27.7.7PACh. 27 - Prob. 27.7.8PACh. 27 - Prob. 27.1CTE
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- What is the difference between expansionary fiscal policy and contractionary fiscal policy?arrow_forwardBriefly state and evaluate the problem of time lags in enacting and applying fiscal policy. How might “politics” complicate fiscal policy? How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates? What is the crowding-out effect, and why might it be relevant to fiscal policy?arrow_forwardBriefly explain the meaning of internal balance or government balanced budget.arrow_forward
- One common argument against discretionary fiscal policy is: “Since the economy returns to equi- librium, we should not react to the fluctuations in the economy. If we do nothing, the economy will fix itself.” Critically evaluate this argument.arrow_forwardEconomist Arthur Laffer famously pointed out that, in some cases, income tax revenue can actually go up when tax rates go down. Why might this be the case? Did it happen following the tax cuts of 2017?arrow_forwardList and briefly explain the time lags involved in discretionary fiscal policy.arrow_forward
- What is expansionary fiscal policy? What is contractionary fiscal policy? Does expansionary fiscal policy directly increase the money supply? Isn't it true that the president and Congress fight recessions by spending more money?arrow_forwardWhy do you think multiplier is equal to zero and fiscal policy becomes less effective when we have an equilibrium on long run aggregate supply curve (Use graph to make your arguments stronger when necessary)arrow_forward"Even if there is full information and that wages and prices are fully flexible as what the Classical economists believe, an expansionary fiscal policy can still change the output of the economy" Outline an economic model that explains this possibility.arrow_forward
- Governments may achieve certain economic goals; say controlling inflation or boostingeconomic growth, by implementing fiscal and/or monetary policies. Briefly explain thedifference between fiscal and monetary policiesarrow_forwardAn example of a expansionary fiscal policy is ___? need only one example fastarrow_forwardDrawing diagrams briefly explain the following scenarios: a. Recessionary gap. b. David Ricardo’s criticism of fiscal policy.arrow_forward
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