Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 33, Problem 6DQ
To determine
Cyclically adjusted budget.
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Suppose actual real GDP is $7.91 trillion, potential real GDP is $13.33 trillion, the marginal propensity to consume is 0.68, and that the government has a balanced budget. If we ignore price effects, by how many trillions of dollars should the government change its spending to fix the gap while keeping the federal budget balanced? (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.)
Suppose the economy begins at full employment. Label this starting point as point "1."
Then, suppose that a long strike by coal miners reduces the coal supply and increases the price of coal. Show the effects on your graph and label the new equilibrium point "2."
Lastly, suppose our government wants the economy to return to full-employment as quickly as possible. Should the government intervene? If so, show the impact of successful fiscal policy on your graph. Label this new equilibrium point "3."
C is consumer expenditure
T is tax revenue
Y is aggregate output
I is investment expenditure
r is interest rate
G is government expenditure
L is money demand
M is money supply
Derive the relevant matrix inverse (do not use Cramer's rule) to solve for the equilibrium level of income in
terms of government expenditure (G). At what level of public spending does the government balance its
budget? (Hint: the endogenous variables are Y and r).
Chapter 33 Solutions
Economics (Irwin Economics)
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