Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion. Four economists agree that expansionaryfiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should beused.Economist A believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist B believes that the government spendingmultiplier is 4 and the tax multiplier is 2.Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for eachscenario, compute the size of the tax cut that would achieve this same effect.Policy Options for Closing Output GapIncrease in SpendingTax CutSpending Multiplier Tax Multiplier(Billions of dollars)(Billions of dollars)Economist A84Economist B42Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that:O Government purchases increase aggregate demand by stimulating investment.Show desk1:27 PM4/29/2022H Homework (Ch 23)Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for eachscenario, compute the size of the tax cut that would achieve this same effect.Policy Options for Closing Output GapIncrease in SpendingTax CutSpending Multiplier Tax Multiplier(Billions of dollars)(Billions of dollars)Economist A84Economist B42Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that:O Government purchases increase aggregate demand by stimulating investment.O Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand.Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the followingstatements is consistent with Economist D's belief?O A rise in government spending does not crowd out private sector spending.O A rise in government spending completely crowds out private sector spending.HG18O62

Fiscal policy is the use of government spending and taxation to influence the economy.Fiscal policy…

Policy Options for Closing Output Gap Increase in Spending Tax Cut Spending Multiplier Tax Multiplier (Billions of dollars) (Billions of dollars) Economist A 8 4 Economist B 4 2 Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that: O Government purchases increase aggregate demand by stimulating investment. O Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand. Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the following statements is consistent with Economist D's belief? O A rise in government spending does not crowd out private sector spending. O A rise in government spending completely crowds out private sector spending.

Policy Options for Closing Output Gap Increase in Spending Tax Cut Spending Multiplier Tax Multiplier (Billions of dollars) (Billions of dollars) Economist A 8 4 Economist B 4 2 Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that: O Government purchases increase aggregate demand by stimulating investment. O Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand. Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the following statements is consistent with Economist D's belief? O A rise in government spending does not crowd out private sector spending. O A rise in government spending completely crowds out private sector spending.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter21: Fiscal Policy

Section: Chapter Questions

Problem 19SQ

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Suppose some imaginary economy is currently experiencing deficient aggregate demand of $64 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are unable to decide which method of expansionary policy will resolve the situation. Economist One believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist Two believes that the government spending multiplier is 4 and the tax multiplier is 2. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect. Economist Three favors increases in government spending over tax cuts. This means that Economist Three likely believes that: - Government purchases increase aggregate demand by stimulating investment -Part of a dollar in tax cuts may be saved rather than…
Suppose there is some hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is 0.65 , and the spending multiplier for this economy is 2.8571 . Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to (blank). This increases income yet again, leading to a second chance in consumption equal to (blank) . The total change in demand resulting from the initial change in government spending is (blank) .
Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." 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 on the graph. PRICE LEVEL 140 135 130 125 120 115 110 105 100 O 9 AD₁ 1 1 3 4 5 OUTPUT (Trillions of dollars) 2 6 7 8 AD₂ ?
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 , and the spending multiplier 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 .
Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. 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 $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to $______ billion. This decreases income yet again, leading to a second change in consumption equal to $________ billion . The total change in demand resulting from the initial change in government spending is $ ________ trillion. The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2AD2) after the multiplier effect takes place. For simplicity,…
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 the economy is______, and the spending multiplier for the economy is______. suppose the government in this economy decides to decrease the government purchases by $300 billion. The decrease in government purchases will lead to a decrease in income generating an initial change in consumption equal to______. This decreases 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 that 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…
Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. 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 $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to This decreases 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 (AD 2) is parallel to the initial aggregate demand curve…
In preparing their estimates of the stimulus package's effect on GDP, Obama administration economists estimated a government purchases multiplier of 1.57. Economist Robert Barro argues that the government purchases multiplier would be lower than the administration's estimate, and economists Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo argued that the multiplier would be higher than the administration's estimate. when the unemployment rate is high; when the value of the dollar is depreciating against foreign currencies when the federal budget is in surplus; when government transfer payments are declining during wartime; when short-term interest rates are near zero during a recession; when the inflation rate is relatively low
Which of the following is true about government spending (G) and tax (T) multiplier? The G multiplier is bigger in absolute value than the T multiplier. The T multiplier is bigger in absolute value than the T multiplier. G and T multipliers are always the same size. Whether the G multiplier is larger/smaller than the T multiplier depends on the size of MPC.
The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The marginal propensity to consume (MPC) for this economy is (0.25 or 0.75 or 1 or 1.33 or 4), and the spending multiplier for this economy is (0.25 or 0.75 or 1 or 1.33 or 4). Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to (-$1,000 billion or -$187.5 billion or -$93.8 billion or - $62.5 billion or -500 billion). This decreases income yet again, leading to a second change in consumption equal to (- $93.8 billion or - 1,000 billion or - $500 billion or - $140.6 billion or -62.5 billion). The total change in demand resulting from the initial change in government spending is (-$1 trillion or - $1.9…
The multiplier effect of a change in government purchases Suppose there is some 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 (0.2 or 0.8 or 1 or 1.25 or 5), and the spending multiplier for this economy is (0.2 or 0.8 or 1 or 1.25 or 5). Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to (320 billion or 2000 billion or 1000 billion or 80 billion or 160 billion). This increases income yet again, leading to a second change in consumption equal to (160 billion or 80 billion or 1000 billion or 2000 billion or 256 billion). The total change in demand resulting from the initial change in government spending is (2 trillion or 0.8 trillion or 1.6 trillion or 3.2 trillion).
Suppose the following data for an economy; a consumption function of C = 800 + 0.8Yd, Investment spending is fixed at 300, Government purchases are 400, and net taxes are 100. What is the MPC, MPS, and the value of the tax multiplier? Calculate the equilibrium level of income (Y)? Suppose government increases taxes by 100, use the corresponding multiplier to calculate the new equilibrium level of income. Check to ensure that the multiplier worked (confirm algebraically that your answer in c. is correct, that is, solve for the new equilibrium level of income (Y)).