2) For both political and macroeconomic reasons governments are often reluctant to run budget deficits. Here, we examine whether policy changes in G and T that maintain a balanced budget are macroeconomically neutral. Put another way, we examine whether it is possible to affect output through changes in G and T so that the government budget remains balanced. Start from the equilibrium condition in the goods market: Y = c +c₁ (Y-T) + I + G a. by how much does Y increase when G increases by one unit? b. By how much does Y decrease when T increases by one unit? c. Why are your answers to (a) and (b) different?
2) For both political and macroeconomic reasons governments are often reluctant to run budget deficits. Here, we examine whether policy changes in G and T that maintain a balanced budget are macroeconomically neutral. Put another way, we examine whether it is possible to affect output through changes in G and T so that the government budget remains balanced. Start from the equilibrium condition in the goods market: Y = c +c₁ (Y-T) + I + G a. by how much does Y increase when G increases by one unit? b. By how much does Y decrease when T increases by one unit? c. Why are your answers to (a) and (b) different?
Chapter17: Federal Deficits, Surpluses, And The National Debt
Section: Chapter Questions
Problem 7SQP
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