Assume an economy is in recession and the government is considering using fiscal stimulus measures to boost spending, production and employment. a) Using the IS-LM curve diagram, illustrate the crowding out problem that could occur as a result of increased government spending. Make sure to clearly indicate the new equilibrium position including showing how both the interest rate and level of Y change.

Q: In the IS/LM model, the fiscal policy multiplier with respect to interest rates is (α corresponds to…

A: The correct answer is given in the second step.

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Q: True or False Assume a closed economy in which C = 60 + 0.5(Y - T), G = 40, I = 40 T = 0, where C…

A: Y = C+I+G Y = 60+0.5(Y)+40+40 Y = 140+0.5Y 0.5Y = 140 Y = 280   Now, Private Sector Saving = S = Y -…

Q: The following diagram indicates the end result of an expansionary fiscal policy in the IS-LM model.…

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Q: Using IS/LM diagram explain the likely effects of a fiscal expansion financed by government…

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Q: Assume i=0%, beta=1. Consumer has income of 80 in year 1, 100 in year 2. Now suppose gov't gives…

A: In the policy of the fiscal expansion that government starts the policy of borrowing and using the…

Q: Problem 2. First, briefly explain what is meant by a policy mix. Second, explain how a government…

A: POLICY MIX Policy mix is a term that refers to the mixture of monetary and fiscal policies. Fiscal…

Q: Identify and explain the lags which must be taken into account to ensure optimality in interest rate…

A: Since you have posted multiple questions , I will solve the first one for you.

Q: Assume that the economy is in a severe recession with a high level of under-utilized capacity. The…

A: HI Student, as per the guideline, we are providing answer for the first question. Kindly post the…

Q: Suppose an economy is initially in equilibrium at its potential output level. As a result of an…

A: Given: Horizontal distance=$140 billion MPC=0.25

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Q: Which of the following sequence of events occurs in response to an expansionary fiscal policy?

A: Fiscal policy is essentially the policy framework adopted by the government with regards to its…

Q: Assume i=0%, beta=1. Consumer has income of 80 in year 1, 100 in year 2.  Now suppose gov't gives…

A: The consumer has an income of 80 in year 1 and an additional 10 given by the government.  when…

Q: “Expansionary fiscal policy is more effective in influencing the aggregate income level when…

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A: Have no effect on aggregate demand --- is correct

Q: Assume that the economy is in a severe recession with a high level of under-utilized capacity. The…

A: HI Student, as per the guideline, we are providing answer for the first question. Kindly post the…

Q: 4. Why are fiscal policy multipliers smaller in magnitude in the variable price-fixed wage version…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Assume that an economy is experiencing simultaneous equilibrium in both the product market and money…

A: The IS-LM model is based on short-run macroeconomics. This model analyses the interactions and…

Q: if the mps increases the multiplier decreases

A: MPS and multiplier shows certain relations.

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A: Aggregate demand is a sum of consumption spending, investment, government spending and net exports.…

Q: plain

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A: Crowding-out effect is when increased government spending results in lowering of private investment…

Q: Suppose an economy is initially in equilibrium at its potential output level. As a result of an…

A: Marginal propensity to consume = MPC = 0.25  Government Multiplier = 11-MPC= 11-0.25 = = 10.75 =…

Q: Assume that the economy is in a severe recession with a high level of under-utilized capacity. The…

A: A balanced budget means increase in government expenditure is matched by increase in taxes. Thus for…

Q: 2. Draw the IS-LM curves such that the LM curve slopes up and the IS curve slopes down and use the…

A: As we answer only 3 subparts and the question has more than 3 subparts, we are answering the first 3…

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A: a) When households in the economy become thrifty then the consumption expenditure of households will…

Q: Questions number 6 to 10 are based on having an MPC equal to 0.8 and potential output is P800…

A: "Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Q.2.1.4 Identify two injection flows that are illustrated in this flow diagram. Q.2.1.5 From the…

A: Injections are such variables that add to the circular flow of income.

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A: When equilibrium national income is greater than potential income, there will be recessionary gap.…

Q: Assume i=0%, beta=1. Consumer has income of 80 in year 1, 100 in year 2.  Now suppose gov't gives…

A: Given information beta=1  i=0% Income in period 1=80 Income in period 2=100 Government gives free…

Q: Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the…

A: To reduce the budget deficit expansionary fiscal policy is required.