Country D experiences a recession due to a decrease in consumer confidence. There are two economists, Andrew and Betty. Betty suggests the government to do nothing. Andrew suggests the government to implement fiscal policies to revive the economy as soon as possible. If the government adopts Betty’s policy, draw an AD-AS graph to show what happens to the economy in short run and then long run after the decrease in consumer confidence. Suppose the government adopts Andrew’s policy.(i) Will the government increase or decrease spending?(ii) The government cuts the income tax rate. After cutting the income tax rate, the total income tax revenue collected increases. Explain why.(iii) Will Andrew’s policy be more effective if MPC is smaller? Give one advantage of Betty’s policy over Andrew’s policy.

Decline in consumers confidence results in decline in demand for consumer goods, thus there would be…

Answered: Country D experiences a recession due…

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter16: Expectations Theory And The Economy

Section: Chapter Questions

Problem 10QP

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Country D experiences a recession due to a decrease in consumer confidence. There are two economists, Andrew and Betty. Betty suggests the government to do nothing. Andrew suggests the government to implement fiscal policies to revive the economy as soon as possible.

If the government adopts Betty’s policy, draw an AD-AS graph to show what happens to the economy in short run and then long run after the decrease in consumer confidence.

Suppose the government adopts Andrew’s policy.
(i) Will the government increase or decrease spending?
(ii) The government cuts the income tax rate. After cutting the income tax rate, the total income tax revenue collected increases. Explain why.
(iii) Will Andrew’s policy be more effective if MPC is smaller?

Give one advantage of Betty’s policy over Andrew’s policy.

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