government chooses to use fiscal policy to stabilize the economy and the marginal propensity to consume (MPC) is given as 0.75 with no crowding out. b. If there is a crowding out effect and investment is very sensitive
government chooses to use fiscal policy to stabilize the economy and the marginal propensity to consume (MPC) is given as 0.75 with no crowding out. b. If there is a crowding out effect and investment is very sensitive
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand
Section: Chapter Questions
Problem 7PA
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2. Suppose the economy is in recession. Policymakers estimate that aggregate
$100 billion short of the amount necessary to generate the long run natural rate of output.
That is, if aggregate demand were shifted to the right by $100 billion, the economy would be in
long run equilibrium.
a. Explain the impact on the economy if the government chooses to use fiscal policy to stabilize
the economy and the marginal propensity to consume (MPC) is given as 0.75 with no crowding
out.
b. If there is a crowding out effect and investment is very sensitive to changes in the interest rate,
should the government increase spending more or less than this amount?
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