Refer to the information provided in Figure 17.2 below to answer the questions that follow.Price levelRFigure 17.2Y₁OutputASADRefer to Figure 17.2. According to the new classical economists, under rational expectations an expected decreasein government spending wouldO shift AD, to the left.Oshift AD, to the right.O shift AS, to the right.O not change AD and AS.

According to new classical economics, under rational expectations, an expected decrease in…

Answered: Refer to the information provided in…

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

Problem 2CQQ

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Discuss how Classical Economists views and Keynesians’ views conflict each other regarding Say’s Law,flexibility of wages and prices, existence of self-regulation and the requirement of governmentintervention. Make sure you talk about what happens if there is a recessionary gap and an inflationarygap under both views.
Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. Based on this information, answer the following questions: b) What is meant by the term crowding out? In your answer also explain the implications of crowding out for the macroeconomy. (***explanation of crowding out where the concept is clearly defined and implications for the macroeconomy are fully discussed) c) If the MPC rises to 0.8 and also the sensitivity of real money demand to changes in the income rises well, use the IS-LM model to illustrate the impact of expansionary fiscal policy. Label the initial point prior to the fiscal policy as A and the new point following the expansionary policy as B. (***Correct fully labeled IS-LM Model shown including adjustment from the diagram in a) and correct position of points A and B.)
The Keynesian Transmission mechanism will eliminate a recessionary gap if there are not Liquidity Trap or Insensitive Investment function. Explain:a) What it is a liquidity trapb) What it is insensitive investment function
Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. What is meant by the term crowding out? In your answer also explain the implications of crowding out for the macroeconomy.
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An important similarity between the Keynesian model and theAD/ASmodel is that:in both models, prices change when there is a change in spending.both models allow for government intervention in the short run.both models predict that the economy will move towards full employment automatically.in both models, the price level stays constant when there is a change in spending.in both models real GDP stays constant when there is a change in spending.The best definition of government debt is:the difference between government spending and tax revenue in any one year.itâ€™s always larger than the government deficit.the amount the government spends in any one year.all the money the government owes at any point in time.increasing when the government runs a surplus.The total value of Treasury bonds (T-bonds) in existence at any point in time is:the federal government spending deficit.the trade deficit.less than government spending.necessarily less than GDP.the national debt.If…
In which of the following circumstances is expansionary fiscal p In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment? Explain.a. When the investment accelerator is large or when it is small?b. When the interest sensitivity of investment is large or when it is small?
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“Anytime it is snowing when Joe Commuter gets up inthe morning, he misjudges how long it will take him todrive to work. When it is not snowing, his expectationsof the driving time are perfectly accurate. Consideringthat it snows only once every ten years where Joe lives,Joe’s expectations are almost always perfectly accurate.”Are Joe’s expectations rational? Why or why not?
1) The IS-LM Model a) In the IS/LM model explain what happens to equilibrium output and interest rate if governmentsimultaneously pursues expansionary fiscal policy and the central bank opts for a contractionarymonetary policy. Show with the help of a graph along with a very brief verbal explanation. b) Label the statements below as true or false and give a brief explanation for false statementsonly. i) For a given level of P (price), if M (nominal money) increases by 10%, M/P also increases by10% ii) A monetary expansion leads to a lower output and a higher interest rate. iii) Equilibrium in the financial market implies that an increase in income leads to a decrease ininterest rate making the LM curve downward sloping. c) Assume a model economy with the following parameters:C= 100 + 0.25 YD ; I= 100 + 0.5Y - 3000iG= 125 ; T= 100 ;(M/P)d = 6Y - 24000i ; (M/P)s = 4500Derive the IS and LM relation. 2) The short and medium run a) Suppose that the mark-up of goods prices over marginal…
Consider a keynesian macromodel Y=(C0+G+I) / (1-c) where C0 is autonomus consumption, G is government consumption expenditure, I is investment expenditure, c is the marginal propensity to consume. In this model, if lthere is an increse in both labor productivity and the marginal propensity to consume while autonomus expenditures remain unchanged, what will happen to the level of employment? a. can't say for sure b. decreses c. stays the same d. increases

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