The government plans to stimulate the economy and is considering which of the two policies would generate a larger effect on the real economy. Option 1: Increasing G by $100 (taxes remain unchanged). Option 2: Decreasing taxes by $100. (G remains unchanged). Given that there are credit market imperfections in the market for consumer credit. Examine, with the aid of diagrams, the effects of each policy on aggregate output, the current interest rate, current employment, the current real wage, current consumption and current investment. Explain any differences observed.

The government plans to stimulate the economy and is considering which of the two policies would generate a larger effect on the real economy. Option 1: Increasing G by $100 (taxes remain unchanged). Option 2: Decreasing taxes by $100. (G remains unchanged). Given that there are credit market imperfections in the market for consumer credit. Examine, with the aid of diagrams, the effects of each policy on aggregate output, the current interest rate, current employment, the current real wage, current consumption and current investment. Explain any differences observed.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter15: Macroeconomic Policy, Economic Stability, And The Federal Debt

Section: Chapter Questions

Problem 11CQ

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