Answered: Using the model of aggregate…

Using the model of aggregate demand–aggregate supply to illustrate the traditional view, graphically compare the short-run and long-run impact of debt-financed tax cuts on: a. output. b. prices.

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter15: Fiscal Policy

Section: Chapter Questions

Problem 11SQP

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Using the model of aggregate demand–aggregate supply to illustrate the traditional view,
graphically compare the short-run and long-run impact of debt-financed tax cuts on:
a. output.
b. prices.

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The task I am struggling with: In each of the following cases, either a recessionary or an inflationary gap exists. Assume that the aggregate supply curve is horizontal, so that the change in real GDP arising from a shift of the aggregate demand curve equals the size of the shift of the curve. Calculate both the change in government purchases of goods and services and the change in government transfers necessary to close the gap. a) Real GDP equals $100 billion, potential output equals $160 billion, and the marginal propensity to consume is 0.75. b) Real GDP equals $250 billion, potential output equals $200 billion, and the marginal propensity to consume is 0.5. c) Real GDP equals $180 billion, potential output equals $100 billion, and the marginal propensity to consume is 0.8 Thank you very much for your help.
Fiscal policy consists of intentional changes in the government's spending levels or tax policies designed to achieve specific macroeconomic goals such as full employment, price stability, or economic growth. By influencing the amount of total spending in the economy, the government can influence the position of the aggregate demand curve. Our theory tells us that aggregate demand will shift by a multiple of the change in spending or taxes. However, spending and tax changes have slightly different effects, as changes in taxes affect spending only indirectly by changing the amount of disposable income. An expansionary fiscal policy may be implemented to fight a recession, while a contractionary policy may be appropriate to control demand-pull inflation. Exploration: How do changes in government spending and taxes affect the equilibrium price level and real GDP? Discuss in detail use your economics textbook.
One supply-side measure introduced by the Reagan administration was a cut in income tax rates. Use an aggregate demand/aggregate supply diagram to show what effect was intended. What might happen if such a tax cut also shifted the aggregate demand curve.
When Government Spending increases by $10 Billion Aggregate Demand increases by MORE than $10 Billion. Which part of Aggregate Demand increases so as to make this ripple effect, or multiplied impact, happen?
Which fiscal policy is meant to decrease aggregate demand? a. Divisionary b. Built in c. Expansionary d. Contractionary
List pros and cons of government spending. Can government spending be shown on the IS model or the aggregate demand model?
Using the aggregate demand and supply model show how a government can manage aggregate demand. Faced with the possibility of recession explain how fiscal may be used to rectify the position.
supply-side economists believe that a reduction in the tax rate a. always decrease government tax revenue b. shifts the aggregate supply curve to the right c. would decrease consumption d. provides no incentive for people to work more d. provides no incentive for people to work more
Explain why increased government spending of, for example, $15 billion, will have a different impact on aggregate demand than a $15 billion tax cut.
Use an aggregate demand and aggregate supply framework to illustrate why the existence of stickiness in prices would be extremely important for predicting the potential effects of policy actions on real GDP.
If the government announces a decrease in spending with an increase in taxes, which of the following would most likely occur? a. a leftward shift of the aggregate demand curve b. a rightward shift of the aggregate demand curve c. an upward movement along the aggregate demand curve d. a downward movement along the aggregate demand curve e. no change in the aggregate demand curve as well as no movement along it
Explain with example how a reduction in taxes without a reduction in government spending may have no impact on aggregate demand.