Macroeconomics (9th Edition)
9th Edition
ISBN: 9780134167398
Author: Andrew B. Abel, Ben Bernanke, Dean Croushore
Publisher: PEARSON
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Chapter 10, Problem 6RQ
To determine
The impact of a temporary increase in the amount of government purchases on the labor market, the output, real rate of interest and the general price level as suggested by Classical economists.
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Which of the following is an appropriate fiscal policy response if the economy is in a state of rising inflation?
Contractionary fiscal policy by decreasing government spending and taxes.
Expansionary fiscal policy by increasing government spending and taxes.
Contractionary fiscal policy by decreasing government spending and increasing taxes.
Expansionary fiscal policy by increasing government spending and lowering taxes.
(Evolution of Fiscal Policy) What did classical economists assume about the flexibility of prices, wages, and interest rates? What did this assumption imply about the self-correcting tendencies in an economy in recession? What disagreements did Keynes have with classical economists?
Explain how Classical and Keynesian economists view the use of active government to maintain full employment.
Chapter 10 Solutions
Macroeconomics (9th Edition)
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- Assume that the current unemployment rate in Country A is lower than the natural rate of unemployment. Draw a single correctly labeled graph with both the long-run Phillips curve and the short-run Phillips curve. Label the current short-run equilibrium point Z. Identify a specific fiscal policy action that would bring the economy to full employment. Draw a correctly labeled graph of the loanable funds market, and show the effect of the fiscal policy from part (b) on the real interest rate in the short run. Now assume instead that there is no fiscal policy action. Will the short-run Phillips curve shift to the right, shift to the left, or remain the same over time? Explain.arrow_forwardKeynes thought that one macroeconomic problem is that an economy: a. can be pushed below the equilibrium level of output by fiscal policy. b. always operates at the potential and business cycles are created by government intervention. c. can be pushed away from the potential if prices and wages are flexible. d. can tend toward an equilibrium level of output that is below the potential level. e. will move back to its potential after a business cycle on its own.arrow_forwardWhich of the following statements are FALSE? (a) When the government prints money to buy goods and services the resulting inflation is a form of tax, since people will not have to pay more for their goods and services than before. (b) An effective fiscal policy macroeconomic stimulus should aim to replace private spending with public (government) spending. (c) To be effective a fiscal policy macroeconomic stimulus should have temporary increases in spending and permanent tax cuts. (d) The paradox of thrift is that the increase in saving during a recession because people postpone major purposes prolongs the recession and thus is not good for the economy, while normally saving grows the economy.arrow_forward
- Explain what kind of fiscal policy and what kind of monetary policy are likely to reduce GDP.arrow_forwardExplain the difference between fiscal policy and monetary policy. What are some of the reasons these macroeconomic policies are used? Elaborate on reasons these policies are used.arrow_forwardSuppose that the federal government ran a sizable budget surplus during the next decade. Compared to balancing the budget, how would this surplus affect interest rates, saving, and investment? Compare and contrast the traditional view and the new classical view.arrow_forward
- In the figure above, assume that output is $10.5 trillion, while potential output is $12 trillion. If a fiscal stimulus package is implemented quickly, raising output to $12 trillion, while inflation remains constant at one percent, then the figure implies that the real interest rate will be ________ percent. A) 1.5 B) zero C) one D) 0.5 E) 2.5arrow_forwardIn this question, we assume Canada is a closed economy and is in its long-run equilibrium. TransCanada announced that they will not proceed with the East Energy pipeline in October 2017. According to the long-run classical model, what happens to the equilibrium levels of output, real interest rate, and investment in Canada after TransCanada made this announcement? What happens to the real wage in Canada? Explain your answer with the aid of TWOdiagrams - one for the loanable funds market and one for the labour market.arrow_forwardWhich of the following would be a fiscal policy prescription for ending inflation? A) Raise taxes B) Increase government expenditures to let the multiplier work C) Raise interest rates to stimulate saving D) Promote exports to increase injections in the domestic economyarrow_forward
- It’s probably fair to say that for many years fiscal policy has been the poor relation to monetary policy in macroeconomic policy making circles. Now it is back in vogue. In their recent assessment of the economic impact of the pandemic, the World Bank (p56, 2021) concluded, for advanced economies such as the United Kingdom (UK), that, “With monetary policy increasingly constrained, fiscal policy has taken on a critical role in macroeconomic stabilization during the crisis, delivering unprecedented stimulus in 2020 in the form of cash transfers and income support to households and firms.” Firstly, explain how monetary and fiscal policy is implemented and how they can be used to influence GDP and the price level. Secondly, the quotation above highlights the unprecedented use that has been made of fiscal policy in countries such as the UK during the crisis. Briefly consider whether fiscal policy will remain the key policy instrument in these sorts of countries in the near future.arrow_forwardare these the correct answers? 1) In the classical view, if savings exceeds investment borrowing in the economy interest rates will fall.- true 2) The self adjustment process began with falling wages and then allowed for prices to fall and sales to increase. -true 3)In the classical model, a reduction in AD leads to a new equilibrium at a very low rate of output and employment. -falsearrow_forwardAt the monetary policy meeting in February 2021, the central bank of Mexico cut its policy the rate for the first time since September in an effort to stimulate the economy. However, after the United States government announced in March 2021 the introduction of a new financial stimulus package to boost the US economy, the Governor of the Mexican central bank announced that the board would consider the impact of the US fiscal stimulus in the Mexican economy, and whether it is necessary to change their monetary response. Explain how a US fiscal stimulus may affect the Mexican economy and why the central bank may respond to it. (100 words max)arrow_forward
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