ECON MACRO
5th Edition
ISBN: 9781337000529
Author: William A. McEachern
Publisher: Cengage Learning
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Chapter 11, Problem 1.7P
To determine
The impact of tax cut on the recessionary gap.
Concept Introduction:
Fiscal Policy: Fiscal policy is the policy by which government regulates the nation’s economy by adjusting the government spending and controlling the tax rates. It tries to influence the demand side of the economy.
Recessionary Gap: Recessionary Gap is the gap between actual output and potential output under full employment situation when actual output is less than potential output.
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Chapter 11 shows that increased government purchases, with taxes held constant, can eliminate a recessionary gap. How could a tax cut achieve the same result?
(Fiscal Policy) Chapter 11 shows that increased government purchases, with taxes held constant, can eliminate a recessionary gap. How could a tax cut achieve the same result?
Suppose the economy has a recessionary gap. By using an expansionary fiscal policy, the Federal Government can close this gap by
A.)increasing government spending in order to increase aggregate demand.
B.)reducing taxes in order to stimulate investment, and thus increase aggregate supply.
C.)increasing government spending and taxes in order to both increase aggregate demand and aggregate supply
D.)decreasing government spending in order to increase aggregate supply.
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- suppose the government wishes to eliminate a recessionary GAP of 100 billion and the MPC is .75. How much must the government increase in spending instead of increasing government spending by the amount you calculated? What would be the effect of the government decreasing taxes by this amount explain?arrow_forwardPlease consider the attached photo; that is connected to the question: If the current real GDP is P700 billion, which of the following policies would bring the economy to potential output? a. increase government spending by P25 billion b. increase government spending by P100 billion c. increase government spending by P20 billion d. decrease government spending by P100 billion. The tax multiplier is: a. -0.8 b. -1.25 c. -5 d. -4arrow_forwardConsider an economy that is operating below the full-employment level of real GDP. What would be the effect of an increase in government spending on aggregate demand and real GDP?arrow_forward
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