Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 11, Problem 4E
To determine
The effect of an increase in government purchases on the IS curve.
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List three of the extensions of the Ricardian model. Explain how each extension differs from the relevant assumptions of the simple Ricardian model.
Suppose policymakers decide to reduce the budget deficit by cutting government spending. Use the Keynesian Cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label: (a) the axes, (b) the curves, (c) the initial equilibrium values, (d) the direction the curve shifts, and (e) the final equilibrium values. Explain in words what happens to equilibrium income as a result of the cut in government spending. (100 words max)
Two identical countries, Country A and Country B, can each be described by a Keynesian-cross model. The MPC is 0.6 in each country. Country A decides to increase government spending by $2 billion, while Country B decides to cut taxes by $2 billion. In which country will the new equilibrium level of income be greater? Show all computations.
Chapter 11 Solutions
Macroeconomics (Fourth Edition)
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Similar questions
- With the aid of a diagram and using the Keynesian analysis , explain in detail how income and aggregate spending are affected by the government spending and a cut in spending by European firms.arrow_forwardThe following question relates only to the equilibrium in the goods market IN A CLOSED ECONOMY and asks you to carry out a graphical analysis using both the Keynesian cross diagram together with the IS-MP diagram. >>) Suppose after the government has implemented the reduction in taxation that the central bank wants to keep the level of investment at the same level as before the tax reduction. How can the central bank intervene in the market to achieve this goal? Explain and illustrate graphically how the central bank can keep investment at the same level as before. Is there any additional impact of the central bank intervention on output, consumption and interest rates? If so what is the impact?arrow_forwardConsider a standard Keynesian model but with two types of consumers, Type A who have low marginal propensities to consume and Type B who have high marginal propensities to consume. An economy with relatively more Type A consumers is more vulnerable to a negative shock to investment demand.Answer true, false, or uncertain. Please briefly explain your answer.arrow_forward
- In the Keynesian Cross model, an increase in government purchases by one unit would generate an increase in output by less than one unit. True or Falsearrow_forwardIf an economy was in deep recession what type of demand-side policy would be most effective when the IS curve is very steep?arrow_forwardWhich of the following would be most likely to shift the MP curve downward? easy (expansionary) monetary policy easy (expansionary) fiscal policy contractionary (tight) fiscal policy contractionary (tight) monetary policyarrow_forward
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