Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 11, Problem 5E
To determine
The effect of an increase in social security transfers.
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Examine the following policies and determine which would decrease the level of aggregate demand.
Decreasing in government spending and decreasing taxes
Increasing investment and increasing government spending
Increasing consumption and decreasing taxes
Decreasing in government spending and increasing in taxes
Consider a Keynesian model but where investment (just like consumption) is increasing in aggregate income, e.g., because investment depends on business cash flow. Now that investment depends on aggregate income, a fiscal stimulus has more effect on equilibrium output.Answer true, false, or uncertain. Please briefly explain your answer
If the simple Keynesian macroeconomic model is used to explain expansionary fiscal policy, which of the following can be concluded with regard to macroeconomic equilibrium?
a) That firms experience an unplanned increase in their inventories.
b) The economy will move towards equilibrium.
c) Inventory levels will rise above the equilibrium level.
d) The effect on equilibrium cannot be determined given the information given
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Macroeconomics (Fourth Edition)
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- The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it a. reduces investment and thereby increases consumer spending. b. increases the money supply and thereby reduces interest rates. c. increases income and thereby increases consumer spending. d. decreases income and thereby increases consumer spending.arrow_forwardIn the AD/AS model, the multiplier magnifies the effect of autonomous spending, for example government spending, on the budget deficits aggregate demand tax receipts potential GDParrow_forwardSuppose 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.arrow_forward
- 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.arrow_forwardIn each of the following cases, either a recessionary or 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. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardSuppose aggregate demand is at AD2 and a recession occurs. The goal of an automatic stabilizer would most likely bea.To shift aggregate demand from AD2 to AD3b. To shift aggregate demand from AD3 to AD2C.To shift aggregate demand form AD1 to AD2d. To shift aggregate demand form AD3 to AD1e. To keep aggregate demand stable at AD1arrow_forward
- Changes in taxes The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax cut has on the economy. Suppose the governments of two very similar economies, economy B and economy A, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy B is 0.7 and the MPC in economy A is 0.85. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the (SMALLER MPC or LARGER MPC).arrow_forwardSuppose we have the following information for the simple (fixed r, fixed P, fixed W) Keynesian model. C = 400 + 0.8 I = 310 G = 140 = 400 + 0.8 (Y - T) T = 200, where C is the consumption function, (Y - T) is disposable income, I is investment, G is government spending, and T is taxes If government spending increased by $80, equilibrium Y would Group of answer choices A) increase by $400. B) decrease by $160. C) increase by $80. D) increase by $320. E) increase by approximately $106.67.arrow_forwardConsider the Keynesian Cross model. If the fiscal multiplier equals 2, and the government decides to increase government purchases by 100, by how much would equilibrium output increase?arrow_forward
- According to the classical macroeconomic model, expansionary fiscal policy has an inflationary effect True or falsearrow_forwardAccording to the standard textbook Keynesian analysis, which is greater: the tax multiplier or the government spending multiplier? Explain the reasoning behind this relationship.arrow_forwardPlease answer all the three An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to__________ and the IS curve to shift to the__________ everything else held constant. A) fall; right B) rise; left C) fall; left D) rise: right Which of the following statements concerning IS-MP analysis is true? A) Changes in net exports arising from a change in interest rates causes a shift in the IS curve. B) Expansionary fiscal policy will cause the interest rate to fall. C) A fall in the money supply shifts the LM curve to the right. D) For a given change in taxes, the IS curve will shift less than for an equal change in government spending. LVTS participants with positive settlement balances at the end of the day.________ A) are paid the overnight rate B) are paid the bank rate less 50 basis points C) are paid the prime rate D) are paid the bank ratearrow_forward
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