The short-run and long-run effects of expansionary fiscal policy.

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Chapter 16, Problem 10QP

To determine

The short-run and long-run effects of expansionary fiscal policy.

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From an initial long-run equilibrium, if aggregate demand grows slower than long-run aggregate supply while the short-run aggregate supply is unchanged, then the proper fiscal policy is to Group of answer choices increase government purchases. decrease government purchases and tax rates by the same amount. increase the money supply. increase lump-sum taxes.

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.

An economy is operating with output that is $40 billion below its natural level, and fiscal policymakers want to close this recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The marginal propensity to consume is 4/5, and the price level is completely fixed in the short run. In what direction and by how much would government spending need to change to close the recessionary gap? Explain your thinking.?