MACROECONOMICS W/SAPLING PLUS
10th Edition
ISBN: 9781319258900
Author: Mankiw
Publisher: MAC HIGHER
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Chapter 19, Problem 4PA
(a)
To determine
The impact of borrowing constraints on aggregate demand.
(b)
To determine
The impact of borrowing constraints on aggregate demand.
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Right now many economies in the world are experiencing a downturn due to the Corona Virus.a) What kind of fiscal policy can governments use to address the decline? b) What actions will be taken by the government in implementing the fiscal policy that you described in part a? c) What will be the effect on Aggregate Demand (if any) as a result of the actions taken in part b?d) What will be the effect on Aggregate Supply (if any) as a result of the actions taken in part b?
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Identify one fiscal policy action that could counter the increase in investments. Explain how this policy will affect each of the following.i. Output ii. The price level iii. Nominal interest rates
Chapter 19 Solutions
MACROECONOMICS W/SAPLING PLUS
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- Assuming the economy is in long run and the govt implemnents a tax cut of $420 Billion, there is no crowding out, and marginal propensity to consume is 0.9 what's the initial and total effect of the tax reduction on aggregate demand? Is there a formula to calculate this?arrow_forwardHide student question Time Left : Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs. a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use. b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending. c. The government finances the construction of a classical music museum that otherwise would never have received private funding.arrow_forwardThe graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Price Level 160 140 120 100 80 60 $ 40 20 0 Fiscal Policy LRAS AD₁ Real GDP (billions of dollars) billion AS 80 160 240 320 400 480 560 640 720 800 AD Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion O b. If the MPC is 0.8, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? Suppose instead that the MPC is 0.9. c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and government purchases need to change by $ billion.arrow_forward
- The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output (Y*) to increase? A. If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve. B. If the increase in G is offset by an equal decrease in C, I, and NX. C. If the increase in G crowds out private investment. D. If the increase in G leads to a permanent increase in the level of autonomous saving in the economy. E. If the increase in G is spent on public infrastructure that increases the productivity of private-sector production.arrow_forwardAssume there is a decrease in the aggregate demand, if expansionary fiscal policy is being used, the following action could be taken a. increase consumption by raising disposable income through cuts in personal taxes or payroll taxes b. increasing government spending by raising after-tax profits through cuts in business taxes c. increase government purchases through increased Federal Government spending on final goods and services and raising grants to state and local government to increase their expenditures on final goods and services d. All of the abovearrow_forwardWhich of the following is a tool of fiscal policy used to increase aggregate demand in an economy? A) Decreasing government spending B) Decreasing taxes C) Decreasing interest rates D) Decreasing the money supplyarrow_forward
- The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Fiscal Policy Price Level 180 LRAS AS 160 140 120 100 80 60 40 20 0 AD AD1 100 200 300 400 500 600 700 800 900 Real GDP (billions of dollars) (900, 120) Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to increase to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.75, how much does government purchases need to increase to shift aggregate demand by the amount you found in part a? $ billion Suppose instead that the MPC is 0.6. c. How much does aggregate demand and government purchases need to increase to restore the economy to its long-run equilibrium? Aggregate demand needs to increase by $ billion and government purchases need to increase by $ billion.arrow_forwardUse the following graph to answer the next question. Price Level AS AD₂ AD₂ ADoi I Yo Y₁ Y₂ Y₂ Real GDP Suppose an economy's full employment output is at the level Y₁, and the economy's current aggregate demand is represented by AD2. If the government swiftly implements contractionary fiscal policy that immediately shifts the economy's aggregate demand to AD₁, the short to medium term aggregate demand would be most closely represented by AD₁arrow_forwardThe outbreak of COVID-19 pandemic in 2020-21 has had a significant impact on the Australian economy. a) What is the the short-run equilibrium impact on inflation and output of the lockdown that governments imposed? Explain using the AS-AD model with graphs The Australian government implemented fiscal stimulus aimed at supporting households and businesses. b) Describe the key elements of the fiscal stimulus.arrow_forward
- Our macroeconomic model suggests that after a decline in aggregate demand like that of 2007, the economy will self correct and return to a position where the GDP gap is zero. If this is correct, why should the government ever intervene with fiscal policy? a. It take many years for the GDP gap to close on its own. b. This is part of the government's "mission statement" as given in the Constitution. c. Fiscal policy is profitable for banks. d. People do not trust the theory behind the model.arrow_forwardWhat is the impact of using Fiscal policy tools on an economy - more specifically aggregate demand and how can they be used to potentially assist (stimulate) an economy experiencing sluggish growth or in a recession. In your discussion, investigate the positive impacts, potential impact of lags, as well as other disadvantages associated with fiscal tools.arrow_forwardDetermine whether the following items are examples of expansionary fiscal policy, contractionary fiscal policy, expansionary monetary policy or contractionary monetary policy as they affect the aggregate demand of an economy. 1. Decrease in income taxes a. Expansionary fiscal policyb. Contractionary fiscal policyc. Expansionary monetary policyd. Contractionary monetary policy2. Increase in government spending a. Expansionary fiscal policyb. Contractionary fiscal policyc. Expansionary monetary policyd. Contractionary monetary policyarrow_forward
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