Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971509
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 21, Problem 8PA
To determine
Increase in government spending.
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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.?
An economy is operating with output that is $40 billion below its natural level. And fiscal policy makers 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 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.
An economy is operating with output that is $400 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 not crowding out. The marginal propensity to consume is4⁄5′ 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.
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Principles of Macroeconomics (MindTap Course List)
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- An economy is operating with an output of $500 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 0.25, and the price level is completely fixed in the short run. In what direction and by how much would government spending need to change?arrow_forwardAn 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 Please give me answer in daetail pleasearrow_forwardAn economy is operating with an output that is $400 billion dollars below its natural rate of $2000 billion dollars and fiscal policy makers want to close the recessionary gap. The central bank agrees to hold the interest rate constant so there is no crowding out. The marginal propensity to consume is 4/5. In which direction and by how much would the government spending need to change to close the gap? Fully explain your answer and provide a graph that shows the initial situationarrow_forward
- An economy is operating with output $400 billion above its natural level, and fiscal policymakers want to close this expansionary 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. To close the expansionary gap, the government would need to spending by billion.arrow_forwardThe federal government implements an expansionary fiscal policy of increased spending and decreased taxes. Policy advisors predict output will increase 4% but are surprised when only 3% growth occurs. What might account for the fact that GDP increased by less than the multiplier predicted? a. Policy advisors' calculation of MPS was too high b. The aggregate supply curve was perfectly elastic c. Foreign purchases of domestic goods was greater than expected due to a devalued currency d. Consumption increases more than expected because of the decrease in taxes e. Investment decreased due to rising interest ratesarrow_forwardSuppose a government has a tax revenue shortfall. Will hyperinflation inevitably follow unless the government cuts its fiscal expenditures?arrow_forward
- The formula for the tax multiplier is: -MPS/MPC. MPS/MPC. -MPC/MPS. -1/MPS. A government policy action that moves the economy closer to full employment or potential output is called: an aggregate supply policy. an expansionary policy. a stabilization policy. a contractionary policy. All else constant, if the GDP in an economy decreases then: demand for money increases. demand for money decreases. the quantity demanded for money increases. the quantity demanded for money decreases. If the marginal propensity to consume is 0.8, the value of the multiplier is: 5. 1.25. 2. 0.8.arrow_forwardThere is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct? A) By themselves, both the change in the output and the change in the interest rate decrease desired investment. B) By themselves, both the change in output and the change in the interest rate increase desired investment. C) By itself, the change in the output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending. D) BY itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending.arrow_forwardSuppose actual real GDP is $7.91 trillion, potential real GDP is $13.33 trillion, the marginal propensity to consume is 0.68, and that the government has a balanced budget. If we ignore price effects, by how many trillions of dollars should the government change its spending to fix the gap while keeping the federal budget balanced? (Round this to two digits after the decimal and enter this value as either a positive value or a negative value without the dollar sign.)arrow_forward
- Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate supply curve $60 billion to the right. At the same time, government purchases increase by $40 billion. If the MPC equals 0.75 and the crowding-out effect is $160 billion, what would we expect to happen in the long-run to real GDP and the price level? a. Both real GDP and the price level would be higher. b. Real GDP would be higher, but the price level would be the same. c. Real GDP would be higher, but the price level would be lower. d. Both real GDP and the price level would be lower.arrow_forwardRefer to the above diagram. The economy is at equilibrium at point C. What fiscal policy would increase real GDP? Group of answer choices Increase aggregate demand from AD2 to AD1 by decreasing taxes. Decrease aggregate demand from AD2 to AD3 by increasing taxes. Increase aggregate demand from AD1 to AD2 by increasing government spending. Make no change because the economy is at or near its full-employment level of real output.arrow_forward
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