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 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.?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 1TY

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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 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?
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.
The 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 rates
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An 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 situation