Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 26, Problem 2DQ
To determine
Built-in stability mechanism in the economy.
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What is the difference between an expansionary(inflationary gap) gap and contractionary(recessionary) gap?
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Chapter 26 Solutions
Economics: Principles & Policy
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- Describe the differences between recessionary and inflationary gaps.arrow_forwardSuppose that actual output is $120 billion and potential (full-employment) output is $156 billion. What is an output gap in this hypothetical economy? Based on your estimate of the output gap, would you expect the unemployment level to be higher or lower than usual?arrow_forwardDistinguish between inflationary and recessionary (deflationary) gaps? How do these gaps impact the economy?arrow_forward
- Suppose the Federal Reserve begins to increase the supply of money at an increasing rate. What impact would that have on GDP, unemployment, and inflation?arrow_forwardAssume that the economy has an inflationary gap. Explain how the economy will remove this gap without government intervention. Use graphs to illustrate your answer. (Provide graph)arrow_forwardUse an aggregate demand and aggregate supply framework to illustrate why the existence of stickiness in prices would be extremely important for predicting the potential effects of policy actions on real GDP.arrow_forward
- Using the AD/AS Model, construct 2 graphs that show how a recession can occur. Explain how discretionary fiscal or monetary policies can be used to move the economy out of recession. • Using the AD/AS Model, construct 2 graphs that show how higher rates of inflation can occur. Explain how discretionary fiscal or monetary policies can be used to bring down the inflation rate. • In times of recession what can government do to lessen the economic hardship faced by those who lost their jobs?arrow_forwardIf the marginal propensity to consume is zero, a temporary tax increase leads to a small decreasein inflation in the short run but a large decrease in inflation in the long run.Answer True or False. Remember to include your explanationarrow_forwardWhich of the following would be a fiscal policy prescription for ending inflation? A) Raise taxes B) Increase government expenditures to let the multiplier work C) Raise interest rates to stimulate saving D) Promote exports to increase injections in the domestic economyarrow_forward
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