Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 29, Problem 3.4P
To determine
Macro economic effects of the spending and tax changes, when the government tries reduce the deficit.
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Use AD and AS curves to explain the effects on the equilibrium price level and equilibrium level of output in the short run.(a) An expansionary fiscal policy with the economy operating near full capacity.
(b) A contractionary monetary policy during a period of high unemployment and excess industrial capacity.
(c) A strong hurricane destroys energy plants which cause energy prices to increase, assuming that the Fed attempts to keep interest rates constant by accommodating inflation.
(d) The federal government pursues a contractionary fiscal policy while the Fed acts to keep output from falling.
Read the following quote and explain in complete sentences whether it discusses fiscal policy, monetary policy or both.
“Taking substantial action at this point, though, would send what could be a negative message to the market — that the balance sheet runoff, which former Chair Janet Yellen said would be ‘like watching paint dry,’ is running into snags and requires corrective action. However, the Fed would have no choice if there are indications that it can't control the market movements, particularly considering the record level of Treasury debt the government has issued this year.”
What is the importance of fiscal policy during times of economic recession?
What is the reason why fiscal policy should be in tune with monetary policy when the economy is in the recession phase?
What is the importance of the Central Bank in the financial market?
Chapter 29 Solutions
Principles of Economics (12th Edition)
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- Do you think the typical time lag for fiscal policy is likely to be longer or shorter than the time lag for monetary policy? Explain your answer?arrow_forwardMost economists agree that individual consumers and business cannot pull the economy out of a severe recession without help from either the government or the Federal Reserve. Which group(s) believe fiscal policy is ineffective: Keynesians or Monetarists? Briefly explain the answer. Which group(s) believe monetary policy is ineffective in the short run: Keynesians or Monetarists? Briefly explain the answer. Which group(s) believe monetary policy is ineffective in the long run: Keynesians or Monetarists? Briefly explain the answer.arrow_forwardOne of the main arguments against using Fiscal Policy is the crowding out effect. Suppose the government uses government purchases to stimulate the economy. Explain quantitative easing? If the Fed’s current policy is quantitative easing, do you think that there is a danger of the government’s current fiscal policy being crowded out? Why or Why not? Explanation required.arrow_forward
- Please explain the differences between: Expansionary fiscal policyExpansionary monetary policy Contractionary fiscal policyContractionary monetary policyarrow_forwardDiscuss the fiscal policy measures adopted by the government in the last two years. Evaluate the expected effects of these measures on aggregate demand and supply, as well as their impact on the major macroeconomic goals of steady GDP growth, price stability, and full employment. Determine whether these measures are expansionary or contractionary and consider their implications for the budget deficit and national debt. Explain the most recent monetary policy move by the Federal Reserve (the FED). Determine whether this policy is expansionary or contractionary and elaborate on the reasons behind the Fed's decision. Analyze the observed impacts of this policy. For best results and up-to-date information, refer to recent announcements made by the Federal Open Market Committee (FOMC).arrow_forwardCan you explain policy lags briefly and compare fiscal and monetarypolicies with respect to inside and outside lags. thanks.arrow_forward
- What is the Laffer Curve, and how does it relate to supply-side economics? Why is determining the economy’s location on the curve so important in assessing tax policy?arrow_forwardWhy it could be the case that after an initial sharp increase, the budget deficit could drop through time (as it did in the USA after the 2008 financial crisis)?arrow_forwardSuppose a government has a tax revenue shortfall. Will hyperinflation inevitably follow unless the government cuts its fiscal expenditures?arrow_forward
- The second-round effects of expansionary Fiscal Policy when the FED has a binding zero interest rate policy are: a) decrease in investment, shift down of AE (aggregate expenditure) and decrease in income. b) increase in income, increase in money demand and no change in the interest rate. c) none of the listed options. d) no change in investment, no shift of the AE and no change in income. e) increase in investment, shift up of AE and increase in income.arrow_forwardCompare monetarist and Keynesian views on the proper conduct of FISCAL POLICY. For both monetarists and Keynesians, explain not only their conclusions concerning fiscal policy but also how those conclusions are related to their respective theories.arrow_forwardRead the following excerpt. Identify whether the policy action is fiscal or monetary and expansionary or contractionary. Draw and label the change that would occur on the AD/AS graph as a result of the policy action described. Identify what will happen as a result of the policy to the price level, employment, and real GDP. Excerpt from FOMC Statement Released December 16, 2008 “The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to ¼ percent. Since the Committee’s last meeting labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.” Identify whether the policy action is fiscal or monetary. Identify whether the policy action is expansionary or contractionary. Draw and label the change that…arrow_forward
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