EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 31, Problem 6RQ
To determine
Crowding out effect.
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12. Suppose that, in January, the interest rate is 5 percent and firms borrow $50 billion per month
for investment projects. In February, the federal government doubles its monthly borrowing
from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms
cut back their borrowing to only $30 billion per month. Answer by filling blanks below.
There is a crowding-out effect of $20 billion. A crowding-out effect occurs when increased government borrowing
drives ( down, up ) interest rates and thereby reduces investment by firms. That is in this scenario, where the
government's decision to double its monthly borrowing drives up the interest rate from 5 to 7 percent, causing
firms to cut back on their investment spending by $
5 percent interest rate – $
billion per month (= $
billion per month at the new 7 percent interest rate).
billion per month at the old
#17
Chapter 31 Solutions
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- Suppose that the investment demand curve in a certain economy is such that investment declines by $110 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $190 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out? Instructions: Enter your answer as a whole number. billion %24arrow_forwardSuppose that the investment demand curve in a certain economy is such that investment declines by $110 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardWhich of the following is correct? 1) Expansionary fiscal policy during a recession means cutting taxes, increasing government spending, or taking both actions. 2) The goal of expansionary fiscal policy is to rein in inflation. 3) Expansionary fiscal policy tends to lead to a smaller budget deficit. O 4) Expansionary fiscal policy is always better than contractionary fiscal policy for 4) the economy.arrow_forward
- QUESTION 16 If the marginal propensity to save is 0.1, the marginal propensity to import is 0.1 and the marginal tax rate is 0.2, how much would consumption increase if income rises by £8billion? O a. 4.8 O b. 13.3 O c. 3.2 O d. 20 4arrow_forward13. Which fiscal policy would make a budget surplus larger or a budget deficit smaller? O lower taxes O increase in government purchases of goods and services O lower government transfers O higher interest ratesarrow_forwardI need help on this questionarrow_forward
- 5.arrow_forwardSuppose that a family's income is exactly the same as the poverty threshold. This family's income deficit would be and their ratio of income to poverty would be O 0; 1 0 ; 0 1;0 O 1;1 Consider a family of four in 2008, whose poverty threshold is $22,024. If this family's total income was $12394, what would their income deficit be? income deficit: $arrow_forward37arrow_forward
- 6. Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy's built-in stability? In a phrase, “net tax revenues vary directly with GDP." When GDP is rising so are tax collections, both income taxes and sales taxes. At the same time, government payouts-transfer payments such as unemployment compensation, and welfare-are ( increasing, decreasing). Since net taxes are taxes less transfer payments, net taxes definitely (rise, fall) with GDP, which dampens the rise in GDP. (Note: Net Taxes = Taxes – Transfer Payments) On the other hand, when GDP drops in a recession, tax collections slow down or actually diminish while transfer payments ( rise, fall ) quickly. Thus, net taxes ( increase, decrease ) along with GDP drops, which softens the decline in GDP. A ( progressive, proportional, regressive ) tax system would have the most stabilizing effect of the three tax systems and the…arrow_forwardExplanation pleasearrow_forward4arrow_forward
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