Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 33, Problem 2DQ
To determine
Government fiscal policy.
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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 $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?
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Suppose that the investment demand curve in a certain economy is such that investment declines by $120 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment.If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out?$ billion
Q.1.5 Which one of the following statements regarding fiscal policy and the budget is correct?(a) When the government plans to stimulate economic activity, it can increase spending or reduce taxes;(b) Revenue from tax is always greater than government spending in SouthAfrica;(c) Demand management only refers to fiscal policy;(d) A contractionary fiscal policy should be implemented to combatunemployment.
Chapter 33 Solutions
Economics (Irwin Economics)
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- 13. Suppose that two countries differ on in the size of their MPC, where the MPC is high in country A and low in country B. Draw IS/LM and AD/AS curves for each country. In which country will monetary policy be most effective at changing income? Fiscal policy?arrow_forwardSuppose the government's present value of current and projected future outlays is 75 percent of GDP and its present value of current and projected future revenues is 50 percent of GDP. What gap does this describe, and what is the size of the gap? This information describes the _______. A. fiscal gap, which is 25 percent of GDP B. generational gap, which is 25 percent of GDP C. fiscal gap, which is 125 percent of GDP D. fiscal gap, which is – 25 percent of GDParrow_forwardNow suppose that the gross national debt initially is equal to $2.5 trillion and the federal government then runs a deficit of $100 billion. What is the new level of gross national debt? If 100 percent of this deficit is financed by the sale of securities to the public, what happens to the level of debt held by the public? What happens to the level of gross debt? 3. If GDP increases by 6 percent in the same year as the deficit is run, what happens to the gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?arrow_forward
- 3)Show and explain how an expansionary fiscal policy can cause crowding-out effect by using aggregateexpenditure and aggregate output curves.2)What action could the TCMB take to reduce the crowding-out effect of an expansionary fiscal policy?1)By using graphs, show and explain the effects of an expansionary fiscal policy on the goods market by taking thelink between two markets into accountarrow_forwardQ No.3 What we mean by Economic dues in case of Fiscal Policy in Islamic Economy? Discuss the function of Economic dues in the context of Zakah as a non-discretionary fiscal policy tool of Islamic Economy.arrow_forwardThis problem gets at the question of whether a government can run a budget deficit forever. For a government to avoid defaulting on its debt, it has to ensure its Debt/GDP ratio doesn’t get too big. Assume that ratio is not too big in the US right now, even though it’s about 100%.a) US nominal GDP has been rising by about 4% in recent years. Assume that continues. How much can US government debt rise each year in percent and keep the Debt/GDP ratio constant? b) If US government debt equaled $23 trillion at the start of this year, how big of a budget deficit could the US government run in dollars this year and still keep its Debt/GDP ratio constant?arrow_forward
- 4) Suppose an economy is producing real GDP of $600 billion. Potential GDP is equal to $540 billion, and the MPC is equal to 0.6. i)What kind of a gap (or problem) is this country experiencing? ii) What policy action do you suggest the government to take to eliminate the gap? State both the specific type of policy action and its size. Show your work for partial credit.arrow_forward1. If the marginal propensity to consume is 0.8 in an economy, a $20 billion rise in Incomes will do what to GDP? (Tell if it will increase or decrease GDP, and by how much.) 2. Suppose that the level of government spending increased by $100 billion where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by: 3. The Government has a $.8 Trillion Growth target. What fiscal policy should they implement if MPS = .2?arrow_forward7 Suppose a closed economy with no government spending which in equilibrium is producing an output and income of 1100. Suppose also that the marginal propensity to consume is 0.80, and that, if at full employment, the economy would produce an output and income of 3850 By how much would the government need to cut taxes (T) to bring the economy to full employment? (round your answer to the nearest whole value)arrow_forward
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