Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 14: Q. 9 (page 319)

Suppose that the economy is experiencing the short-run equilibrium position depicted at point Ain the diagram below. Then the government raises its spending and thereby runs a budget deficit in an effort to boost equilibrium real GDP to its long-run equilibrium level of $18trillion (in base-year dollars). Explain the effects of an increase in the government deficit on equilibrium real GDP and the equilibrium price level. In addition, given that many taxes and government benefits vary with real GDP, discuss what change we might expect to see in the budget deficit as a result of the effects on equilibrium real GDP.

Short Answer

Expert verified

In the long run, real GDP has reverted to its initial level, and no additional rises or falls in real GDP or income are expected.

Step by step solution

01

Introduction

A rise in government spending will shift aggregate demand to the right, boosting the economy. The equilibrium price and real GDP will rise as a result.

The fiscal deficit will rise as a result of this. Income, on the other hand, will rise as a result of the multiplier effect. There will be an inflationary gap as a result of this.

02

Explanation

Real GDP has reverted to its original level in the long run, and there will be no further increases or decreases in real GDP or income.

It will shift a higher share of annual real GDP to goods and services provided by the government.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Consider Figure 14-2. The years immediately after 2008 stand out as having the highest values in the figure. The main reason is that the dollar magnitudes of the federal government's deficits were very large during these years. How might the fact that a significant economic contraction occurred during these years provide another explanation for why the percentages for these years were so high?

Describe the possible ways to reduce the government budget deficit.

Take a look at the most recent years of data on the net public debt displayed in Figure 14-3, and then examine the most recent years of data on federal budget deficits shown in Figure 14-2. Why do you suppose that the net public debt as a percentage of GDP has grown more slowly recently than was the case between 2008 and 2015 ?

Suppose that the share of U.S. GDP going to domestic consumption remains constant. Initially, the federal government was operating with a balanced budget, but this year it has increased its spending well above its collections of taxes and other sources of revenues. To fund its deficit spending, the government has issued bonds. So far, very few foreign residents have shown any interest in purchasing the bonds.

a. What must happen to induce foreign residents to buy the bonds?

b. If foreign residents desire to purchase the bonds, what is the most important source of dollars to buy them?

To which key set of expenditures do you suppose that "other things being equal" definitely applies in the government's projections displayed in panel (b) of Figure 14-6? (Hint: Which types of expenses does the government often refer to as "non controllable"?)
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free