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Chapter 13: Q. 1 For critical thinking (page 293)

1. Other things being equal, what features of a nation's economy do you think would tend to contribute to a higher value for its stabilization coefficient? [Hint: Consider the chapter's discussion of the reasons fiscal policy actions tend to have larger effects on real GDP.)

Short Answer

Expert verified

The impact fiscal multiplier aims to measure the direct, real-time influence on equilibrium GDP in this way.

Step by step solution

01

Introduction 

The given is the discussions of the Fiscal's policy actions

The objective is to find what factor would contribute to a higher value for a stabilization coefficient

02

Step 1

The reciprocal of marginal inclination to save is the Keynesian multiplier (MPS). This encapsulates the government's spending's maximum possible effect on equilibrium GDP.

The impact fiscal multiplier, on the other hand, includes all information on time lags, direct fiscal offsets, and short-term crowding-out effects.

03

Step 2

The impact fiscal multiplier tries to measure the direct, real-time influence on equilibrium GDP in this way.

As a result, the spending multiplier's value is greatly lowered, and it is only near to 1.

Because the Keynesian multiplier does not account for these factors, it is always greater than 1.0

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Most popular questions from this chapter

Consider the accompanying diagram, in which the current short-run equilibrium is at point A, and answer the questions that follow:

a. What type of gap exists at point A?

b. If the marginal propensity to consume equals 0.75, what change in government spending financed by borrowing from the private sector could eliminate the gap identified in part (a)? Explain.

Assume that MPC= 45when answering the following questions.

a. If government expenditures rise by \( 2 billion, by how much will the aggregate expenditure curve shift upward? By how much will equilibrium real GDP per year change?

b. If taxes increase by \) 2 billion, by how much will the aggregate expenditure curve shift downward? By how much will equilibrium real GDP per year change?

In May and June of 2008, the federal government issued one-time tax rebates - checks returning a small portion of taxes previously paid to millions of U.S residents, and U.S. real disposable income temporarily jumped by nearly $500 billion. Household real consumption spending did not increase in response to the short-lived increase in real disposable income. Explain how the logic of the permanent income hypothesis might help to account for this apparent non relationship between real consumption and real disposable income in the late spring of 2008.

Suppose that Congress and the president decide that the nation's economic performance is weakening and that the government should "do something" about the situation. They make no tax changes but do enact new laws increasing government spending on a variety of programs.

a. Prior to the congressional and presidential action, careful studies by government economists indicated that the Keynesian multiplier effect of a rise in government expenditures on equilibrium real GDP per year is equal to 3. In the 12 months since the increase in government spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. What factors might account for this?

b. Another year and a half elapses following passage of the government spending boost. The government has undertaken no additional policy actions, nor have there been any other events of significance. Nevertheless, by the end of the second year, real GDP has returned to its original level, and the price level has increased sharply, Provide a possible explanation for this outcome.

Assume that MPC = 45when answering the following questions.

a. If government expenditures rise by \( 1 billion, by how much will the aggregate expenditure curve shift upward?

b. If taxes rise by \) 1 billion, by how much will the aggregate expenditure curve shift downward?

c. If both taxes and government expenditures rise by $ 1 billion, by how much will the aggregate expenditure curve shift? What will happen to the equilibrium level of real GDP?

d. How does your response to the second question in part (c) change if MPC = 34? If MPC =12?
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