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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

Suppose that Congress enacts a lump-sum tax cut of $750 billion. The marginal propensity to consume is equal to 0.75. Assuming that Ricardian equivalence holds true, what is the effect on equilibrium real GDP? On saving?

Explain how time lags in discretionary fiscal policy making could thwart the efforts of Congress and the president to stabilize real GDP in the face of an economic downturn. Is it possible that these time lags could actually cause the discretionary fiscal policy to destabilize real GDP?

Determine whether each of the following is an example of discretionary fiscal policy action.

a. A recession occurs, and government-funded unemployment compensation is paid to laid-off workers.

b. Congress votes to fund a new jobs program designed to pat unemployed workers to work.

c. The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow inflation.

d. Under powers authorized by an act of Congress, the president decides to authorize an emergency release of funds for spending programs intended to head off economic crises.

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 enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. What might account for this outcome?
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