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Chapter 13: Q. 13 (page 297)
Assume that the Ricardian equivalence theorem is not relevant. Explain why an income-tax-rate cut should affect short-run equilibrium real GDP.
As a result of changes in autonomous spending, the equilibrium real GDP is less stable.
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Describe how certain aspects of fiscal policy function as automatic stabilizers for the economy
It is late 2019 , and the U.S. economy is showing signs of slipping into a potentially deep recession. Government policymakers are searching for income-tax-policy changes that will bring about a significant and lasting boost to real consumption spending. According to the logic of the permanent income hypothesis, should the proposed income-tax-policy changes involve tax increases or tax reductions, and should the policy changes be short-lived or long-lasting?
Assume that MPC = when 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 = ? If MPC =?
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 . In the 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.
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.
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