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Chapter 13: Q. 13.1 (page 281)

Use traditional Keynesian analysis to evaluate the effects of discretionary fiscal policies.

Short Answer

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We conclude this paper with a summary and its impact on policy. Gaberetal. (2013) suggested that when considering the transmission mechanism of fiscal policy, an important assumption of the model is whether the actors are positive, as explained in the section above (Section 2.1.2.1). And 2.1.2.2). In the absence of micro-based positive behavior, expected future changes will not affect the determination of the current period, but positive consumers with reasonable expectations will be the future of the current period. Responds to expected changes in variables

Step by step solution

01

Step 1- Introduction

From a Keynesian perspective, discretionary fiscal policy stabilizes the trade cycle within the short term, tax cuts and better government spending will result in higher personal consumption and thus aggregate demand. This is often because of market flaws like short-sighted behavior and price rigidity within the labor and goods markets.

02

- Effects of discretionary fiscal policies

The effects of economic policy shocks still be hotly debated, as neither theoretical nor empirical studies have reached consensus on the qualitative or quantitative characteristics of such effects (Franta, 2012). "The effectiveness of economic policy to stimulate the important economy is an ongoing intellectual debate in prominent academic journals and prominent columns," Gaber, (2013). "As the world recession of 2008 struck the planet, interest in using economic policy as an effective efficient policy tool has recently revived.

03

Step 3- Keynesian model

The Keynesian model was created primarily during the nice Depression. Normally, Early Keynesian emphasized that economic policy state decision revenue and public spending level could have a major impact on level output and employment. Macroeconomics overall has two basic theories fluctuation (recession, expansion): classic and political Keynesian.

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Most popular questions from this chapter

Based on Schwinn's conclusions, is the government likely to be able to boost real GDP with an increase in government spending if it has raised and lowered its expenditures a number of times in previous months? Explain your reasoning.

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.

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.)

Consider the diagram below, 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 save equals 0.02, what change in government spending financed by borrowing from the private sector could eliminate the gap identified in part (a)? Explain.

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?
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