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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

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.

Describe how certain aspects of fiscal policy function as automatic stabilizers for the economy

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.

Discuss ways in which indirect crowding out and direct expenditure offsets can reduce the effectiveness of fiscal policy actions.

Determine whether each of the following is an example of a situation in which there is indirect crowding out resulting from an expansionary fiscal policy action.

a. The government provides a subsidy to help keep an existing firm operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business.

b. The government reduces its taxes without decreasing its expenditures. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. Government expenditures fund construction of a high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building.
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