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Chapter 13: Q 2 For critical thinking (page 294)

2. Why do you suppose that some economists have argued that a key determinant of a nation's stabilization coefficient value is whether its government relies to a greater extent on automatic fiscal stabilizers instead of discretionary policy actions?

Short Answer

Expert verified

It is determined that if they both change by 100 percent, the equilibrium GDP is negatively affected, and the multiplier's overall value is negative.

Step by step solution

01

Introduction

The data is about the argument of the Economists about the key determinant of nation's stabilization coefficient value

The objective is to explain the concepts of key determinants involved in the argument.

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

Economists employ the cumulative fiscal multiplier to achieve this. This is true for the long run, once all discretionary fiscal policy acts and crowding-out effects on equilibrium GDP have been eliminated.

If they both change by 100 percent, the equilibrium GDP is negatively affected, and the multiplier's overall value is negative.

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Most popular questions from this chapter

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?

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.

A government has found that 2 months elapse before it can identify a problem to address with policy action. It has been found that 1 month is required to determine the appropriate policy action. Finally, it has been concluded that the total time required between the initial presence of the problem and the effects of a policy action to be realized is 12 months. What are the remaining policy time lag and its duration?

Assume that the Ricardian equivalence theorem is not relevant. Explain why an income-tax-rate cut should affect short-run equilibrium real GDP.

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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