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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

Determine whether each of the following is an example of an automatic fiscal stabilizer.

a. A federal agency must extend loans to businesses whenever an economic downturn begins.

b. As the economy heats up, the resulting increase in equilibrium real GDP per year immediately results in higher income tax payments, which dampen consumption spending somewhat.

c. As the economy starts to recover from a severe recession and more people go back to work, government-funded unemployment compensation payments begin to decline.

d. To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on govemment programs.

Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (a) of Figure 13-1, the government determined that the amount by which the AD curve had to be shifted directly rightward from the point E1 was equal to \(1.0 trillion. If the government decided that a \)0.2 trillion increase in real government spending was required to generate this shift, what must be the value of the MPC?

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.

Consider the accompanying diagram, 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 consume equals 0.75, what change in government spending financed by borrowing from the private sector could eliminate the gap identified in part (a)? Explain.

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.
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