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Chapter 13: Q.22 (page 298)

In Figure 13-6, explain why a budget deficit naturally tends to rise at a real GDP level such as Y2to the left of Yf.

Short Answer

Expert verified

a budget deficit naturally tends to rise at a real GDP level as the government runs a budget deficit

Step by step solution

01

introduction

The budget Deficit alludes to the overabundance of central government consumption over its receipts during a year.

02

explanation

The tax revenues of the public authority are by and large equivalent to the joblessness pay and other exchange instalments of the public authority at the real GDP of Yf. Thusly, the national government When the real GDP of the economy falls underneath Yfbusiness falls.

Simultaneously, charge assortments fall as fewer individuals are utilized. Thus, government spending ascends from one viewpoint and duty assortments decline, on the other. Consequently, the public authority, whose financial plan was adjusted at Yf, presently runs a financial plan deficit.

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Most popular questions from this chapter

1. How does unemployment compensation function as an automatic stabilizer?

Recall that the Keynesian spending multiplier equals 1 /(1-M P C). Suppose that in Figure 13-4, the MPC is equal to 0.9. In addition, the amount of the horizontal leftward shift from AD2 to AD3 caused by a crowding-out effect on planned investment spending was 0.5\( trillion, or \) 500 billion. How much investment spending was crowded out?

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

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

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.
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