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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

Suppose that Congress enacts a lump-sum tax cut of $750 billion. The marginal propensity to consume is equal to 0.75. Assuming that Ricardian equivalence holds true, what is the effect on equilibrium real GDP? On saving?

If a government agency decided to fund the construction of a private hospital in an area in which other private hospitals already are just breaking even, why might one of the other private hospitals cancel plans to expand the size of its facility?

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.

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.
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