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Chapter 13: Q.b - For Critical Thinking (page 291)

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.

Short Answer

Expert verified

If the economy is in a downturn, and the public authority can get from the private section, then it can go about as an expansionary monetary game plan to help the general financial turn of events.

Step by step solution

01

introduction

The extended government spending might have a multiplier effect. If organization spending makes the jobless get occupations, by then they will have more compensation to spend inciting a further augmentation in complete interest.

02

explanation

If the economy is close as far as possible, higher government spending can incite swarming out. This is the place where the assembly burns through even more. Anyway, it has the effect of reducing private division spending. Assuming the economy is close as far as possible, by then higher government spending might cause inflationary loads and little augmentation in real GDP. If the economy is in a downturn, and the public authority can get from the private section, then it can go about as an expansionary monetary game plan to help the general financial turn of events.

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Most popular questions from this chapter

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.

A government is currently operating with an annual budget deficit of \(40 billion. The government has determined that every \)10 billion reduction in the amount it borrows each year would reduce the market interest rate by 0.1 percentage point. Furthermore, it has determined that every 0.1-percentage-point change in the market interest rate generates a change in planned investment expenditures in the opposite direction equal to \(5 billion. The marginal propensity to consume is 0.75. Finally, the government knows that to eliminate an inflationary gap and take into account the resulting change in the price level, it must generate a net leftward shift in the aggregate demand curve equal to \)40 billion. Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? (Hint: How much new private investment spending is induced by each $10 billion decrease in government spending? )

Use traditional Keynesian analysis to evaluate the effects of discretionary fiscal policies.

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?

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