should the data have suggested that the expansion was unsustainable? Problem Set
ID: 1127134 • Letter: S
Question
should the data have suggested that the expansion was unsustainable? Problem Set #12: You've just been appointed chairman to the Council of Economic Advisers in the Dismal Science Land. You must rely on your research assistant for the specific numbers. He says the GDP gap (recessionary gap) is $651.2 billion, MPC is .9, and the president wants to lower unemployment. 1. By how much would government spending have to increase to shift the aggregate demand curve rightward by $651.2 billion? 2. How large a tax cut would be needed to achieve this same increase in aggregate demand? Why the difference? 3. Determine one possible combination of government spending increases and tax decreases that would accomplish this same goal. Problem Set #13 Describe (1) how the crowding-out effects may occur with government fiscal stimulus spending and (2) how they may affect the interest rate, consumption spending, private investment spending and net exports Problem Set #14: You've just been appointed chairman to the Council of Economic Advisers in the Dismal Science Land. Current GDP is $600,000, unemployment is 5 percent, and there are signs of coming inflation. You rely on your research assistant for the specific numbers. He tells you that potential GDP (full-employment GDP) is $564,000 and the MPC is .5 1. The government wants to eliminate the inflationary gap. What policy would you suggest? 2. By how much will unemployment change after your policy has taken effect? Problem Set #1 hat is the Laffer Curve and how does it relate to supply-side economics? Why is determining the location where the economy is on the curve so important in assessing tax policy? Problem Set #16: Explain how a demand-pull inflation would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output and prices and wages are eventually flexible both upward and downward. Construct a long-run AD-AS model to illustrate your answer Problem Set #17 Explain how an AS shock such as a sudden increase in oil prices would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output and prices and wages are eventually flexible both upward and downward. Construct a long-run AD-AS model to illustrate your answerExplanation / Answer
12.
1.
GDP gap = $651.2 Billion
MPC = .9
Spending Multiplier = 1/(1-MPC) = 1/(1-.9) = 10
Required government spending = GDP gap/Spending multiplier = 651.2/10
Required government spending = $65.12 Billion
So, the increase in government spending of $65.12 Billion will fill the GDP gap of $651.2 Billion.
2.
Tax multiplier = MPC/(1-MPC) = .9/(1-.9) = 9
Required decrease in tax = 651.2/9 = $72.36 Billion
So, the cut in taxation of $72.36 Billion will fill the GDP gap of $651.2 Billion.
3.
Let, 50% of $651.2 Billion is achieved by government spending and 50% is achieved by decrease in taxes.
Required government spending = .5*651.2/10 = $32.56 Billion
Required decrease in tax = .5*651.2/9 = $36.177 billion
An increase in government spending of $32.56 Billion, and tax cut of $36.177 billion is requires to fill the gap of $651.2 Billion.
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13.
1.
Crowding out effect refers to the discouragement to the private firms’ spending when the government spending takes place. As a part of the discretionary fiscal policy, the government spends and while doing so, all the available funds are consumed by the government and new funds are only available at a higher interest rates. It discourages the private firms from making investment spending. Hence, crowding out effect takes places.
2.
Due to the crowding out effect:
A. interest rate increases ( with increase in demand of funds for spending)
B. Consumption spending comes down (with increased level of interest rates)
C. Private spending comes down (with increased level of interest rates)
D. Exports decrease due to the decrease in consumption
Pl. repost other unanswered questions for their proper answers!
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