Suppose a hypothetical economy is amenity in a recessionary gap of $64 billion.

Question

Suppose a hypothetical economy is amenity in a recessionary gap of $64 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should be used. Economist A believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist B believes that the government spending multiplier is 4 and the tax multiplier is 2. Compute the amount the government would have to increase spending to term the output gap according to each economist's belief. Then, each scenario. compute the size or the tar cut that mould achieve the same effect Economist c favor increase in government spending to tax cuts. This means that economist c likely believes that: Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to the aggregate government purchases increase aggregate demand by stimulating investment Economist D accuse that it is not possible to remove the economy from the recession gap by increase government spending which ogf the following statements is consistent with economist D's belief?

Explanation / Answer

Change in GDP = Multiplier*Government Spending = Tax multipier*tax cut

Government spending tax Cut

Economist A 64/8 = 8 64/4 = 16

Economist B 64/4 = 16 64/2 = 32

2. Government purchases increases AD

3. 1. Government spending completely crowds out the private

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