Login Registrieren

Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 13: Q. 10 (page 297)

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.

Short Answer

Expert verified

a) The type of gap exists at the point is determined as inflationary gap

b) The changes in government spending reduced is found as $$ 0.20$ trillion

Step by step solution

01

Introduction

The given is the current short equilibrium at a point

The objective is to determine the type of gap and the changes in the expenses of the government

02

Explanation (part a)

a)

Since the current equilibrium at $A$ , where real GDP is $$ 18.8$ trillion and potential GDP is $$ 18$ trillion, This suggests that there is an inflationary gap.

03

Explanation (part b)

b)

The $$ 0.8$ trillion budget deficit must be closed by reducing government spending. The multiplier is four times the value of MPS ( $$ 0.25$ ).

As a result, a $$ 0.20$ trillion cut in spending is required.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

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

Determine whether each of the following is an example of a situation in which there is indirect crowding out resulting from an expansionary fiscal policy action.

a. The government provides a subsidy to help keep an existing firm operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business.

b. The government reduces its taxes without decreasing its expenditures. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. Government expenditures fund construction of a high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building.

Currently, a government's budget is balanced. The marginal propensity to consume is $\(0.80$ . The government has determined that each additional $\) 10$ billion it borrows to finance a budget deficit pushes up the market interest rate by role="math" localid="1651613391961" $0.1$ percentage point. It has also determined that every role="math" localid="1651613378175" $0.1$ -percentage point change in the market interest rate generates a change in planned investment expenditures equal to $\(2$ billion. Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price level, it must generate a net rightward shift in the aggregate demand curve equal to $\) 200$ billion. Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase its expenditures? (Hint: How much private investment spending will each $$ 10$ billion increase in government spending crowd out?)

Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs.

a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use.

b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. The government finances the construction of a classical music museum that otherwise would never have received private funding.

In May and June of $2008$ , the federal government issued one-time tax rebates - checks returning a small portion of taxes previously paid to millions of U.S residents, and U.S. real disposable income temporarily jumped by nearly $$ 500$ billion. Household real consumption spending did not increase in response to the short-lived increase in real disposable income. Explain how the logic of the permanent income hypothesis might help to account for this apparent non relationship between real consumption and real disposable income in the late spring of $2008$ .

See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free