Chapter 13: Q. 14 (page 297)
Suppose that Congress enacts a lump-sum tax cut of billion. The marginal propensity to consume is equal to . Assuming that Ricardian equivalence holds true, what is the effect on equilibrium real GDP? On saving?
As a result, it is evident that tax cuts have no impact on actual GDP or savings.
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Determine whether each of the following is an example of an automatic fiscal stabilizer.
a. A federal agency must extend loans to businesses whenever an economic downturn begins.
b. As the economy heats up, the resulting increase in equilibrium real GDP per year immediately results in higher income tax payments, which dampen consumption spending somewhat.
c. As the economy starts to recover from a severe recession and more people go back to work, government-funded unemployment compensation payments begin to decline.
d. To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on govemment programs.
2. Why do you suppose that many economists perceive a trade-off between short-term stabilization benefits of unemployment compensation and a contribution to a higher unemployment rate in the long run?
The U.S. government is in the midst of spending more than billion on seven buildings containing more than square feet of space to be used for the study of infectious diseases. Prior to the government's decision to construct these buildings, a few universities had been planning to build essentially the same facilities using privately obtained funds. After construction on the government buildings began, however, the universities dropped their plans. Evaluate whether the government's billion expenditure is actually likely to push U.S. real GDP above the level it would have reached in the absence of the government's construction spree.
1. Other things being equal, what features of a nation's economy do you think would tend to contribute to a higher value for its stabilization coefficient? [Hint: Consider the chapter's discussion of the reasons fiscal policy actions tend to have larger effects on real GDP.)
Currently, a government's budget is balanced. The marginal propensity to consume is . The government has determined that each additional billion it borrows to finance a budget deficit pushes up the market interest rate by role="math" localid="1651613391961" percentage point. It has also determined that every role="math" localid="1651613378175" -percentage point change in the market interest rate generates a change in planned investment expenditures equal to 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 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 billion increase in government spending crowd out?)
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