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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

Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (b) of Figure 13-1, the government knows that the MPC is equal to 0.75 and that the amount of the horizontal distance that the AD curve had to be shifted directly leftward from point E1 was equal to $1.0 trillion. What is the reduction in real government spending required to have generated this shift?

Assume that equilibrium real GDP is \( 18.2 trillion and full-employment equilibrium (F E) is \) 18.55 trillion. The marginal propensity to save is 17. Answer the questions using the data in the following graph.

a. What is the marginal propensity to consume?

b. By how much must new investment or government spending increase to bring the economy up to full employment?

c. By how much must government cut personal taxes to stimulate the economy to the full employment equilibrium?

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.

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.

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.)
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