ECON 214 Problem Set 9 solutions complete answers

ECON 214 Problem Set 9 solutions complete answers 

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As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. The marginal propensity to consume is 0.7, and the amount of new government spending is $600 billion.

 

The American Recovery and Reinvestment Act introduced a large amount of government spending into the economy—$789 billion! Suppose the marginal propensity to consume in the United States is 0.65. How much would the program increase total spending in the economy?

 

Suppose the economy is in a recession. The economy needs to expand by at least $450 billion, and the marginal propensity to consume is 0.7.

 

The multiplier effect of fiscal policy predicts that an increase in government spending of $100 billion will increase total income by $400.00 billion if the marginal propensity to consume is 0.75. If we account for crowding-out, then the increase in aggregate demand will be

 

Question 1

 

Please read the article below, and use the information in the article to answer this question.

 

Global Governments Boosting Spending at the Fastest Rate since 2009 by Luke Kawa

 

Although many countries have recently adopted expansionary fiscal policies with the hope of increasing their real GDP growth, these countries have pursued different fiscal policies. Below, match the country with the fiscal policy it is pursuing.

 

Question 2

 

Part 1

 

As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. The marginal propensity to consume is 0.8, and the amount of new government spending is $600 billion.

 

What is the multiplier?  Compute this to the first place beyond the decimal.

 

Part 2

 

By how much would the economy be stimulated?

 

Question 3

 

The graph below shows initial equilibrium in the loanable funds market at $800 million and an interest rate of 4%, point A. Now assume that the government increases spending by $100 million that is entirely deficit-financed. The new equilibrium in the loanable funds market is now $840 million and an interest rate of 5%, point B. 

 

If we assume there was no government debt prior to the fiscal stimulus, determine the new quantities for the blanks below:

 

Question 4

 

During the fall of 2007, the United States economy began a descent into deep recession. As a result, the federal government and the Federal Reserve took action to stimulate economic growth. Which of the following would have been an appropriate fiscal policy?  

 

Question 5

 

Assume the economy is operating beyond the full-employment output level, as shown in the graph below. The government wants to use contractionary fiscal policy to correct the situation. Drag the appropriate line to the correct position to show the change. 

 

Question 6

 

The American Recovery and Reinvestment Act introduced a large amount of government spending into the economy—$789 billion! Suppose the marginal propensity to consume in the United States is 0.75. How much would the program increase total spending in the economy?

 

Question 7

 

The government of a country has decided to lower income taxes in an attempt to expand the economy to the full-employment output level. Assume the policy is successful. Shift the appropriate curve to the correct position.

 

Question 8

 

Consider the Economic Stimulus Act passed in 2008. Which of the following could have caused real GDP to remain negative through the first half of 2009?

 

Question 9

 

Which of the following policies represents an automatic stabilizer with respect to fiscal policy?

 

Question 10

 

Part 1

 

If the government gave tax breaks for education, what type of fiscal policy would that be?  

 

Part 2

 

Based on your answer to Part 1 above, drag the appropriate curve in the graph below to show the effect of the education tax credits.

 

Question 11

 

In the graph below, AD1 shows where the economy was operating before fiscal policy was implemented, and AD2 shows the effects of a successful fiscal policy with no crowding out. On the graph, drag AD2 to its correct position if the fiscal policy led to complete crowding out.

 

Question 12

 

When the economy is in a recession, the government can use expansionary fiscal policy to stimulate and encourage economic growth. Which of the following scenarios represent expansionary fiscal policies from both a supply perspective and a demand perspective? 

 

Question 13

 

During the Great Recession, the U.S. budget deficit worsened as tax collections fell and payments to the poor rose. In other words, the deficit worsened as a result of _________ in the federal budget.

 

Question 14

 

Part 1

 

The graph below shows the situation in a loanable funds market where, presently, the entire supply of loanable funds comes from private savings activity, and the entire demand comes from private borrowing. The market quantity (money lent to borrowers) stands at $300 billion, and the interest rate stands at 3%.

 

Shift the demand curve to model the effect of a move by the government to borrow $150 billion, which it will spend on infrastructure in order to boost capital resources and at the same time create jobs in the construction industry. 

 

Part 2

 

Because of the crowding-out effect, the total market quantity of funds lent to borrowers did not increase by $150 billion. Rather, it increased by only  

 

Question 15

 

What are the consequences of automatic stabilizers when real GDP decreases?

 

Question 16

 

Suppose the economy is in a recession. The economy needs to expand by at least $450 billion, and the marginal propensity to consume is 0.8.

 

What is the least amount the government can spend to overcome the $450 billion gap?

 

Question 17

 

In a bid to be re-elected president of the United States, you promise both a lower tax rate and greater tax revenue. Would you be able to back up this promise with economic reasoning? Use the Laffer curve, shown here, to support your answer.

 

Question 18

 

Suppose that the president of a small island nation has decided to increase government spending by constructing three beach resorts to attract tourists. The legislation was enacted without any delay. From here, planning will take 6 months and construction will take 2 months.

 

Which of the following is true?

 

Question 19

 

Suppose that, during a recession, the government borrows money to provide free wireless Internet access in urban areas. Which of the following statements are correct?

 

Question 20

 

The multiplier effect of fiscal policy predicts that an increase in government spending of $250 billion will increase total income by $1000.00 billion if the marginal propensity to consume is 0.75. If we account for crowding-out, then the increase in aggregate demand will be