KW_Macro_Ch_12_End_of_Chapter_Problems

KW_Macro_Ch_12_End_o - chapter 12 > Fiscal Policy PROBLEMS 1 The accompanying diagram shows the current macroeconomic situation for the economy of

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>> Fiscal Policy chapter 12 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to help the economy move to potential output, Y E . AD 1 SRAS P 1 Real GDP Y 1 Y E Aggregate price level E 1 LRAS Potential output PROBLEMS
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a. Is Albernia facing a recessionary or inflationary gap? b. Which type of fiscal policy—expansionary or contradictionary—would move the econo- my of Albernia to potential output, Y E ? What are some examples of such policies? c. Illustrate the macroeconomic situation in Albernia with a diagram after the successful fiscal policy has been implemented. 2. The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y 1 and the aggregate price level is P 1 . You have been hired as an economic consultant to help the economy move to potential output, Y E . a. Is Brittania facing a recessionary or inflationary gap? Which type of fiscal policy—expansionary or contradictionary—would move the econo- my of Brittania to potential output, Y E ? What are some examples of such policies? c. Illustrate the macroeconomic situation in Brittania with a diagram after the successful fiscal policy has been implemented. AD 1 SRAS P 1 Real GDP Y 1 Y E Aggregate price level E 1 LRAS Potential output 2 CHAPTER 12 PROBLEMS
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3. An economy is in long-run macroeconomic equilibrium when each of the following aggre- gate demand shocks occurs. What kind of gap—inflationary or recessionary—will the econ- omy face after the shock, and what type of fiscal policies would help move the economy back to potential output? a. A stock market boom increases the value of stocks held by households. b. Firms come to believe that a recession in the near future is likely. c. Anticipating the possibility of war, the government increases its purchases of military equipment. d. The quantity of money in the economy declines and interest rates increase. 4. Show why a $10 billion decrease in government purchases will have a larger effect on real GDP than a $10 billion reduction in government transfers by completing the table at the top of the following page for an economy with a marginal propensity to consume ( MPC) of 0.6. The first and second rows of the table are filled in for you: in the first row, the $10 billion decrease in government purchases decreases real GDP and disposable income, YD ,
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_12_End_o - chapter 12 > Fiscal Policy PROBLEMS 1 The accompanying diagram shows the current macroeconomic situation for the economy of

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