terrichichester-BU204-homework-unit7

terrichichester-BU204-homework-unit7 - HOMEWORK - UNIT 7...

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HOMEWORK - UNIT 7 FISCAL POLICY Chapter 12: Problems 3, 5, 6, and 13 on pages 316-318 Chapter 12 / FISCAL POLICY /24 3. An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap — inflationary or recessionary — will the economy 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. (6 pts) This will create an Inflationary gap – contractionary fiscal policy would move the economy back to potential output by reducing government purchases of goods and services, increasing taxes, or reducing government transfers. b. Firms come to believe that a recession in the near future is likely. (6 pts) This will create a Recessionary gap – expansionary fiscal policy will help to move the economy back in line with potential output by increasing government purchases of goods and services, tax cuts, and an increase in government transfers. c. Anticipating the possibility of war, the government increases its purchases of military equipment. (6 pts) This will create an Inflationary gap – contractionary fiscal policy would have to be put in place by either increasing taxes or reducing government transfers. d. The quantity of money in the economy declines and interest rates increase. (6 pts) Recessionary gap – expansionary fiscal policy will help to move the economy
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terrichichester-BU204-homework-unit7 - HOMEWORK - UNIT 7...

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