Grh requires across the board spending cuts even

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GRH requires across-the-board spending cuts, even during a recession.11.(b)Government bonds are backed by the “full faith and credit of the United StatesGovernment,” making them less risky than corporate bonds.12.(b)See Figure 15.5 (30.5) on p. 287 [599].13.(d)Stocks and bonds are both assets that add to the wealth of households.14.(c)Wealthier people spend more of their current income and, therefore, save less. Recall thatthe personal saving rate is the percentage of disposable income that is saved.15.(b)$1,000´0.04 = $40.See p. 288 [600].16.(b)Declining wealth reduces consumption. Given income, saving should increase. Withdecreasing demand the Fed is more likely to lower, rather than raise, interest rates.17.(a)Relatively low unemployment and relatively high inflation is best explained by theaggregate demand curve shifting to the right (as household wealth increases).18.(a)With increased demand, there would be an expansion an production. If the Fed chose toslow the pace of economic growth, to prevent inflation, it would increase interest rates.19.(c)Interest rates decreased in an effort to stimulate the economy. There is a negativerelationship between interest rates and bond prices.20.(b)When stock prices increase, household wealth increases, encouraging additionalconsumption. Because household income has not changed, saving decreases.
Chapter 15 [30]: Policy Timing, Deficit Targeting, and Stock Market Effects 155II.Solutions to Application Questions1.(a)True. If output falls by $1 billion, the deficit response index indicates how much the deficitwill increase as a result. If theDRIwere zero, the deficit would not change at all. If, toreduce the deficit, government spending were cut and it was this that prompted the declinein output, and theDRIwere zero, there would be no offsetting increase in the deficit. Referto p. 283 [595].(b)False. GRH would have been destabilizing, calling, for example, for cuts in governmentspending during a recession. Refer to p. 281 [593].(c)True. An expansionary monetary policy will increase output and employment. Net taxeswill be increased, reducing the deficit.2.(a)GDP=G´multiplier = –$240 million´1.5 = –$360 million.(b)Net taxes =GDP´0.2 = –$360 million´0.2 = –$72 million.(c)D=GT= (–$240 – $72) million = –$168 million.(d)The deficit has been reduced by $168 million, from $240 million to $72 million.(e)TheADcurve has shifted to the left. The new intersection ofADand the short-runAScurve is $360 million below the full-employment output level where the verticalLRAScurve is located. The overall price level is lower and, as output has been reduced,unemployment is higher.(f)In the long run the economy will move back to the full-employment output level—theshort-run aggregate supply curve will shift to the right. As output expands (by $360million), net taxes will increase by $360 million times 0.2, or $72 million. The budget willbe balanced.(g)D=GT=G– 0.2GDP.GDP= 1.5G.D=G– 0.2(1.5)G=G– 0.3G= 0.7G.D= $240 million.0.7G= $240 million, thereforeG= $342.8571 million.Government spending must be cut by $342,857,143.(h)The Fed would need to undertake an expansionary monetary policy.(i)

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Term
Fall
Professor
Mr. Kemmerer

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