By how much would government spending need to change

Assignment Help Econometrics

Reference no: EM13239572

An economy is operating with output $400 billion below its natural rate, and fiscal policymakers want to close this recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The marginal propensity to consume is 4/5, and the price level is completely fixed in the short run.

a. In what direction and by how much would government spending need to change to close the recessionary gap? Explain your thinking.

b. In what direction and by how much would taxes need to change to close the gap? Explain.

c. If the central bank were to hold the money supply, rather than the interest rate, constant in response to the change in fiscal policy, would your answers to the previous questions be larger, smaller, or the same? Explain.

d. If policymakers in this economy wanted to close the recessionary gap without increasing the government's budget deficit, what are two ways they can accomplish this goal?

Reference no: EM13239572

Questions Cloud

What are the effects of temporary decrease in govt spending : Discuss, with the help of Krugman-Obstfeld-Melitz' AA- and DD-curves, the effects of a contractive fiscal policy (a decrease in government spending) on the interest rate, the nominal and real exchange rates, output and the price level.

Explain dynamics implied by the so-called walters critique : Ireland and Spain are now in deep economic crises after preceding booms with fast credit growth, house price bubbles and real appreciations. a) Why could not these countries pursue economic policies preventing the earlier booms

Define octane is completely converted to co2 and water vapor : if you burn 10.00g of octane. if the temperature is 500K, and you have an expansion of 1.00 atm, how much work in joule can be done by the system if the octane is completely converted to CO2 and water vapor. what will be the enthalpy change

Explain a molecule has the empirical formula c3h7 : A molecule has the empirical formula C3H7 and has a density of 3.844g/L at STP. If one mole of this gas is burned completely in excess oxygen, how many moles of CO2 are produced

By how much would government spending need to change : An economy is operating with output $400 billion below its natural rate, and fiscal policymakers want to close this recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant

Find the location of the coins final image : A converging lens of focal length 7.550cm is 20.5cm to the left of a diverging lens of focal length -6.50cm, find the location of the coins final image

Explain what would be the volume of product gases at stp : What would be the volume of product gases (CO2 and H2O) at STP from 0.50 mole cyclohexanone (in presence of excess oxygen)

Calculate the prices in both countries in trade equilibrium : it has the same demand curve and there is only one firm there that also produces apples at the marginal cost of $4 per kilo. Also, each firm in every country has to pay a transportation cost of $1 per kilo to deliver its apples to the market abroa..

Explain how many moles of o2 are required : If 0.50 moles of liquid cyclohexanone (C6H10O) is completely combusted, how many moles of O2 are required

User Account

All Pages