14. Suppose that Korea has been in recession and many economists have concerns about the long-term recession. Therefore, the Bank of Korea and the government are preparing stimulus packages for the economy. (1) Using both AA and DD curves, describe the effect of the government’s temporarily expansionary fiscal policy on the change of equilibrium of national output and foreign exchange rate. (2) The Korean government decides to annually spend an extra budget on constructing and maintaining social infrastructure forever. Using both AA and DD curves, describe the impact of the government’s policy on the change of equilibrium of national output and foreign exchange rate.

14. Suppose that Korea has been in recession and many economists have concerns about the long-term recession. Therefore, the Bank of Korea and the government are preparing stimulus packages for the economy. (1) Using both AA and DD curves, describe the effect of the government’s temporarily expansionary fiscal policy on the change of equilibrium of national output and foreign exchange rate. (2) The Korean government decides to annually spend an extra budget on constructing and maintaining social infrastructure forever. Using both AA and DD curves, describe the impact of the government’s policy on the change of equilibrium of national output and foreign exchange rate.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.1P

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'The U.S., world's largest economy, went into recession in February of 2020. It has taken a broad range of steps to combat the economic disruption caused by COVID-19. In response to this crisis, governments have enacted sweeping and sizable fiscal stimulus of trillions of dollars.' Is it an appropriate policy response if the primary responsibility of the government is to maintain economic growth? Explain the significance of Fiscal policy for an economy? Is there any difference in the two approaches of fiscal expansion through - direct transfer benefit and government spending directly on purchase of goods and services that may influence real GDP? What role does multiplier play? Explicate. Support your answer with the suitable diagram/s.
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5. Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (AD). Suppose now that the government increases its purchases by $5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes place Hint: Be sure the new aggregate demand curve (AD) is parallel to AD, You can see the slope of AD, by selecting it on the following graph. ? 114 112 15.0 110 104 12.5 75 10.0 102 100 2.5 100 105 The following graph plots equilibrium in the money market at an interest rate of 7.5% and a quantity of money equal to $45 billion. 115 110 120 125 130 135 OUTPUT (lions of dollars) Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the…
4 HOMEY set of any of yes to $30 -0- -o- My ly Suppose that for every increase in the sterest rate ens peresage the end of westmant spending decies by 565 bon Based on the anes the level of investments to b Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to known as the by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (ADS) after accounting for the impact of the increase in government purchases on the interest rate and the level of…
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