Fiscal policy 2. Fiscal policySuppose a hypothetical economy is currently in a situation of deficient aggregate demand of $32 billion. Four economists agree that expansionaryfiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should beused.Economist A believes that the government spending multiplier is 4 and the tax multiplier is 2. Economist B believes that the government spendingmultiplier is 2 and the tax multiplier is 8.Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for eachscenario, compute the size of the tax cut that would achieve this same effect.Policy Options for Closing Output GapIncrease in Spending(Billions of dollars)Tax CutSpending MultiplierTax Multiplier(Billions of dollars)Economist A42Economist B2Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that:Government purchases increase aggregate demand by stimulating investment.Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand.Economist D is skeptical about the effectiveness of an increase in government spending as an expansionary fiscal policy. Which of the followingstatements is consistent with Economist D's belief?How government spends money is less crucial to the success of policy than the magnitude of government spending.O The specifics of how the government spends money are crucial to the effectiveness of an expansionary policy.

There is an output gap of $32 billion. To fill out this o/p gap or to help the economy to come out…

2. Fiscal policy Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $32 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should be used. Economist A believes that the government spending multiplier is 4 and the tax multiplier is 2. Economist B believes that the government spending multiplier is 2 and the tax multiplier is 8. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect.

2. Fiscal policy Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $32 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should be used. Economist A believes that the government spending multiplier is 4 and the tax multiplier is 2. Economist B believes that the government spending multiplier is 2 and the tax multiplier is 8. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter24: Fiscal Policy

Section: Chapter Questions

Problem 5P

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Fiscal policy

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