Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 32.A, Problem 2ARQ
To determine
Impact of change in government expenditure on aggregate demand curve.
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Suppose that the investment demand curve in a certain economy is such that investment declines by $120 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment.If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out?$ billion
5. Show why a $10 billion reduction in government
purchases of goods and services will have a larger
effect on real GDP than a $10 billion reduction in
government transfers by completing the accom-
panying table for an economy with a marginal
propensity to consume (MPC) of 0.6. The first and
second rows of the table are filled in for you: on the
left side of the table, in the first row, the $10 billion
reduction in government purchases decreases real
GDP and disposable income, YD, by $10 billion, lead-
ing to a reduction in consumer spending of $6 billion
Rounds
1
2
3
4
5
6
7
8
9
10
Decrease in G=-$10 billion
(billions of dollars)
Change in
real GDP
Change in
G or C
AG = -$10.00
AC =
AC =
AC =
AC =
AC =
AC =
AC =
AC =
AC =
-6.00
?
?
?
?
?
?
?
?
-$10.00
-6.00
?
?
?
?
?
?
?
?
Change in
YD
-$10.00
-6.00
?
?
?
?
?
?
?
?
Change in
TR or C
ATR=-$10.00
AC =
AC =
AC =
AC =
AC =
AC =
AC =
AC =
AC =
(MPC x change in disposable income) in row 2. How-
ever, on the right side of the table, the $10…
Assume that the federal government is attempting to counter a negative shock through fiscal
policy. The federal government increases government spending by $350 billion. As a result of this
policy change, the net change in total economic activity (including the increased government
spending) is a decrease of $25 billion. Which of the following is most likely to be true?
O the multiplier effect is larger than any crowding out effect
O crowding out is not present
O the increase in government spending led to a substantial increase in exports
the government has a lot debt already and is likely to default
Chapter 32 Solutions
Economics (Irwin Economics)
Ch. 32.7 - Prob. 1QQCh. 32.7 - Prob. 2QQCh. 32.7 - Prob. 3QQCh. 32.7 - Prob. 4QQCh. 32.A - Prob. 1ADQCh. 32.A - Prob. 2ADQCh. 32.A - Prob. 1ARQCh. 32.A - Prob. 2ARQCh. 32.A - Prob. 1APCh. 32.A - Prob. 2AP
Ch. 32 - Prob. 1DQCh. 32 - Prob. 2DQCh. 32 - Prob. 3DQCh. 32 - Prob. 4DQCh. 32 - Prob. 5DQCh. 32 - Prob. 6DQCh. 32 - Prob. 7DQCh. 32 - Prob. 8DQCh. 32 - Prob. 9DQCh. 32 - Prob. 1RQCh. 32 - Prob. 2RQCh. 32 - Prob. 3RQCh. 32 - Prob. 4RQCh. 32 - Prob. 5RQCh. 32 - Prob. 6RQCh. 32 - Prob. 7RQCh. 32 - Prob. 8RQCh. 32 - Prob. 9RQCh. 32 - Prob. 1PCh. 32 - Prob. 2PCh. 32 - Prob. 3PCh. 32 - Prob. 4PCh. 32 - Prob. 5P
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