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Pizzati, Macroeconomic, Winter 2016

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Six Deate over Macroeconomic Polic (Moile-nhanced)

Graded Aignment | Read Chapter 18 | ack to Aignment

Attempt:

Due Wedneda 01.27.16 at 11:00 PM

Average: 1.5 / 3

2.Fiscalpolicy
Supposeahypotheticaleconomyiscurrentlyinarecessionarygapof$16billion.Foureconomistsagreethatexpansionaryfiscalpolicycanincreasetotal
spendingandmovetheeconomyoutofrecession,buttheyaredebatingwhichtypeofexpansionarypolicyshouldbeused.
EconomistAbelievesthatthegovernmentspendingmultiplieris8andthetaxmultiplieris2.EconomistBbelievesthatthegovernmentspending
multiplieris4andthetaxmultiplieris8.

Computetheamountthegovernmentwouldhavetoincreasespendingtoclosetheoutputgapaccordingtoeacheconomist'sbelief.Then,foreach
scenario,computethesizeofthetaxcutthatwouldachievethissameeffect.
PolicyOptionsforClosingOutputGap
IncreaseinSpending

TaxCut

(Billionsofdollars)

(Billionsofdollars)

SpendingMultiplier

TaxMultiplier

EconomistA

EconomistB

2
Points:

Explanation:

1/1

CloseExplanation

IfEconomistAiscorrectandthegovernmentspendingmultiplieris8,thegovernmentcanincreaseitsspendingby$2billiontoincreasethereal
GDPby$16billion(

).

Ifthetaxmultiplieris2,asecondoptionistocuttaxesby$8billion(

).

IfEconomistBiscorrectandthegovernmentspendingmultiplieris4,thegovernmentcanincreaseitsspendingby$4billiontoincreasethereal
GDPby$16billion(

).

Ifthetaxmultiplieris8,asecondoptionistocuttaxesby$2billion(

).

EconomistCfavorsincreasesingovernmentspendingtotaxcuts.ThismeansthatEconomistClikelybelievesthat:
Partofadollarintaxcutsmaybesavedratherthanspentandthusdoesnotfullycontributetotheaggregatedemand.
Governmentpurchasesincreaseaggregatedemandbystimulatinginvestment.

Points:

Explanation:

1/1

CloseExplanation

EconomistClikelybelievesthatincreasesingovernmentspendingofferabiggerbangforthebuckthandecreasesintaxes.
TraditionalKeynesiananalysisindicatesthatincreasesingovernmentpurchasesareamorepotenttoolthandecreasesintaxes.Partofadollarin
taxcutsmaybesavedratherthanspentandthusnotcontributetotheaggregatedemandforgoodsandservices.Bycontrast,whenthe

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governmentspendsadollarbuyingagoodorservice,thatdollarimmediatelyandfullyaddstoaggregatedemand.
Notethatitistaxcutsthattendtostimulateinvestment.

EconomistDisskepticalabouttheeffectivenessofanincreaseingovernmentspendingasanexpansionaryfiscalpolicy.Whichofthefollowing
Session
Timeout

statementsisconsistentwithEconomistD'sbelief?

57:11

Thespecificsofhowgovernmentspendsmoneyiscrucialtotheeffectivenessofexpansionarypolicy.
Howgovernmentspendsmoneyislesscrucialtothesuccessofpolicythanthemagnitudeofgovernmentspending.

Points:

Explanation:

1/1

CloseExplanation

EconomistDbelievesthatthestimulativeeffectofgovernmentspendingdependsonhowwellthemoneyisspent.Thatis,shebelievesifthe
moneyisspentonthingsthatareoflittlevalue,theeffectontheeconomywillbesubstantiallylessthanifthemoneyiswelltargetedon
programsandprojectsthatgenerategrowth.

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