For each of the following situations, choose a fiscal policy and explain how it could be used to correct the economic problem
a. Real GDP is below potential GDP following a financial market crisis.
b. A positive demand shock increases aggregate expenditure beyond the full employment level and leads to fears of rising inflation.
c. The economy is in a recession due to rising defaults on mortgages following the bursting of a housing bubble.
a. If real GDP is below potential GDP, expansionary fiscal policy would be used. Government purchases of goods and services could be increased, transfer payments could be increased, or taxes could be reduced. If government purchases are increased, the government purchases (G) component of aggregate expenditure will increase. If transfer payments are increased or personal income taxes are decreased, the consumption expenditure (C) component of aggregate expenditure will increase. If corporate income taxes are decreased, the investment expenditure (I) component of aggregate expenditure will increase.
b. To reduce aggregate expenditure back to full employment, contractionary fiscal policy would be used. Government purchases of goods and services could be reduced, transfer payments could be reduced, or taxes could be increased. If government purchases are reduced, the government purchases (G) component of aggregate expenditure will decline. If transfer payments are reduced or personal income taxes are increased, the consumption expenditure (C) component of aggregate expenditure will decline. If corporate income taxes are increased, the investment expenditure (I) component of aggregate expenditure will decline.
a. If the economy is in a recession, real GDP is below potential GDP so expansionary fiscal policy would be used. Government purchases of goods and services could be increased, transfer payments could be increased, or taxes could be reduced. If government purchases are increased, the government purchases (G) component of aggregate expenditure will increase. If transfer payments are increased or personal income taxes are decreased, the consumption expenditure (C) component of aggregate expenditure will increase. If corporate income taxes are decreased, the investment expenditure (I) component of aggregate expenditure will increase.
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? Refer to Table 4-1. At $4, what is the shortage?
A. 0 B. 1,500 C. 3,000 D. 4,500 E. 6,000
Refer to Table 2.1. You can spend $40 on going to the movies or eating at a restaurant, or both. What is the opportunity cost of spending all your money at the restaurant?
Table 2.1 Item A B C D E Movie $0 $10 $20 $30 $40 Restaurant $40 $30 $20 $10 $0 a. $0 b. $10 c. $20 d. $30 e. $40
Assume a society can produce either beer or wine. If the marginal rate of transformation of gallons of beer into gallons of wine is 0.5, then the opportunity cost of wine is
A. the 2 gallons of wine that must be forgone. B. the additional 0.5 gallons of beer that can be produced. C. the 0.5 gallons of beer that must be forgone. D. the 2 gallons of beer that must be forgone.
Which of the following statements is true?
a. Prestigious theaters that can sell tickets for operas for $500 should never sell tickets at $20 prices. b. You should never tip a host in a restaurant in order to avoid a long wait. c.Even though the pharmaceutical industry cannot stop other countries from selling lower price drugs to U.S. residents, the industry's efforts to price-discriminate are profitable. d.Perfect price discrimination can never lead to the most socially desirable level of output since it involves monopoly power.