In 2009, President Obama with Congressional approval increased government spending and decreased lump-sum taxes in response...

In 2009, President Obama with Congressional approval increased government spending and decreased lump-sum taxes in response to the financial crisis.
1. Graph and explain what happens in both the ISLM model and the ADAS model (with the upward sloping SRAS curve) in the short run. Be sure to discuss real output, real interest rate and the price level in your answer.
2. Graph and explain what happens in the long run if the Fed does not change monetary policy. Be sure to discuss real output, real interest rate and the price level in your answer. You may use your graph from part a.
3. Fill in the table based on your answers to a. and b.

Indicate if the variable increases, decreases or does not change. Compare to the initial equilibrium.
	Short run	Long run
Real output
Real interest rate
Price level
Consumption
Investment

Expert Solution

All the above listed are fiscal measures to boost aggregare demand, hence the Ad curve will shift to the right

In short run, there is increase in output and an increase in interest rate as shown in ISLM curve. Real output and real interest rate rises in the short run as there is no sudden change in price levels. So, there is no inflation and hence no change in price level in short run

AS-AD:

Now, assuming that the economy started in the long run, we see that output is beyond full employment level. So, prices will strat increasing now, so that there is a shift along the new AD curve. AD':

So, we see that output retuns to initail level with a much higher increase in price. On the ISLM fornt, an increase in price means that the real money supply is falling, so the LM curve will move backwards. Also, an increase in interest rate means that there is some reduction in investment so IS curve shift to the left as well:

So we find that output has fallen back to original position, with an increase in nominal interest rates.

The following table summarises:

	Short run	Long run
Real output	Increase	Does not change
Real interest rate	Increase	Does not change
Price level	Does not change	Increase
Consumption	Increase	Increase
Investment	falls	falls

Rahul Sunny answered 7 months ago

If government spending is decreased by $300, taxes are increased by $300, and the MPC is...

If government spending is decreased by $300, taxes are increased by $300, and the MPC is 0.5, equilibrium output will change by Select one : a. $0. b. $150. c. $300. d. $600. e. $900.

Consider the possibility that government spending increases produc- tivity so that with lump sum taxes after...

Consider the possibility that government spending increases produc- tivity so that with lump sum taxes after an increase in government spending the original equilibrium level of consumption and leisure is still just affordable. How will an increase in government spending af- fect consumption, hours worked, output and welfare? What if the new PPF is beyond the original one at this point?

The United States, a large open economy has substantially increased government spending and decreased taxes during...

The United States, a large open economy has substantially increased government spending and decreased taxes during the early 1980s. Not only has that changed national saving in the United States, but also in the rest of the world. (a) What was the consequence for the world real interest rate? (b) What was the consequence of the US policy on Norway, a small open economy? Use a model of a long-run small open economy with perfect capital mobility to discuss what...

QUESTION 3 “If taxes and government spending are increased by the same amount, there will still...

QUESTION 3 “If taxes and government spending are increased by the same amount, there will still be a positive effect on equilibrium GDP.” Is this statement correct? Discuss by giving appropriate examples of scenario, data and/or diagrams to justify your answer. ANSWER FOR QUESTION 3

Suppose that the government decides to reduce the lump-sum taxes. Using the diagram, describe and explain...

Suppose that the government decides to reduce the lump-sum taxes. Using the diagram, describe and explain the effects of this policy on aggregate output, consumption, employment (or hours worked), and the real wage (note: you should diagram the effects on a graph with the production possibilities frontier and indifference curve).

What would happen if the government increased its spending in response to an increase in consumer...

What would happen if the government increased its spending in response to an increase in consumer savings? The increase in government spending would cause output to rise by even more than it would as a result of the increase in savings. The increase in government spending would offset (fully or partially) the decline in consumer spending. The increase in government spending would cause investment spending to fall, causing output to decline. None of the above. (8) An...

1. The government of an economy has increased its spending and its taxes by the same amount....

1. The government of an economy has increased its spending and its taxes by the same amount. What is the effect on investment? Use the long-run model of the economy developed in Chapter 3.

Among other things, President Obama has often been criticized by Republicans for having increased government regulations...

Among other things, President Obama has often been criticized by Republicans for having increased government regulations which they claim has harmed American businesses.Since taking office, President Trump has reversed many of these regulations and some believe that our ongoing economic expansion could partly be attributed that. We do know that in just about all market economies there are laws and regulations that governments impose on business activities. What are the reasons behind such regulations? To what extent are they necessary?...

Research the 2009 to 2017 Obama administration’s use of fiscal policy and deficit spending in the...

Research the 2009 to 2017 Obama administration’s use of fiscal policy and deficit spending in the face of The Great Recession which began in 2007. Focus only on fiscal policy. Do not include information about other policies such as monetary policy, healthcare, military spending, trade agreements, foreign affairs, etc. Answer the following questions: 1. Describe the main tools of fiscal policy and when it is appropriate to use them. 4. What specific fiscal policy measures did the Obama administration use,...

Although President Roosevelt increased government spending during the great depression, the great stimulus id not come...

Although President Roosevelt increased government spending during the great depression, the great stimulus id not come until World War II. Between 1940 and 1945 government expenditures on national defense increased significantly. For example, national defense spending grew from a yearly rate of $3 billion in 1940 to $15 billion in 1941, $53 billion in 1942, and to $87 billion in 1943. To finance the war, the government had to increase taxes. Assume the MPC is .9 All the following problems...

Question