Question

In: Economics

Suppose the federal government unexpectedly decreases its spending. Using the IS-LM model, explain how this contractionary...

Suppose the federal government unexpectedly decreases its spending.

Using the IS-LM model, explain how this contractionary fiscal policy affects the real interest rate, r, and total output, Y , in both the short run and the long run.

What happens to consumption, C, investment, I, and government expenditure, G, in the short-run?

What happens to C, I, G, and r in the long- run?

(Note: For full credit, you must provide a brief explanation for why each variable changes or remains constant.)

Expert Solution

in short run --

G----- decreases due to decrease in government spending

I------decreases due to decrease in AD

C---- decrease in AD leads to decrease in consumption

in long run-----

G--decreases

I---increases

C--consuption increases

raesons for increase or decrease in the C,I,G is given in the fig itself

i hope my answer is clear now

Rahul Sunny answered 2 years ago

Suppose the federal government unexpectedly decreases its spending. With the aid of an aggregate demand-aggregate supply...

Suppose the federal government unexpectedly decreases its spending. With the aid of an aggregate demand-aggregate supply diagram, explain how this contractionary fiscal policy affects the price level, P, and total output, Y, in the short-run. How does the economy adjust to this policy in the long-run? What is the effect of this policy on P and Y in the long-run? [Note: Assume that the economy is in a long-run equilibrium prior to the increase in government spending. Also assume that...

1. The government decreases taxes. (a) Answer the following questions using the IS-LM model: In the...

1. The government decreases taxes. (a) Answer the following questions using the IS-LM model: In the short-run, how does the policy affect the level of national income (Y ) and the real interest rate (r)? Include the appropriate diagram. How does the policy affect the levels of (i) consumption (C), (ii) investment (I), and (iii) government expenditure (G)? How do you know? (b) Use the long-run model of loanable funds to answer the following questions: In the long-run, how does...

A temporary government spending shock. a) Suppose the government very temporarily, and unexpectedly, increases its purchases...

A temporary government spending shock. a) Suppose the government very temporarily, and unexpectedly, increases its purchases of goods. (Assume the government finances these temporary purchases by issuing additional debt. Assume the government only purchases goods—it does not produce goods, or employ labor directly.) Explain the impact in both the goods and labor markets today. What happens to consumption demand, investment demand, aggregate demand, and aggregate supply? What happens to the market-clearing real interest rate, output, consumption and investment? Illustrate graphically....

Question 3: Suppose federal government decreases taxes by (ΔT= 10 million) and increases government spending by...

Question 3: Suppose federal government decreases taxes by (ΔT= 10 million) and increases government spending by (ΔG = 20 million), as a result output is changed by (ΔY). a. (10 points) Assuming that the Federal reserve changes money supply such that the interest rate stays constant and marginal propensity to consume is MPC= 0.6. What is the change in output (ΔY)? What is ΔY ? What is ΔY? Show your work. ΔT ΔG b. (10 points) If the fed does...

Use the IS-LM model to explain under what conditions an increase in government spending is likely...

Use the IS-LM model to explain under what conditions an increase in government spending is likely to have a) a greater impact on national output b) a smaller impact on national output.

1. Using AD and AS model, graphically explain the following: Suppose that the Government increases spending...

1. Using AD and AS model, graphically explain the following: Suppose that the Government increases spending and simultaneously raises taxes. a) Show the effect of this change on AD schedule. b) How does this affect output and price level in the Keynesian case. c) How does this affect output and price level in Classical case.

explain how the various categories of federal government spending (such as spending on entitlements, or infrastructure...

explain how the various categories of federal government spending (such as spending on entitlements, or infrastructure or basic research) qualify as either consumption or investment spending. explain how the various categories of federal government spending (such as spending on entitlements, or infrastructure or basic research) qualify as either consumption or investment spending.

Describe how the multiplier works when the government decreases spending? Explain how the multiplier depends on...

Describe how the multiplier works when the government decreases spending? Explain how the multiplier depends on the MPC and the income tax rate. Provide intuition for your answer. What happens if MPC = 0? What happens if MPC = 1? Draw the Keynesian consumption function and relate the size of the multiplier to the slope of the Keynesian consumption function.

Using the IS-LM-FE model for a small open economy, analyze the effects of a contractionary monetary...

Using the IS-LM-FE model for a small open economy, analyze the effects of a contractionary monetary policy on output and the real interest rate in the short run and the long run. In each case, discuss the differences between the classical and the Keynesian models.

3. Using the IS-LM graphs, show that a decrease in government spending will cause output and...

3. Using the IS-LM graphs, show that a decrease in government spending will cause output and interest rates to fall. 4. Using the IS-LM graphs, show what will happen to output and the interest rates if there is a balanced budget increase in spending—that is higher spending financed by higher taxes. 5. Using IS-LM graphs, predict what will happen to output and the interest rate if the central bank reduces the money supply.