Suppose that a federal election is called at a time when the economy is experiencing a...

Suppose that a federal election is called at a time when the economy is experiencing a recessionary gap and there is a budget deficit.

The leader of Party A promises, if elected, to immediately balance the budget by slashing government spending.

The leader of Party B promises, if elected, to stimulate the economy with a tax decrease.

What would be the effect of each party’s proposed policy on each of the following.

	The effect of Party A's proposed policy on:	The effect of Party B's proposed policy on:
a. the level of GDP.	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase
b. the level of NTR.	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase
c. the level of unemployment.	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase
d. the budget deficit.	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase
e. the price level	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase	(Click to select) decrease increase may increase or decrease remain the same remain the same or decrease remain the same or increase

Solutions

Expert Solution

> Effect of part A's proposed policy

a) decrease

( GDP= consumption expenditure+ investment expenditure+ government expenditure+ net exports. So a fall in government expenditure will lead to a decline in GDP.)

b) decrease

( NTR is a function of government expenditure. So a fall in government expenditure will lead to a decline in NTR.)

c) increase

( lf employment opportunities and consumption are financed by government expenditure, then unemployment rate will rise.)

d) decrease

( Budget deficit= total receipts- total spending. Lower the spending, lower the budget deficit.)

e) decrease

( Decrease in government expenditure will lead to a decline in aggregate demand. Decline in aggregate demand will be accompanied by a fall in price level.)

Rahul Sunny answered 1 year ago

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