How large a tax cut would be needed to achieve the same increase in aggregate demand? $12.50 billion .
How can a tax cut eliminate a recessionary gap?
Fiscal policy means using either taxes or government spending to stabilize the economy. Expansionary fiscal policy can close recessionary gaps (using either decreased taxes or increased spending) and contractionary fiscal policy can close inflationary gaps (using either increased taxes or decreased spending).
How equal size increases in G and T could eliminate a recessionary gap and how equal size decreases in G and T could eliminate an inflationary gap?
Equal-size increases (decreases) in G and T could eliminate a recessionary (inflationary) expenditure gap because the multiplier effects of a change in government spending are greater than they are for a change in taxes. The effect of a change in G is found by taking the change in G times the spending multiplier .
Why real GDP increases when both taxes and government purchases increases by the same amount?
According to Keynesian economics, if the economy is producing less than potential output, government spending can be used to employ idle resources and boost output. Increased government spending will result in increased aggregate demand , which then increases the real GDP, resulting in an rise in prices.
How large is its cyclically adjusted budget deficit?
Since the government is running a cyclically adjusted budget deficit, this fiscal policy is expansionary. Answers: $52 billion; 50 percent . Feedback: Public debt is the sum of deficits and surpluses (negative deficits) over time.
Why is inflationary gap bad?
When an inflationary gap occurs, the economy is out of equilibrium level , and the price level of goods and services will rise (either naturally or through government intervention) to make up for the increased demand and insufficient supply—and that rise in prices is called demand-pull inflation.
What happens if the tax rate is increased?
As tax rates increase from low levels, tax revenue collected by the also government increases . Eventually, if tax rates reached 100 percent, shown as the far right on the Laffer Curve, all people would choose not to work because everything they earned would go to the government.
Does GDP go up with government spending?
According to Keynesian economics, if the economy is producing less than potential output, government spending can be used to employ idle resources and boost output. Increased government spending will result in increased aggregate demand , which then increases the real GDP, resulting in an rise in prices.
How does tax increase affect the economy?
They find that the effect of taxes on growth are highly non-linear: At low rates with small changes, the effects are essentially zero, but the economic damage grows with a higher initial tax rate and larger rate changes . ... A percentage-point cut in the average income tax rate raises GDP by 0.78 percent.
What does cyclically adjusted mean?
A cyclically adjusted deficit is a budget deficit caused by a slowing economy rather than fiscal policies such as increasing discretionary spending or decreasing the tax rates.
What is the absolute size of its public debt in Year 5?
What is the absolute size of its public debt in year 5? Public Debt = $42 billion .
Why is the debt as a percentage of GDP more relevant than the total debt?
Debt as a percentage of GDP is more relevant because it is a better measure of an economy’s (or government’s) ability to manage that debt .
What is deflationary gap example?
For example, deflationary gap is the amount by which aggregate demand must be increased to push the equilibrium level of income through the multiplier to the full employment level . In other words, if current national income is below full employment national income, a deflationary gap will arise.
Can deflationary gap exist at full employment level of income?
Answer: Yes , deflationary gap can exist at equilibrium level of income. In the below figure equilibrium is attained at a equilibrium point E,, when deflationary gap is EB. Answer: Inflationary gap is the gap showing excess of current aggregate demand over ‘aggregate supply at the level of full employment’.
Is inflationary gap good or bad?
An inflationary gap suggests that because the economy cannot produce enough goods and services to absorb this level of aggregate expenditures
