Exam 15: Financial Crises, Stabilization, and Deficits

Assume that tax revenue is represented by the following function: T = - 200 + .25Y, where the first term represents net taxes and Y represents GDP. Assume furthermore that government spending is $400 billion and the economy is in equilibrium at $2000 billion. Calculate the value of the budget deficit.

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Question 1

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Tax revenue will equal -200 + .25(2000) = $300 billion. With government spending of $400 billion this gives rise to a budget deficit of $100 billion.

Assume the government is running a budget deficit of $40 billion and cuts spending by this amount. Suppose that this cut in spending resulted in a new budget deficit of $30 billion. With a multiplier of 1.5 what must be the value of the deficit response index?

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Question 2

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First, the cut in spending would cause the economy to contract by 1.5 x $40 billion = $60 billion. Since we know that the budget deficit was offset by $10 billion ($40 billion - $30 billion) we can write the following: DRI x $60 billion = $10 billion. Thus the DRI = $10 billion/$60 billion = 1/6 or .16.

Identify the time lags that are associated with stabilization policies.

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Question 3

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Effective stabilization policies are subject to various time lags that can seriously weaken the objective of achieving noninflationary and sustained economic growth. The recognition lag is the elapsed time for policy makers to realize the need to do something. The implementation lag is the time needed to implement the policies and the response lag is the time between the introduction of the policy measures and their impact.

Assume two different economies: one represented by AD₁ and one represented by AD₂. Which economy would the Fed be more inclined to expand the money supply and why? Demonstrate your answer by drawing in the new demand curve that would result.

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Question 4

When is the Fed more likely to decrease the money supply and why?

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Question 5

Why would a balanced budget amendment to the Constitution be considered destabilizing during a recession in which the government is running a budget deficit?

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Question 6

Explain what economists mean by the Fed "leaning against the wind".

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Question 7

What is the economic impact of automatic stabilizers during expansionary periods?

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Question 8

What kind of impact on the economy will there be from a contractionary monetary policy when the economy is suffering from stagflation?

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Question 9

Assume an economy with a deficit response index of -.20. With a budget deficit of $200 billion, what would be the impact on the budget deficit if the economy were to expand by $100 billion? Assume that the government takes no action to change taxes or government spending.

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Question 10

Explain with the use of Milton Friedman's "fool in the shower" analogy why policy makers efforts to combat recession often do not work.

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Question 11

What would automatic destabilizing policies tend to due to inflationary pressures or recessionary conditions?

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Question 12

Using Scenario 1, calculate the value of the spending multiplier in this economy.

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Question 13

What is the Dow Jones Industrial Average?

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Question 14

Why is it said that changes in government spending have a direct and immediate impact on the economy but changes in personal taxes have a delayed impact on the economy?

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Question 15

Assume that government spending is reduced by $10 billion, the value of the expenditure multiplier is 2, and the DRI is -.25. What is the net effect of the spending decrease on the deficit?

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Question 16

Why would an income multiplier of zero make balancing the budget easier?

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Question 17

Explain the relationship between changes in the money supply, interest rates, spending, and prices.

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Question 18

Under what economic conditions could the deficit reduction targets of the Gramm-Rudman-Hollings Act be destabilizing?

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Question 19

Explain the important policy objectives of Federal Reserve monetary policies.

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Question 20

Showing 1 - 20 of 102

Assume the government is running a budget deficit of $40 billion and cuts spending by this amount. Suppose that this cut in spending resulted in a new budget deficit of $30 billion. With a multiplier of 1.5 what must be the value of the deficit response index?

Identify the time lags that are associated with stabilization policies.

Assume two different economies: one represented by AD₁ and one represented by AD₂. Which economy would the Fed be more inclined to expand the money supply and why? Demonstrate your answer by drawing in the new demand curve that would result.

When is the Fed more likely to decrease the money supply and why?

Why would a balanced budget amendment to the Constitution be considered destabilizing during a recession in which the government is running a budget deficit?

Explain what economists mean by the Fed "leaning against the wind".

What is the economic impact of automatic stabilizers during expansionary periods?

What kind of impact on the economy will there be from a contractionary monetary policy when the economy is suffering from stagflation?

Assume an economy with a deficit response index of -.20. With a budget deficit of $200 billion, what would be the impact on the budget deficit if the economy were to expand by $100 billion? Assume that the government takes no action to change taxes or government spending.

Explain with the use of Milton Friedman's "fool in the shower" analogy why policy makers efforts to combat recession often do not work.

What would automatic destabilizing policies tend to due to inflationary pressures or recessionary conditions?

Using Scenario 1, calculate the value of the spending multiplier in this economy.

What is the Dow Jones Industrial Average?

Why is it said that changes in government spending have a direct and immediate impact on the economy but changes in personal taxes have a delayed impact on the economy?

Assume that government spending is reduced by $10 billion, the value of the expenditure multiplier is 2, and the DRI is -.25. What is the net effect of the spending decrease on the deficit?

Why would an income multiplier of zero make balancing the budget easier?

Explain the relationship between changes in the money supply, interest rates, spending, and prices.

Under what economic conditions could the deficit reduction targets of the Gramm-Rudman-Hollings Act be destabilizing?

Explain the important policy objectives of Federal Reserve monetary policies.

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

The Money Supply and the Federal Reserve System

Money Demand and the Equilibrium Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Costs Shocks in the Asad Model

The Labor Market in the Macroeconomy

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

Alternative Views in Macroeconomics

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

Filters

Exam 15: Financial Crises, Stabilization, and Deficits

Assume the government is running a budget deficit of $40 billion and cuts spending by this amount. Suppose that this cut in spending resulted in a new budget deficit of $30 billion. With a multiplier of 1.5 what must be the value of the deficit response index?

Identify the time lags that are associated with stabilization policies.

Assume two different economies: one represented by AD1 and one represented by AD2. Which economy would the Fed be more inclined to expand the money supply and why? Demonstrate your answer by drawing in the new demand curve that would result.

When is the Fed more likely to decrease the money supply and why?

Why would a balanced budget amendment to the Constitution be considered destabilizing during a recession in which the government is running a budget deficit?

Explain what economists mean by the Fed "leaning against the wind".

What is the economic impact of automatic stabilizers during expansionary periods?

What kind of impact on the economy will there be from a contractionary monetary policy when the economy is suffering from stagflation?

Assume an economy with a deficit response index of -.20. With a budget deficit of $200 billion, what would be the impact on the budget deficit if the economy were to expand by $100 billion? Assume that the government takes no action to change taxes or government spending.

Explain with the use of Milton Friedman's "fool in the shower" analogy why policy makers efforts to combat recession often do not work.

What would automatic destabilizing policies tend to due to inflationary pressures or recessionary conditions?

Using Scenario 1, calculate the value of the spending multiplier in this economy.

What is the Dow Jones Industrial Average?

Why is it said that changes in government spending have a direct and immediate impact on the economy but changes in personal taxes have a delayed impact on the economy?

Assume that government spending is reduced by $10 billion, the value of the expenditure multiplier is 2, and the DRI is -.25. What is the net effect of the spending decrease on the deficit?

Why would an income multiplier of zero make balancing the budget easier?

Explain the relationship between changes in the money supply, interest rates, spending, and prices.

Under what economic conditions could the deficit reduction targets of the Gramm-Rudman-Hollings Act be destabilizing?

Explain the important policy objectives of Federal Reserve monetary policies.

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

The Money Supply and the Federal Reserve System

Money Demand and the Equilibrium Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Costs Shocks in the Asad Model

The Labor Market in the Macroeconomy

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

Alternative Views in Macroeconomics

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

Filters

Assume two different economies: one represented by AD₁ and one represented by AD₂. Which economy would the Fed be more inclined to expand the money supply and why? Demonstrate your answer by drawing in the new demand curve that would result.