5. Consider a country with an economic structure consistent with the assumptions of the classical model. Suppose that businesses in this nation suddenly anticipate higher future profitability from investments they undertake today. Explain whether or how this could affect the following:
a. The current equilibrium interest rate
b. Current equilibrium real GDP
c. Current equilibrium employment
d. Current equilibrium saving
e. Future equilibrium real GDP (see Chapter 9)
6. Suppose that the Keynesian short-run aggregate supply curve is applicable for a nation’s economy. Use appropriate diagrams to assist in answering the following questions:
a. What are two events that can cause the nation’s real GDP to increase in the short run?
b. What are two events that can cause the nation’s real GDP to increase in the long run?
7. Classify each of the following as either a stock or a flow.
a. Myung Park earns $850 per week.
b. Time Warner purchases $100 million in new telecommunications equipment this month.
c. Sally Schmidt has $1,000 in a savings account at a credit union.
d. XYZ, Inc., produces 200 units of output per week.
e. Giorgio Giannelli owns three private jets.
f. Apple’s production declines by 750 digital devices per month.
g. Russia owes $25 billion to the International Monetary Fund.
8. Suppose that Congress and the president decide that the nation’s economic performance is weakening and that the government should “do something†about the situation. They make no tax changes but do enact new laws increasing government spending on a variety of programs.
a. Prior to the congressional and presidential action, careful studies by government economists indicated that the Keynesian multiplier effect of a rise in government expenditures on equilibrium real GDP per year is equal to 3. In the 12 months since the increase in government spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. What factors might account for this?
b. Another year and a half elapses following passage of the government spending boost. The government has undertaken no additional policy actions, nor have there been any other events of significance. Nevertheless, by the end of the second year, real GDP has returned to its original level, and the price level has increased sharply. Provide a possible explanation for this outcome.
9. Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. What might account for this outcome?
10. Explain how time lags in discretionary fiscal policymaking could thwart the efforts of Congress and the president to stabilize real GDP in the face of an economic downturn. Is it possible that these time lags could actually cause discretionary fiscal policy to destabilize real GDP?
11. Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs.
a. In an effort to help rejuvenate the nation’s railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use.
b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.
c. The government finances the construction of a classical music museum that otherwise would never have received private funding.
12. Determine whether each of the following is an example of a situation in which there is indirect crowding out resulting from an expansionary fiscal policy action.
a. The government provides a subsidy to help keep an existing firm operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business.
b. The government reduces its taxes without decreasing its expenditures. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.
c. Government expenditures fund construction of a high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building.
13. It may be argued that the effects of a higher public debt are the same as the effects of a higher deficit. Why?
14. What happens to the net public debt if the federal government operates next year with the following:
a. A budget deficit?
b. A balanced budget?
c. A budget surplus?
15. What is the relationship between the gross public debt and the net public debt?
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