Question

Assume there is a fall investment spending caused by a pessimistic outlook on the regulatory environment....

Assume there is a fall investment spending caused by a pessimistic outlook on the regulatory environment. How does the AD curve change? If the MPC=.60 what is the size of the shift in the AD?

If the Congress wants to use fiscal policy in this situation, how should it act? Will there be crowding out in this case?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Lower investment spending will decrease aggregate demand, shifting the AD curve leftward.

If MPC = 0.6, Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.6) = 1 / 0.4 = 2.5

Therefore,

Magnitude of rightward shift in AD = Amount of decrease in investment spending x 2.5

A fall in AD has to be countered by expansionary fiscal policy to stimulate aggregate demand, which can be done by increasing government spending and/or decreasing tax. If government spending is increased, it will lead to higher budget deficit (or lower budget surplus), to finance which, government will resort to borrowing. Higher borrowing will increase interest rate, dampening investment demand which will crowd out the increase in AD caused by higher government spending.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose that the fiscal policy multiplier is 8.6. What is MPC? Use that MPC and assume...
Suppose that the fiscal policy multiplier is 8.6. What is MPC? Use that MPC and assume that there is no crowding out in this economy. If the federal government knows that it will take a $750 billion rightward shift in AD to end a recession, how much does government spending need to be raised to accomplish that?
Suppose the MPC is 0.8. Assume there are no crowding out or investment accelerator effects. If...
Suppose the MPC is 0.8. Assume there are no crowding out or investment accelerator effects. If the government decreases expenditures by $100 billion, then by how much does aggregate demand change? A. $100 billion B. -$100 billion C. $500 billion D. -$500 billion If the MPC = 0.2, then the government purchases multiplier is A. 0.2. B. 0.8. C. 5 D. 1.25. According to the AS-AD model, an increase in the money supply causes A. prices to decrease in the...
The aggregate demand curve shows the relationship between the aggregate price level and: A) aggregate productivity....
The aggregate demand curve shows the relationship between the aggregate price level and: A) aggregate productivity. B) the aggregate unemployment rate. C) the aggregate quantity of output demanded by households, businesses, the government, and the rest of the world. D) the aggregate quantity of output demanded by businesses only. 2.When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This is known as the _____ effect and is a reason why...
The crowding out effect is zero if Select one: a. the LM-curve is vertical b. the...
The crowding out effect is zero if Select one: a. the LM-curve is vertical b. the central bank conducts open market sales following fiscal expansion c. income is stimulated via a tax cut rather than an increase in government spending d. the central bank conducts open market purchases following fiscal expansion e. the LM-curve is horizontal An asset (other than money) is considered to be more liquid if Select one: a. it can be quickly and cheaply transferred into money...
1. The Federal Reserve Act says that the Fed must try to achieve​ ______. A. a...
1. The Federal Reserve Act says that the Fed must try to achieve​ ______. A. a balanced budget B. maximum​ employment, stable​ prices, and moderate​ long-term interest rates C. a stable U.S. dollar on foreign exchange markets and moderate​ long-term and​ short-term interest rates D. an economic environment in which investment in U.S. stock and money markets is encouraged The Federal Reserve Act says that the Fed must use​ ______ to achieve its objectives. A. bank reserves B. commercial banks...
1. All of the following programs are considered mandatory spending EXCEPT: interest on national debt. Medicare....
1. All of the following programs are considered mandatory spending EXCEPT: interest on national debt. Medicare. Social Security. national defense. 2. What did Arthur Laffer suggest President Reagan do in the 1980s? increase welfare benefits increase corporate taxes increase income taxes decrease income taxes 3. A type of money made from a substance that is also valuable is called: economic money. fiat money. commodity money. metallic money. 4. What are the two common measures of the money supply in use...
6. A persistent increase in the actual growth rate of real GDP in excess of the...
6. A persistent increase in the actual growth rate of real GDP in excess of the growth rate of potential real GDP likely will most result eventually in: (a) accelerating inflation; (b) a recession; (c) stagflation (rising inflation and falling real economic growth); (d) a looser monetary policy from the Federal Reserve. 7. For the most part, rising U.S. inflation is associated with: (a) a much stronger U.S. dollar in foreign exchange markets; (b) growth in aggregate demand at a...
Q: Write one paragraph summary about this article. Big oil and the environment The truth about...
Q: Write one paragraph summary about this article. Big oil and the environment The truth about big oil and climate change Even as concerns about global warming grow, energy firms are planning to increase fossil-fuel production. None more than ExxonMobil. In america, the world’s largest economy and its second biggest polluter, climate change is becoming hard to ignore. Extreme weather has grown more frequent. In November wildfires scorched California; last week Chicago was colder than parts of Mars. Scientists are...
CASE: Sharesies: NZ investment platform Everyday investment company Sharesies was launched in February 2017, after conducting...
CASE: Sharesies: NZ investment platform Everyday investment company Sharesies was launched in February 2017, after conducting research on New Zealanders’ attitudes towards investing. Prior to launching the company, the co-founders interviewed over 200 people asking them “If I gave you $50 right now, and you had to do something with it in the next 5 minutes what would you do?” Only 5 out of 200 people chose an option to save or invest the $50. More popular options were bills,...
I need to answer the questions based on the following article The article is Although the...
I need to answer the questions based on the following article The article is Although the virus has delayed the budget until October, Treasurer Josh Frydenberg will deliver an update on the budget and – more importantly – the economy, within the next fortnight. But last week the secretary to the Treasury dropped some big hints on what to expect. In evidence to the Senate committee inquiring into the response to the virus, Dr Steven Kennedy started with the outlook...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT