Question

In 1993, Congress failed to pass President Clinton's $16 billion economic stimulus package intended to create...

In 1993, Congress failed to pass President Clinton's $16 billion economic stimulus package intended to create jobs. A major criticism was that his new government spending was not matched by tax increases. Assume (for this problem) a similar situation exists now and the U.S. economy is below full employment and Congress had passed a law that requires than an increase in government spending of $16 billion be matched or balanced by an equal increase in taxes. The MPC = 0.75 and aggregate demand must be increased by $20 billion to reach full employment. Will the economy reach full employment if Congress increases spending by $16 billion and increases taxes by the same amount? Show or describe why or why not for full credit.

Homework Answers

Answer #1

Due to increase in government spending of $16 Billion,

Increase in AD = 16*(1/(1-MPC) = 16*(1/(1-.75))

Increase in AD = $64 Billion

==

Due to decrease in tax of $16 Billion,

Decrease in AD = 16*(MPC/(1-MPC) = 16*(.75/(1-.75))

Decrease in AD = $48 Billion

So,

net increase in AD = 64 - 48

net increase in AD = 16 Billion

Since the gap is of $20 Billion, but plan of spending and tax increase, only increases AD by $16 Billion, then economy will not be able to achieve full employment level with this plan.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Calculations: If there a $2billion increase in government spending, other things being equal, what would be...
Calculations: If there a $2billion increase in government spending, other things being equal, what would be the resulting change in aggregate demand, and how much of the change would a change in consumption, if the MPC were the following: 1/3? 1/2? 2/3? 3/4? 4/5? The economy is experiencing a $225 million inflationary gap. If the government decided to solve this macroeconomic disequilibrium using a change in taxes, would you recommend an increase or decrease in taxes? If the MPC =0.9,...
Governments to get the economy out of recession or cool the economy down when the economy...
Governments to get the economy out of recession or cool the economy down when the economy is overheating often use fiscal policy.   1. What is fiscal policy?   2. How can it be used to get the economy out of recession? 3. How can it be used to get the economy out of the situation where the economy is in an expansionary period where we exceed long run potential?   4. Do both situations result on different impacts on inflation? Why or...
In A country the consumption function is: C (Y) = 5 + 0.75 Y The investments...
In A country the consumption function is: C (Y) = 5 + 0.75 Y The investments are I = 4; full employment income is YV = 40. a) How high must government expenditure be for full employment to be achieved? b) How high would government transfers to A-land citizens have to be to achieve the same goal? (Note: a transfer is like a negative tax, -T) c) Why is it that the state expenditure is higher for b) than for...
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...
2) A spike in “All Other Outlays” of the federal government in 2009 was due to:...
2) A spike in “All Other Outlays” of the federal government in 2009 was due to: a) an increase in the financial aid given to Greece earlier that year. b) an increase in the expenditures on Social Security and Medicare. c) the fiscal stimulus package passed earlier that year. d) a sudden increase in military expenditure as a result of the war in Iraq. e) an increase in the national debt earlier that year. 3) In 2016, welfare spending accounted...
1. The first step in any top down stock valuation is:A. economic analysis.B. an accurate stock...
1. The first step in any top down stock valuation is:A. economic analysis.B. an accurate stock market prediction.C. financial analysis.D. industry analysis. 2. Which of the following is not a goal of the federal government economic policy as established by the Employment Act of 1946?A. Low inflationB. High levels of employmentC. Balanced federal budgetsD. Economic growth 3. The most widely used tool of the Federal Reserve is: A. open-market operations (buying and selling securities for its own portfolio).B. changing the...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how the firms resources incompetencies support the given pressures regarding costs and local responsiveness. Describe entry modes have they usually used, and whether they are appropriate for the given strategy. Any key issues in their global strategy? casestudy: Atlanta, June 17, 2014. Sea of Delta employees and their families swarmed between food trucks, amusement park booths, and entertainment venues that were scattered throughout what would...
What tools could AA leaders have used to increase their awareness of internal and external issues?...
What tools could AA leaders have used to increase their awareness of internal and external issues? ???ALASKA AIRLINES: NAVIGATING CHANGE In the autumn of 2007, Alaska Airlines executives adjourned at the end of a long and stressful day in the midst of a multi-day strategic planning session. Most headed outside to relax, unwind and enjoy a bonfire on the shore of Semiahmoo Spit, outside the meeting venue in Blaine, a seaport town in northwest Washington state. Meanwhile, several members of...