Question

In the classical model, what is the effect of an increase in government spending that is...

In the classical model, what is the effect of an increase in government spending that is not financed by an increase in taxes (an increase in the deficit)? How do prices, real GDP, consumption, saving, investment spending, and real interest rates change as a result of the increase in government spending? Explain and show graphically.

(Hint: Use the market for loanable funds model.)

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Increase in government spending increases aggregate demand . This shifts AD rightwards to AD'. This leads to increase in price from P1 to P2 and real gdp remains same at Y. Consumption remains the same real GDP is constant.

Due to increase in price real money balances fall which leads to decrease in supply of loanable funds. This shifts S leftwards to S'. This results in lower investment and higher interest rate. Savings also fall because higher price is charged now.

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 the government reduces taxes but holds government spending constant, thus increasing the government budget deficit....
Suppose the government reduces taxes but holds government spending constant, thus increasing the government budget deficit. 1. What would be the major effect in the market for loanable funds?                   Increase in demand for loanable funds (increased supply of bonds)                                  Decrease in demand for loanable funds (decreased supply of bonds)                   Increase in supply of loanable funds (increased demand for bonds)                   Decrease in supply of federal funds (decreased demand for bonds) Why? 2. Graphically illustrate the effect on the equilibrium interest rate...
Assume that the world works according to the Classical model. In a small open economy, output...
Assume that the world works according to the Classical model. In a small open economy, output is produced according to a Cobb-Douglas production function, consumption is equal to C=40+0.6(Y-T) and the investment function is I=280-10r. You know that the output produced is Y=900, government spending is G=150, taxes are T=90 and that the world real interest rate is 4% (r*=4). In all the questions below, make sure to explain your answers and show all your work. a. Compute: i. Private...
Question 1: A bond-financed increase in government spending in the classical model would cause both real...
Question 1: A bond-financed increase in government spending in the classical model would cause both real output and the interest rate to rise. Is this true or false? Explain your answer.
The federal government in Australia has been running large budget deficits. The government has stated that...
The federal government in Australia has been running large budget deficits. The government has stated that it will take actions that will turn the budget deficits into budget surpluses over time. Use a market for loanable funds graph to illustrate the effect of the federal budget surpluses. What happens to the equilibrium real interest rate and the quantity of loanable funds? What happens to the level of saving and investment? Now suppose that households believe that surpluses will result in...
According to the Ricardo-Barro effect,A)taxpayers fail to foresee that government deficits imply higher future taxes.B)a government...
According to the Ricardo-Barro effect,A)taxpayers fail to foresee that government deficits imply higher future taxes.B)a government deficit decreases the supply of loanable funds.C)government deficits raise the real interest rate.D)government budget deficits increase households' expected future disposable income.E)households increase personal saving when governments run budget deficits.Topic:Government in the Market for Loanable Funds106)The Ricardo-Barro effect of a government budget deficit isTopic:Government in the Market for Loanable Funds107)The Ricardo-Barro effect holds thatTopic:Government in the Market for Loanable Funds
True or False: Government spending can raise Aggregate Demand and real GDP in the Classical model....
True or False: Government spending can raise Aggregate Demand and real GDP in the Classical model. Classical economists said that the velocity of money is very volatile. Classical Economists claim interest rates guarantee that savings will equal investment. According to money neutrality, the Ms determines nominal but not real variables. According to Say’s Law, “demand creates its own supply”.
The response of investment spending to an increase in the government budget deficit is called Select...
The response of investment spending to an increase in the government budget deficit is called Select one: a. crowding out. b. income minus net taxes. c. private dissaving. d. expansionary investment. How will an increase in the government budget surplus as a result of lower government spending (with no change in net taxes) affect private saving in the economy? Select one: a. Private saving will decrease by less than the amount of increase in the budget surplus. b. Private saving...
What effect would government deficit spending have on interest rates? Explain. This change in interest rates...
What effect would government deficit spending have on interest rates? Explain. This change in interest rates caused by the government deficit spending would have a long run effect on investment spending. What effect would that be and why?
If the government decreases taxes and government spending by the same amount, what happens to the...
If the government decreases taxes and government spending by the same amount, what happens to the real interest rate in the loanable funds market?
QUESTION 8 An increase in government spending that is NOT financed by an increase in taxes...
QUESTION 8 An increase in government spending that is NOT financed by an increase in taxes will cause which of the following? an increase in interest rates and an increase in planned investment a reduction in interest rates and an increase in planned investment a reduction in interest rates and a reduction in planned investment an increase in interest rates and a reduction in planned investment
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT