Back to Assignment Attempts Keep the Highest / 3 2. Fiscal policy Suppose some imaginary economy is currently experiencing deficient aggregate demand of $64 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are unable to decide which method of expansionary policy will resolve the situation. Economist One believes that the government spending multiplier is 8 and the tax multiplier is 2. Economist Two believes that the government spending multiplier is 4 and the tax multiplier is 8. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect. Policy Options for Closing Output Gap Increase in Spending Tax Cut Spending Multiplier Tax Multiplier (Billions of dollars) (Billions of dollars) Economist One 2 Economist Two Economist Three favors tax cuts over increases in government spending. This means that Economist Three likely believes that: Tax cuts induce investment spending and improve workers' incentives. O A dollar in tax cuts immediately and fully adds to aggregate demand. Economist Four claims it is impossible to move the economy out of recession with an increase in government spending. Which of the following statements is consistent with Economist Four's belief? O A rise in government spending does not crowd out private sector spending. O A rise in government spending completely crowds out private sector spending. Grade It Now Save & Continue Continue without saving