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Question 10

Suppose that the investment demand curve in a certain economy is such that investment declines by $130 billion for every 1 10 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also 10 raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out? points $ billion Skipped eBook Print ReferencesRefer to the accompanying table for Waxwania. 15 Government Tax Real Expenditures, G Revenues, T GDP $170 90 $450 170 110 550 10 170 130 650 points 170 150 750 170 170 850 Skipped Suppose Waxwania is producing $550 of real GDP, whereas the potential real GDP (= full-employment real GDP) is $650. eBook Print a. How large is its budget deficit? References billion b. Its cyclically adjusted budget deficit? $ billion c. Its cyclically adjusted budget deficit as a percentage of potential real GDP? Instructions: Round your answer to two decimal places. percent d. Is Waxwania's fiscal policy expansionary or contractionary? (Click to select) v1 9 Assume that a hypothetical economy with an MPC of 0.8 is experiencing a severe recession. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? Instructions: Round your answer to two decimal places. 10 mints $ billion Slapped b. How large a tax cut would be needed to achieve the same increase in aggregate demand? Instructions: Round your answer to two decimal places. Enter a positive value. EBOOK $ billion Print References c. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt. Increase spending by $ billion and increase taxes by $ billion. 2 0 Suppose that in an economy with a MPC of .5 the government wanted to shift the aggregate demand curve rightward by $80 billion at each price level to expand real GDP. It could: 107 Multiple Choice points Sklpped increase government spending by $40 billion, eBooK Print References increase government spending by $80 billion. reduce taxes by $40 billion, reduce taxes by $160 billion. 0000