Explore BrainMass
Share

Inflationary vs. Recessionary Gaps

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

3. An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap?inflationary or recessionary?will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output?
a. A stock market boom increases the value of stocks held by households.
b. Firms come to believe that a recession in the near future is likely.
c. Anticipating the possibility of war, the government increases its purchases of military equipment.
d. The quantity of money in the economy declines and interest rates increase.

5. In each of the following cases, either a recessionary or inflationary gap exists. Assume that the aggregate supply curve is horizontal so that the change in real GDP arising from a shift
of the aggregate demand curve equals the size of the shift of the curve. Calculate both the change in government purchases of goods and services and the change in government transfers necessary to close the gap.
a. Real GDP equals $100 billion, potential output equals $160 billion, and the marginal propensity to consume is 0.75.
b. Real GDP equals $250 billion, potential output equals $200 billion, and the marginal propensity to consume is 0.5.
c. Real GDP equals $180 billion, potential output equals $100 billion, and the marginal propensity to consume is 0.8.

6. Most macroeconomists believe it is a good thing that taxes act as automatic stabilizers and lower the size of the multiplier. However, a smaller multiplier means that the change in government purchases of goods and services, government transfers, or taxes necessary to close an inflationary or recessionary gap is larger. How can you explain this apparent inconsistency?

13. In which of the following cases does the size of the government's debt and the size of the budget deficit indicate potential problems for the economy?
a. The government's debt is relatively low, but the government is running a large budget deficit as it builds a high speed rail system to connect the major cities of the nation.
b. The government's debt is relatively high due to a recently ended deficit-financed war, but the government is now running only a small budget deficit.
c. The government's debt is relatively low, but the government is running a budget deficit to finance the interest payments on the debt.

© BrainMass Inc. brainmass.com October 24, 2018, 11:33 pm ad1c9bdddf
https://brainmass.com/economics/fiscal-policy/inflationary-vs-recessionary-gaps-197628

Solution Preview

3 a.As people see the values of their portfolios increasing, they will increase their spending (the wealth effect). This shifts the AD curve to the right, and will cause and inflationary gap. To close the gap, the government could use contrationary fiscal policies.

b. If firms become concerned about a recession in the near future, they will decrease investment spending and aggregate demand will shift to the left. The economy will face a recessionary gap. Policy makers could use expansionary fiscal policies to move the economy back to potential output.

c. If the government increases its expenditures, the aggregate demand curve will shift to the right. The economy will face an inflationary gap. Contractionary fiscal policies can be used to move the economy back to potential output.

d. Higher interest rates rise will cause investment spending to decrease and the aggregate demand curve to shift to the left. A ...

Solution Summary

How shocks affect the economy and remedies to restore potential output.

$2.19
See Also This Related BrainMass Solution

Classical and Keynesian schools of economics are compared.

Question One

Contrast the revenue sources of state and local government vs. the federal government. What are the primary sources of funding for the two levels of government?

Contrast the allocation of spending for state and local government vs. the federal government. Why do you think the two levels of government have different expenditure priorities?

Question Two

What are the differences between the Classical and Keynesian schools of economics?

What was each schoolâ??s response to the Great Depression? How was the Great Depression ultimately alleviated?

Question Three

What is the reserve ratio? What are excess reserves?

What is the difference between the simple and approximate real-world money multipliers?

Question Four

Explain the U.S. gold standardâ??s historical relationship to a fixed exchange rate system and monetary policy.

Describe the history of revisions to the U.S. gold standard and its eventual abandonment. What is the basis of U.S. currencyâ??s value today?

Question Five

Describe the U.S. debt-to-GDP ratio from the 1950â??s to the present. What was its peak period and its nadir?

Why is the debt-to-GDP ratio an important indicator to economists?

View Full Posting Details