A new government decides to change the government expenditure model so that it represents a higher sensitivity of government spending to GDP changes, suggesting a more aggressive fiscal policy.The government spending now follows the equation:G=500+0.15Y.What are the immediate impacts on economic growth, budget balance and trade balance of this new policy? (4 points)
Question
A new government decides to change the government expenditure model so that it represents a higher sensitivity of government spending to GDP changes, suggesting a more aggressive fiscal policy.The government spending now follows the equation:G=500+0.15Y.What are the immediate impacts on economic growth, budget balance and trade balance of this new policy? (4 points)
Solution
-
Economic Growth: The immediate impact on economic growth would likely be positive. The equation G=500+0.15Y suggests that for every unit increase in GDP (Y), government spending (G) increases by 0.15 units. This is an expansionary fiscal policy, which is typically used to stimulate the economy during a recession. The increased government spending can lead to an increase in aggregate demand, which can stimulate economic growth.
-
Budget Balance: The impact on the budget balance would depend on the government's revenue and other expenditures. If the increase in government spending is not accompanied by an increase in government revenue (through taxes or other means), it could lead to a budget deficit. However, if the aggressive fiscal policy successfully stimulates economic growth, it could potentially lead to increased tax revenues in the future, improving the budget balance.
-
Trade Balance: The impact on the trade balance would depend on how the increased government spending affects imports and exports. If the increased spending is used to purchase goods and services domestically, it could potentially reduce imports, improving the trade balance. However, if the increased spending leads to an increase in income and consumption, it could increase demand for imported goods, worsening the trade balance. Additionally, if the fiscal stimulus leads to economic growth and an appreciation of the country's currency, it could make exports more expensive and imports cheaper, potentially worsening the trade balance.
Similar Questions
Consider the following economy:(1) C = 1000 + 0.3 (Y - T)(2) I = 700(3) G = 500(4) T = 400Instead the government decides to change government spending to reach a balanced budget. By how much does the government have to increase or decrease government spending? Write the answer below. If the government decreases spending, write a negative number. Note that in this case you are not touching taxes like in the previous question.
Consider the following economy:(1) C = 1000 + 0.3 (Y - T)(2) I = 700(3) G = 500(4) T = 400The government decided to run a balanced budget. By how much would taxes have to increase or decrease? (
The government is running a balanced budget while GDP is at its potential. However, there is now an economic recession and the government makes no policy adjustments. What is the impact on the budget balance? The budget balance would decrease, moving into a surplus. The budget balance would increase, moving into a surplus. The budget balance would remain balanced because of the automatic stabiliser. The budget balance would remain balanced because the government does not change any policies. The budget balance would decrease, moving into a deficit.
If the GDP is at its potential level, then what is the long-run effect of an increase in government purchases (G)? Reduction of consumption, net exports and investment through the wealth, interest rate and international trade effects. Reduction of only investment through the interest rate effect. Reduction of only consumption and investment through the wealth and interest rate effects. Reduction of only net exports through the international trade effect. Reduction of only consumption through the wealth and interest rate effects.
Consider the following economyC=1000+0.4(Y-T)I=500T=400G=300The current administration wants to expand the economy through fiscal policy. It chooses to change government spending (not touching taxes at all). The target income of equilibrium is 3,000. By how much should the government change spending to achieve that goal? Assume that the other components of autonomous spending remain the same. (Note that I asked change in government spending, not level. If the change is negative, you should precede your answer by a minus sign. You should figure out the new level of autonomous spending that would achieve that goal and subtract the old level of autonomous spending.)
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.