Question

Problem 4.1 Question Help The new bridge to the United States in Southern Ontario and similar construction projects elsewhere in the country would be expected to help the economy in the short run, because O A. the use of discretionary fiscal policy would create an one time increase in real GDP but result in a job-less recovery. O B. the use of discretionary fiscal policy would create an one time increase in real GDP and employment. O C. the use of automatic stabilizers would give rise to multipliers larger than one. OD. the use of discretionary fiscal policy would create a multiplied increase in real GDP and employment.

Answer 1

Option B is correct. This is because increased infrastructure spending would result in fiscal expansion and since it is proposed deliberately, it is a discretionary fiscal policy

Option C is correct. This new change would imply that government have to pay more as transfers and have to receive lower revenues so that it spending would rise.

First note that GDP gap is 1.55 - 1.49 = 0.06 trillion or 60 billion

a) Required increase in Government spending = 60 / 2.5 = 24 billion or 0.024 trillion

b) Required decrease in taxes = 60 / 1.5 = 40 billion or 0.040 trillion

c) For this we use the fact that change in G * spending multiplier + change in taxes * tax multiplier = 60 billion

change in G * 2.5 + change in taxes * -1.5 = 60 billion

An optimum combination would be an increase in G by 14.4 billion and a tax cut by 16 billion

This gives 14.4*2.5 + (-16)*-1.5 = 60 billion

Hence the answer is increase government spending by 0.0144 trillion and tax cuts by 0.0160 trillion