Question

Question 1

Keynes, the Multiplier and Fiscal Policy 1.During the 1930s the U.S. entered the Great Depression. During the Great depression investment fell from a yearly rate of $16.7 billion to $1.7 billion. In 1932, President Hoover increased income taxes. Assume the MPC is .8. What effect did the decline in investment have on AD? Use a graph to illustrate a) your answer. ちBilio) Use an AF graph model to show the effect of the decline minvestment. What is the difference between the AD/AS and AE models? Assume that Hoover increased income taxes by $10 billion. Use AD'AS to show c) d) the effect of the tax incrcase e) Given your answer to part d policy? Why? Assume the AD shortfall in 1934 was $200 billion. What change in government ), do you think Hoover implemented the correct f) expenditures on goods and serviccs (G) would you have recommended to restore full-employment? e) what change in income transfers would you have recommended if' the AD Shortfall was $200 billion? h) What change in income taxes would you have recommended if the AD Shortfall was $200 billion? Although President Roosevelt incrcased government spending during the great depression, the great stimulus id not come until World War II . Between 1940 and 1945 overnment expenditures on national defense incrcased significantly. For example, national dcfense spending grew from a yearly rate of $3 billion in 1940 to $15 billion in 1941, $53 billion in 1942 and to $87 billion in 1943. To finance the war, the government had to increase taxes. Assume the MPC is.9. 2. a What was the effect of the increase in government expenditures on from 1941 to R42 on AD? Usc a graph to illustrate your answer. b) What was the effect of the increase in government expenditures on from 1942 to 1943 on AD? Use a graph to illustrate your answer c) If income taxes increased by $4 billion, what happened to the increase in AD described in part (b)? Use a graph to illustrate your answer d) If the govermment increased income transfers by S4 billion, how would it affected the economy? e) If the government had increased payroll taxes by $ 4 billion and income transfers by $4 billion, how would it affected AD? notur v

Answer 1

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