Question

YOU ARE THERE A Japanese ochi Hamada, a retired Yale University economics professor now resid. downward and to the left along the nation's short-run ag ese Economist Tells His Government, "I Told You So!" ing in Japan, n, has recently served as a top adviser to Japan's prime min- gregate supply curve, and equilibrium real GDP has dropped by nea ister. rSome of his advice has fallen on deaf ears, however. Hamada and Hamada is relieved that the Japanese government has postpor ed a planned additional increase in the consumption tax rate until at least another adviser, Etsuro Honda, had ar apan's national consumption tax rate from 5 percent to 8 percent, which 2017. Nevertheless, the government is intent on eventually raising the tax thay anticipated would considerably reduce desired consumption spend- rate to 10 percent, which undoubtedly will generate an additional ing. Because consumption spending amounts to about 60 percent of decrease in aggregate demand and tend to depress equilibrium real GDP apan's aggregate expenditures, Hamada and Honda had predicted a gued against a recent boost in decrease in aggregate demand likely would result. They also viewed CRITICAL THINKING QUESTIONS apan's short-run aggregate supply curve to be upward sloping. Thus, 1. How do you suppose that the increase in Japan's consumption tax rate their prediction was that the consequence of implementing the tax affected the nation's equilibrium price level, other things being equal? ncrease would be a recessionary gap, followed by a decrease in equilib- 2. Why do you suppose that a number of economists are advising the um real GDP Bank of Japan to boost the nation's money supply when the govern- ment implements its additional consumption tax increase? Now it appears that Hamada and Honda were correct. The increase in the consumption tax rate has, Hamada concludes, been a significant ow for consumers." The aggregate demand curve has indeed shifted Sources are fisted at the end of this chapter

Answer 1

Answer:

Given details about a japanese economist telling his government. Based on the given information the critical thinking questions are answered as follows:

(1) supposing increase in japan's consumption tax rate affected the nation's equilibrium price level, other things being equal:

Consider the given problem.

here we can show that a consumption tax can effect “P” through the AD-AS model.

SRAS1 P1 E1 E2 P2 AD1 AD2 Y1

Let’s assume that initial the equilibrium was “E1” where the “P=P1” and “Y=Y1”,

now as the consumption tax is imposed, => the level of consumption will decreases given that other factors remain same, => as the “C” is part of “AD”, => AD will shift to left side to “AD2”.

So, the new equilibrium is “E2” the intersection of “AD2” and “SRA1S”.

So, can see that at the new equilibrium “P=P2 < P1 “, and “Y=Y2 < Y1”.

So, we can see that the consumption leads to decreases in “Y” and “P”.

(2) supposing the number of economists are advising the bank of japan to boost the nation's money supply when the government implements its additional consumption tax increase:

Now, if government want to implement consumption tax that will reduce the “C=consumption”, => reduction in AD.

Now, if the “bank of Japan” increases the money supply, => “r=rate of interest” will falls that will increase “I=Investment”, => increase in AD.

So, if government want to implement consumption tax then the increase in money supply will compensate the recessionary effect on “Y” and deflationary effect on “P” by increasing both “Y” and “P” together.

So, that is the reason to increase the money supply to compensate the recessionary effect on “Y” and deflationary effect on “P”.