For each of the following situations, choose a fiscal policy and explain how it could be used to correct the economic problem
a. Real GDP is below potential GDP following a financial market crisis.
b. A positive demand shock increases aggregate expenditure beyond the full employment level and leads to fears of rising inflation.
c. The economy is in a recession due to rising defaults on mortgages following the bursting of a housing bubble.
a. If real GDP is below potential GDP, expansionary fiscal policy would be used. Government purchases of goods and services could be increased, transfer payments could be increased, or taxes could be reduced. If government purchases are increased, the government purchases (G) component of aggregate expenditure will increase. If transfer payments are increased or personal income taxes are decreased, the consumption expenditure (C) component of aggregate expenditure will increase. If corporate income taxes are decreased, the investment expenditure (I) component of aggregate expenditure will increase.
b. To reduce aggregate expenditure back to full employment, contractionary fiscal policy would be used. Government purchases of goods and services could be reduced, transfer payments could be reduced, or taxes could be increased. If government purchases are reduced, the government purchases (G) component of aggregate expenditure will decline. If transfer payments are reduced or personal income taxes are increased, the consumption expenditure (C) component of aggregate expenditure will decline. If corporate income taxes are increased, the investment expenditure (I) component of aggregate expenditure will decline.
a. If the economy is in a recession, real GDP is below potential GDP so expansionary fiscal policy would be used. Government purchases of goods and services could be increased, transfer payments could be increased, or taxes could be reduced. If government purchases are increased, the government purchases (G) component of aggregate expenditure will increase. If transfer payments are increased or personal income taxes are decreased, the consumption expenditure (C) component of aggregate expenditure will increase. If corporate income taxes are decreased, the investment expenditure (I) component of aggregate expenditure will increase.
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a. True b. False Indicate whether the statement is true or false
In a balanced oligopoly,
a. one firm has significantly greater market power than any other in the industry b. only one firm exists in the industry c. the industry is rapidly converging into a monopolistically competitive industry d. all firms have near-equal market shares e. the four-firm concentration ratio exceeds 100 percent