Macroeconomic fiscal policy choices
Macro-economic choices, particularly
in the areas of fiscal policy, are not just about economics but about political
philosophies, values and goals. This Case asks you to think about some of these
dimensions.
1. Do all government purchases have
the same effect on aggregate demand? Defend your answer with economic
reasoning.
2. Suppose a country increases
government purchases by $100 billion. Suppose the multiplier is 1.5 and the
economy’s real GDP is $5,000 billion.
a. In which direction will the
aggregate demand curve shift and by how much?
b. Why is the change in real GDP is
likely to be smaller than the shift in the aggregate demand curve?
3.
a. What is “crowding out,”
and how does it reduce private investment?
b. Given that only certain types of
government expenditures crowded out private investment, what are the
implications for fiscal policy choices
