Answer to Question #279905 in Macroeconomics for Tenn

Question

1. What is the difference between government expenditures and government purchases? How do the two variables differ in terms of their effect on GDP? 2. Federally funded student aid programs generally reduce benefits by $1 for every $1 that recipients earn. Do such programs represent government purchases or transfer payments? Are they automatic stabilizers? 3. Crowding out reduces the degree to which a change in government purchases influences the level of economic activity. Is it a form of automatic stabilizer? 4. Why is it important to try to determine the size of the fiscal policy multiplier? 

Answer 1

Solution:

1.). Government expenditure defines the sum of government purchases and government transfer payments while government purchases are only purchases of goods and services.

 

2.). The government expenditures increases a nation’s GDP by a bigger percentage compared to government purchases.

 

Such programs represent government transfer payments.

 

3.). Crowding out can be defined as a situation where due to an increase in government spending and raising interest rates the investment by business and the personal consumption of goods and services are reduced, therefore it is a form of automatic stabilizer.

 

4.). The fiscal multiplier measures the effect that increases in fiscal spending will have on a nation's economic output, or gross domestic product (GDP). Fiscal multipliers are vital because they can help guide a government's policies during an economic crisis and help set the stage for economic recovery.