Q. a - For Critical ThinkingExpert-verified
If a government agency decided to fund the construction of a private hospital in an area in which other private hospitals already are just breaking even, why might one of the other private hospitals cancel plans to expand the size of its facility?
Since they've reached their breakeven point, where their chance expenses have been paid and capital has received the expected return, they've reached their full capacity.
In financial aspects, business-and especially cost bookkeeping, the break-even point is the point at which total expense and absolute income are equal. Even though there is no total deficit or gain, and the initial investment has been "balanced," opportunity costs have been paid, and investment has received the expected return.
If an administration organization chooses to subsidize the development of a private clinic in a space where other private medical clinics are already equaling the initial investment because they have reached their breakeven point where their chance expenses have been paid and other private clinics will forsake their ambitions to expand their offices now that their cash has achieved the desired return.
Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (b) of Figure 13-1, the government knows that the MPC is equal to 0.75 and that the amount of the horizontal distance that the AD curve had to be shifted directly leftward from point E1 was equal to $1.0 trillion. What is the reduction in real government spending required to have generated this shift?
Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs.
a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use.
b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.
c. The government finances the construction of a classical music museum that otherwise would never have received private funding.
Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (a) of Figure 13-1, the government determined that the amount by which the AD curve had to be shifted directly rightward from the point E1 was equal to $1.0 trillion. If the government decided that a $0.2 trillion increase in real government spending was required to generate this shift, what must be the value of the MPC?
Assume that MPC = when answering the following questions.
a. If government expenditures rise by $ 1 billion, by how much will the aggregate expenditure curve shift upward?
b. If taxes rise by $ 1 billion, by how much will the aggregate expenditure curve shift downward?
c. If both taxes and government expenditures rise by $ 1 billion, by how much will the aggregate expenditure curve shift? What will happen to the equilibrium level of real GDP?
d. How does your response to the second question in part (c) change if MPC = ? If MPC = ?
Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. What might account for this outcome?
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