1)The OECD( organization for economic cooperation and development)data also indicate for example that the stimulative effects of tax reductions are considerably smaller than those triggered by government expenditure increases, a fact of life long recognized by economists.
Explain why ?
2)Bank Reserves are created in the process, since the Fed can pay simply by crediting the amount of its purchases to the account of the bank involved in the transaction. As a result...
a) What kind of transaction is being discussed here?
b) complete the above statement
3)Suppse the multiplier is 3, the money mutliplier is 6, and the income multiplier to rmoney supply is 4. The governemnt increases spending by $12 billion, but because the economy is operating at full capacity, it wants to use monetary plicy to offset the impact this increase will have on income
a)Does central bank need to buy or sell bonds to offset this policy
b)How many bonds must the monetary authorities buy or sell to accomplish
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1) The OECD data suggests that the stimulative effects of government expenditure increases are greater than those of tax reductions. This is a well-known fact recognized by economists due to several reasons:
a) Marginal Propensity to Consume (MPC): When the government increases its expenditures, it directly injects money into the economy, leading to an increase in people's disposable income. This, in turn, tends to increase their consumption spending, as people typically spend a portion of any additional income they receive. Therefore, the multiplier effect (the total increase in economic activity resulting from an initial increase in spending) is higher for government expenditure increases compared to tax reductions.
b) Crowding Out Effect: When the government increases its expenditures, it may need to finance these expenditures through borrowing. This can lead to an increase in interest rates, which can discourage private investment and borrowing. Consequently, the overall economic impact may be dampened as private sector activity is crowded out by the government's borrowing.
2) a) The transaction being discussed here is the purchase of assets (such as government bonds) by the central bank from commercial banks. This is a commonly used tool of monetary policy known as Open Market Operations.
b) As a result of the central bank purchasing assets, bank reserves are created. Bank reserves are funds held by commercial banks at the central bank. When the central bank makes a purchase, it credits the bank's account with the corresponding amount. This increases the bank's reserves and its ability to make loans and expand credit in the economy.
3) a) In order to offset the impact of the government's increased spending, the central bank would need to sell bonds.
b) To accomplish this, the monetary authorities would need to sell an amount of bonds equivalent to the increase in spending caused by the government. In this case, the government increased spending by $12 billion, so the monetary authorities would need to sell $12 billion worth of bonds to offset the impact on income.