Question

Two economists estimate the government expenditure multiplier and come up with different results. One estimates the multiplier at 0.75​, while the other comes up with an estimate of 1.25. Explain why these estimates are different in terms of the assumptions that each economist is making.

A. Compared to the first economist, the second economist is assuming a longer time frame for the effects of the increased expenditure to be observed.
B. Compared to the first economist, the second economist must be assuming either a smaller induced increase in consumption, a larger crowding out effect, or both.
C.Compared to the first economist, the second economist must be assuming either a larger induced increase in consumption, a smaller crowding out
D. Unlike the first economist, the second economist miust be assuming that the government expenditure is devoted to useful projects.
If the current value of GDP is $14.42 trillion and the government is planning to increase spending by $900 billion (all in one year), the percentage increase in GDP using the multiplier estimate of the first economist is 4.68 percent. (Round your response to two decimal places) Using the multiplier estimate of the second economist and the same current value of GDP, the percentage increase in GDP is percent. (Round your response effect, or both. to two decimal places.)

Answer 1

the correct answer is B

"Compared to the first economist, the second economist must be assuming either a smaller induced increase in consumption, a larger crowding out effect, or both".

Step-by-step explanation:

Government use multiplier used to show increment in level of GDP when government use increment other than consistent of other consumption.

Gross domestic product = c+I+g + ( x-m)

In the event that we steady all use or free factors expected g which is meant government consumption at that point to compute government multiplier the expansion in g consequently increment in GDP.

Swarming impact:- under this administration buy all the more increasingly residential merchandise and ventures which limits private division buy and this circumstance is gotten swarming out.

So if financial specialist second have bigger swarming exertion implies government use increment and this lead higher government multiplier . Gm of 1.25 implies that percent expansion in g lead GDP increment by 25% .

Financial specialist second gauge 0.75 methods 25% abatement in GDP .

Answer 2

Answer: (B)

Compared to the first economist, the second economist must be assuming either a smaller induced increase in consumption, a larger crowding out effect, or both.

Step-by-step explanation:

First of all, I'll like to explain some terms:

- Government Expenditure Multiplier is an index or figure showing the percentage by which Gross domestic product (GDP) will increase, when Government Expenditure increases; all other kinds of expenditure held constant

- the GDP equation is

GDP= C + I + G + (X-M)

Where C = consumption expenditure (by individuals)

I = investment expenditure (by firms)

G = government expenditure

(X-M) = international trade (export-import) expenditure

- If we hold other independent variables constant and measure the government expenditure multiplier, we will derive the index that shows the amount by which an increase in G will increase GDP.

Now to the question;

Crowding out effect means an act by the government to purchase so much more domestic goods and services than they previously purchased.

This is done deliberately by the government for various reasons: to boost the economy, to provide social welfare goods, and to kick-start national projects.

It is called "crowding out" because these huge government purchases limit private sector purchases.

If the 2nd economist assumes a larger crowding out effect, that means greater government expenditure, then this rhymes with the higher GM (government expenditure multiplier) that his estimate produces. GM of 1.25 means that a percent increase in G will increase GDP by 25%.

On the other hand, Economist 1's estimate of 0.75 implies a 25% decrease in GDP (coming from a decrease in G), which explains his part of option B. He (economist 1) is assuming a lesser crowding out effect.

If we add the assumption of Economist 2 that there'll be smaller induced increase in consumption, it follows that C will have a less positive impact on GDP.

If we combine both changes in C and G, we also have G producing more increase in GDP.

You are welcome.