36. Consider a depressed economy that, even after significant monetary stimulus efforts that pushed short-term interest rates to close to zero, still experiences a recessionary gap of 1,200 billion dollars and 10 % unemployment rate. Economist estimate that the marginal propensity to consume is 0.75. Adress the following questions, briefly justifying all your answers. a) Would an increase in the money supply by the Fed help reduce the recession and the unemployment ? Explain why or why not? b) Could an increase in government purchases help? If so, what increase in government purchases would close the gap and restore full employment ? e) How about a tax cut ? If so, a tax cut what size would do the trick ? d) In order to evaluate whether government spending or tax reductions are more efficient in restoring full -employment , try to evaluate whether any one of these policies would restore full - employment with a smaller increase in the government budget deficit ? (Hint : compare the respective budget deficits in (b ) and ( c)) . e) Is there any alternative policy that could restore full employment without increasing the budeget deficit ? Describe it .

Question

36. Consider  a depressed  economy  that, even  after significant  monetary  stimulus  efforts that pushed  short-term interest  rates to close  to zero,  still  experiences  a recessionary  gap  of 1,200 billion  dollars and 10 %  unemployment  rate.  Economist  estimate  that the marginal propensity to consume  is 0.75. Adress the following  questions, briefly justifying  all your answers. a) Would an increase in the money supply by the Fed help reduce the recession and the unemployment ? Explain why or why  not? b) Could  an increase in government  purchases  help? If so,  what increase in government purchases  would  close  the  gap and  restore  full employment ? e)  How about  a tax cut ? If  so, a tax  cut what  size would  do  the trick ? d)  In order  to evaluate  whether  government  spending  or tax reductions  are more  efficient  in restoring  full -employment ,  try to  evaluate  whether  any one  of these  policies  would  restore full - employment  with  a  smaller  increase  in the  government  budget  deficit ?  (Hint : compare the  respective  budget  deficits  in  (b ) and  ( c)) . e)  Is there  any  alternative  policy  that  could  restore  full  employment  without  increasing  the budeget  deficit ? Describe  it .