In advising congress and the president on how much to...

In advising Congress and the President on how much to increase defense spending in response to security concerns, economists suggest that they evaluate the Multiple Choice total cost of defense versus its total benefit. average cost per citizen of defense versus its average benefit. marginal cost of each additional dollar spent on defense versus its marginal benefit. median cost per citizen of defense versus its median benefit.

Transcript

00:01 So first of all, let's refresh what is curve is.

00:04 An is curve is a relationship between output and the real interest rate, downward sloping, right? that indicates goods market equilibrium, right? so is is, again, goods market equilibrium.

00:17 And that goods market equilibrium is where output is equal to c plus i plus g plus x minus m, right? so here, if we're going to increase government purchases.

00:30 So what's going to happen is that the is curve is going to move to the right, right? is shifts out.

00:38 This is stimulus, right? and the idea is something like you have more output for any interest rate, right? because the government is putting its finger on the scale, it's saying we're demanding more output.

00:54 We're going to put our finger on the scale and increase the demand for output regardless of the interest rate.

01:00 So the is curve is shifting out.

01:02 The key thing is the financing, right? and so there are two ways.

01:08 You can take on debt and you can take on taxes, right? you can raise taxes.

01:14 So this will reduce the shift by reducing consumption, right? if you raise taxes and you have a consumption function that depends on current income, people, you're going to increase government spending, but you're going to be, reducing consumption because you're going to leave people with less money.

01:39 So raising taxes for the government purchases will reduce the magnitude of the shift compared to just taking on debt and borrowing the money...

Question

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