2. Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would governmentspending have to increase to shift the aggregate demandcurve rightward by $25 billion? How large a tax cut would beneeded to achieve this same increase in aggregate demand?Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplishthis same goal.
Multiplier = 1/ MPS (1-MPC)
= 1/.8
= 5 (billion)
tax * 0.8 = 5 (billion)
tax cut = 6.25 (billion)
Government can either increase spending by 1 billion, or cut taxes by 5 billion
3. What are government’s fiscal policy options for endingsevere demand-pull inflation? Use the aggregate demand-aggregatesupply model to show the impact of these policies onthe price level. Which of these fiscal policy options do you thinka “conservative” economist might favor? A “liberal” economist?
The government can either increase the taxes, or decrease government spending. A Conservative economist would most likely increase taxes, while a Liberal economist would most likely decrease the government spending in this situation.
Wednesday, May 16, 2007
Last Word Europe Unemployment
Weigh the two arguments regarding unemployment in Europe. Is unemployment high because of high because of high natural rates of unemployment or because of deficient aggregate demand?
Argument #1 claims that high unemployment rates reflect the high natural rates of unemployment in Europe. Although most countries are working at full employment, frctional and structual unemployment occur naturally. The source of this natural rate of unemmployment is from governemnt policies and union contracts. Argument # 2 claims that high unemployment rates are due to defiecient aggregate demand. The cause of this is due to the government, who are fearful of their economy, so they dont implement fiscal or monetary policies, which would increase aggregate deman. The answer to the debate would most likely lie between the two arguements. Unemployment in Europe could be due to natural rates of unemployment as much as aggregate demand. Both arguments include the government as a cause and its policies play a large role in unemployment. Therefore the cause of this high unemployment would mostly be blamed upon the government.
Argument #1 claims that high unemployment rates reflect the high natural rates of unemployment in Europe. Although most countries are working at full employment, frctional and structual unemployment occur naturally. The source of this natural rate of unemmployment is from governemnt policies and union contracts. Argument # 2 claims that high unemployment rates are due to defiecient aggregate demand. The cause of this is due to the government, who are fearful of their economy, so they dont implement fiscal or monetary policies, which would increase aggregate deman. The answer to the debate would most likely lie between the two arguements. Unemployment in Europe could be due to natural rates of unemployment as much as aggregate demand. Both arguments include the government as a cause and its policies play a large role in unemployment. Therefore the cause of this high unemployment would mostly be blamed upon the government.
Tuesday, May 1, 2007
US GDP/Consumption Low Due to High Prices
http://www.940news.com/nouvelles.php?cat=22&id=43070
Within the article, it states that the USA has had surges of price increases within the energy section of the economy especially in oils. The price of electricity, oil and other aspects of electricity have gotten more expensive over the last few months, reducing the amount of money left for consumers to consume, invest, etc. These higher prices have led to the lowest amount of consumption increase, in years at only 0.3% compared to last years 0.7%. The high prices not only lower consumption only, they lower GDP as a whole. GDP which is the measure of total consumption within a country is measure by 4 aspects, consumption, investments, government spendings and net exports. The high prices of energy, would leave less money for the citizens to spend on either consumption and investment, reducing two major portions of a countries GDP, lowering it as a whole. Consumption in the USA is measure to be about 2/3 of the total GDP as stated in the article. If consumption continues to decrease, as many analysts predict, the country may go into a recession, however, that is not likely as long as prices lower, and consumption/investment rises again.
Within the article, it states that the USA has had surges of price increases within the energy section of the economy especially in oils. The price of electricity, oil and other aspects of electricity have gotten more expensive over the last few months, reducing the amount of money left for consumers to consume, invest, etc. These higher prices have led to the lowest amount of consumption increase, in years at only 0.3% compared to last years 0.7%. The high prices not only lower consumption only, they lower GDP as a whole. GDP which is the measure of total consumption within a country is measure by 4 aspects, consumption, investments, government spendings and net exports. The high prices of energy, would leave less money for the citizens to spend on either consumption and investment, reducing two major portions of a countries GDP, lowering it as a whole. Consumption in the USA is measure to be about 2/3 of the total GDP as stated in the article. If consumption continues to decrease, as many analysts predict, the country may go into a recession, however, that is not likely as long as prices lower, and consumption/investment rises again.
Subscribe to:
Posts (Atom)