2) Assume that a hypothetical economy with an MPC of .8is 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.Using the multiplier the real amount of increase of government spending can be found:
1/ MPS
= 1/.8
thus, the government needs to increase its spending by 5 billion dollars.
The MPS 0.8, only 80% of the tax will be spent
.8 x Tax Cut = 5 Billion
The tax should be cut by 6.25 billion dollars
There is a difference because there is MPS, people save their money which is not counted into the GDP.
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?
Fiscal policies that end demand pull inflation are reducing government spending and increasing taxes. Conservatives usually want to keep inflation very low, but liberals may want some inflation so the GDP has a chance to move out, which can make the economy grow.
2007年5月6日星期日
2. Explain the experience of the US between 1996 and 2000 when the economy was at greater than full employment with high GDP growth while maintaining low levels of inflation. What allowed this so-called "New Economy" to occur, and what brought it to an end in 2001?
During that time the US experienced a great economic growth, thus GDP growth and over employment was acceptable because the economy grew even faster than the over employment did. Therefore, inflation remained low. However, in 2001 there was probably a supply shock, or cost push inflation, which made inflation a huge problem. The GDP was not growing that fast anymore to keep inflation down.
During that time the US experienced a great economic growth, thus GDP growth and over employment was acceptable because the economy grew even faster than the over employment did. Therefore, inflation remained low. However, in 2001 there was probably a supply shock, or cost push inflation, which made inflation a huge problem. The GDP was not growing that fast anymore to keep inflation down.
2007年5月5日星期六
Homework 1
1. 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 aggregated demand?
The real answer to this question probably lies in between natural high rates of unemployment and deficient aggregated demand. Most of Western Europe is known for its social welfare and benefits, which provide high welfare to those that are unemployed. Therefore, a magnificent amount of people that are unemployed are not desperately looking for jobs. This means when Europe reaches "full employment" by the economic definition, there are still quite a significant amount of people unemployed. In addition, the interest rates in Europe may be too high, thus discouraging investment. This would lead to deficient aggregated demand because it leads to a lower GDP, and the expenditure approach to measuring GDP includes consumer spending/demand. Therefore, the high unemployment rate in Europe should be due to a mixture of natural high rates of unemployment and deficient aggregated demand.
The real answer to this question probably lies in between natural high rates of unemployment and deficient aggregated demand. Most of Western Europe is known for its social welfare and benefits, which provide high welfare to those that are unemployed. Therefore, a magnificent amount of people that are unemployed are not desperately looking for jobs. This means when Europe reaches "full employment" by the economic definition, there are still quite a significant amount of people unemployed. In addition, the interest rates in Europe may be too high, thus discouraging investment. This would lead to deficient aggregated demand because it leads to a lower GDP, and the expenditure approach to measuring GDP includes consumer spending/demand. Therefore, the high unemployment rate in Europe should be due to a mixture of natural high rates of unemployment and deficient aggregated demand.
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